Question

Please limit your words 250 words for each answer or above. Thank you for who s helping

1. What are the three basic activities of accounting? In which (may be more than one) do you think the most errors or fraud occur? Why?

2. Which financial statement do you find the most useful? Why? Would some users prefer different financial statements than other users? Explain your thoughts.

3. Cash accounting is often used by small businesses, what are your thoughts about this? Could the statements be misleading if they were in accrual? How could cash or accrual be a preferred method? State your reason.

4.Which type of accounts will appear in the post-closing trial balance? Give some examples of specific accounts that are closed

Answer 1

Answer-1:

The three basic activities of accounting are:-

(a) Recording entries in the journal.

(b) Posting entries to the ledger, and

(c) Preparation of financial statement.

The most fraud occurs in the preparation of financial statement to-

(i) create a rosy picture of the company's financial position, performance, and cash flows.

(ii) achieve desired objectives like obtaining bank approval for a loan by misstating the financial statements to create an impression that they can very well pay for such loan.

(iii) make the stock attractive to investors and consequently, increasing the stock price.

(iv) justify the bonuses and increased salaries in case compensation is tied to company performance.

Financial statement fraud is generally accomplished by the following:

(i) improper revenue recognition-This may include scheme such as double billing of sales, recording fictitious revenue, pre-recognition of future sales etc.

(ii) Manipulation of expenses-expenses are capitalized or charged to assets account. This can also be done by depreciating and amortizing costs too slowly

(iii) Non-recognition of liabilities-This may include scheme such as insufficient disclosures of contingencies and disguising loan transaction as other transaction etc.

(iv) Improper cash flow presentation- -this is done by overstating cash inflows of the business, reporting fictitious cash flows, presenting the proceed of loan transaction ads part of the cash flow from operation etc.

Answer-2:

The key components of the financial statements are the income statement, balance sheet, and statement of cash flows. These statements are designed to be taken as a whole, to present a complete picture of the financial condition and results of a business. A case can be made for each of the financial statements being the most important, though the ultimate answer depends on the needs of the user.

The way of looking at the question is which two statements provide the most information? In that case, the best selection is the income statement and balance sheet, since the statement of cash flows can be constructed from these two documents. Yet another variation on the topic is to infer which statement is the most important, based on the perspective of the user. For example:

• Auditor perspective. Auditors audit the balance sheet, so that is the document that they have the greatest interest in.

• Investor perspective. Investor analysis of share value is largely based on cash flows, so they will have the greatest interest in the statement of cash flows.

• Lawyer perspective. Anyone bringing a lawsuit against a company will want to review its balance sheet first, to see if there are enough assets to attach if the lawsuit is successful. Otherwise, it is not cost-effective to pursue a lawsuit.

• Management perspective. Managers are responsible for fine-tuning the business, so they are likely to delve most deeply into the income statement.

Answer-3:

(i) Every small business must make a choice between two accounting methods -- the cash method or the accrual method.

With the cash method, income is recorded when payment from customers is actually received and have the cash in hand. Similarly, expenses are recorded when a check is written and the cash leaves the bank account. It's a simple accounting method that makes intuitive sense.

(ii) No, statements may not be misleading if they were in accrual. Most experts agree that the accrual method gives you a better picture of your financial outlook because it accounts for money that flows in and out of your business.

(iii) Using the cash method has a tendency to distort the picture of your income and expenses because it doesn't account well for situations where you've extended credit to customers or used credit to buy from suppliers.

The cash method is undoubtedly the easier method to maintain because you only record when you receive cash or pay cash out. It's intuitive, familiar, and straightforward. Using the accrual method, you will generally have to do more recording and financial housekeeping, although with accounting software such as Quicken, the program does much of the work for you.

If your small business has sales of under $5 million per year, you're free to use either the cash method or accrual method. However, if your business keeps an inventory of merchandise to sell to customers, you are required by the Internal Revenue Service to use the accrual method for the inventory (that is, for the sales of merchandise to customers and purchase of more inventory).

While the cash method gives you a better picture of what's in your bank account, its ability to give you a clear picture of how your business is doing (how many sales you've completed, how much money is expected, and how many expenses you need to pay) is severely limited.

On the other hand, the accrual method can give you a clearer picture of the business' health but doesn't do such a great job of telling you what cash you have on hand, which could in turn lead to you adding debt you can't afford (although this is something that keeping a close eye on your bank account can go a long way toward curing). Also, for some small businesses, the accrual method is unnecessarily complicated and shifting tax burdens using the accrual method is difficult to navigate.

Some small businesses choose to utilize a hybrid method where they use accrual for their inventory, as required by the IRS, but use the cash method for other income and expenses.

Answer-4:

Only permanent account balances should appear on the post-closing trial balance. A post-closing trial balance is a listing of all balance sheet accounts containing non-zero balances at the end of a reporting period.

All temporary accounts with zero balances were left out of this statement. The post-closing trial balance contains no revenue, expense, gain, loss, or summary account balances, since these temporary accounts have already been closed and their balances moved into the retained earnings account as part of the closing process.

Examples of specific accounts that are closed:

(i) Service revenue

(ii) Rent expense

(iii) Salaries expenses

(iv) Depreciation expenses