Question

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

The three basic activities if accounting are:

• Recording entries in the journal
• Post entries to the ledger
• Preparation of financial statement

The most fraud occurs in the preparation of financial statement as these are evaluated during the audit. So generally material misstatement are represented in the financial statement to take undue advantage. And it is a place where you can make big variance in few steps to take big advantage. Where as in case of journal you have to manipulate many entries to take a significant advantage. Error generally occur in recording the entries as it is the first step and reconciliation happens afterwards.

Balance Sheet is the most useful financial statement because it shows the true financial position of the business on a specified date rather than just the performance for a particular period. It helps in making investment decision for the external users.

Suppliers may use Cash Flow Statement to identify the inflow and outflow cash before allowing long term credit to the business. Short-term investor will go for income statement to just look at the current performance of the business. Long-term investors will look at the balance sheet to identify the long term liquidity position of the business. Thus different users will prefer different financial statements.

As per policy, I can solve first four sub parts of the same question.