Interview Questions (Continued...)
Domain Questions-finance (Accounting)
2. What is permissible accounting method (it is a method mentioned in GAAP).
-> Only the accrual accounting method is allowed by generally accepted accounting principles (GAAP). Accrual accounting recognizes costs and expenses when they occur rather than when actual cash is exchanged.
3. Name two accounting principles?
->
- Accrual principle
- Conservatism principle
- Consistency principle
- Cost principle
- Economic entity principle
- Full disclosure principle
- Going concern principle
- Matching principle
- Materiality principle
- Monetary unit principle
- Reliability principle
- Revenue recognition principle
- Time period principle
-> Going concern is an accounting term for a company that is financially stable enough to meet its obligations and continue its business for the foreseeable future. Certain expenses and assets may be deferred in financial reports if a company is assumed to be a going concern.
5. What do you mean by Business Entity concept?
-> The business entity concept states that the business is separate from the owner(s) of the business. Therefore the accounting records for even the simplest business, the sole trader, must be kept separate from the personal affairs of the owner or owners.
-> Take a look at the three main rules of accounting: Debit the receiver and credit the giver. Debit what comes in and credit what goes out. Debit expenses and losses, credit income and gains.
-> According to the traditional approach, accounts are classified into three types: real accounts, nominal accounts, and personal accounts.
-> Debit cash for the amount received, debit all accumulated depreciation, debit the loss on sale of asset account, and credit the fixed asset. Gain on sale. Debit cash for the amount received, debit all accumulated depreciation, credit the fixed asset, and credit the gain on sale of asset account.
By cash a/c dr.
By dep^ a/c dr.
By loss on sale of machinery a/c dr.
To profit on sale of machinery a/c cr.
To machinery a/c cr.
-> In case of a credit purchase, “Purchase account” is debited, whereas, the “Creditor's account” is credited with the equal amount
10. Give examples of Intangible assets
-> Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets.
11. What are bad debts?
-> Bad debt refers to loans or outstanding balances owed that are no longer deemed recoverable and must be written off. This expense is a cost of doing business with customers on credit, as there is always some default risk inherent with extending credit.
12. What are drawings?
-> A drawing in accounting terms includes any money that is taken from the business account for personal use. ... However, drawings don't only cover cash withdrawals. It can also include goods and services withdrawn from the company by the owner for personal use.
13. What do you mean by BEP?
-> The break-even point (BEP) or break-even level represents the sales amount—in either unit (quantity) or revenue (sales) terms—that is required to cover total costs, consisting of both fixed and variable costs to the company. Total profit at the break-even point is zero.
14. Give examples of Administrative Cost?
-> Typical items listed as general and administrative expenses include:
- Rent.
- Utilities.
- Insurance.
- Executives wages and benefits.
Legal counsel and accounting staff salaries.
Office supplies.
15.
(1) What is unearned income, its effect in financial statements and journal entry?
-> Unearned income is income from investments and other sources unrelated to employment. Examples of unearned income include interest from savings accounts, bond interest, alimony, and dividends from stock. 1 2 Unearned income, known as a passive source of income, is income not acquired through work.
(2) What is unearned revenue, its effect in financial statements and journal entry?
-> Unearned revenue (Deferred revenue, also known as unearned revenue) should be entered into your journal as a credit to the unearned revenue account, and a debit to the cash account. This journal entry illustrates that the business has received cash for a service, but it has been earned on credit, a prepayment for future goods or services rendered.
16. What is accumulated depreciation, its effect in financial statements and journal entry?
-> Accumulated depreciation balance shows the amount of the total depreciation expense, which has already been charged by the company on its assets since its purchase date. The balance of the accumulated depreciation account increases every year with the depreciation charge of the current year.
17. What is contingent liability, its effect in financial statements and journal entry?
-> A contingent liability is a potential liability that may occur in the future, such as pending lawsuits or honoring product warranties. If the liability is likely to occur and the amount can be reasonably estimated, the liability should be recorded in the accounting records of a firm. it is recorded as loss or expense in the statement of income.
18. What are the two methods of accounting?
-> The two main accounting methods are cash accounting and accrual accounting. Cash accounting records revenues and expenses when they are received and paid. Accrual accounting records revenues and expenses when they occur. Generally accepted accounting principles (GAAP) requires accrual accounting.
19. What do you mean by accrual method of accounting?
-> Accrual accounting is an accounting method where revenue or expenses are recorded when a transaction occurs rather than when payment is received or made.
KEY TAKEAWAYS:
- Accrual accounting is an accounting method where revenue or expenses are recorded when a transaction occurs rather than when payment is received or made.
- The method follows the matching principle, which says that revenues and expenses should be recognized in the same period.
- Cash accounting is the other accounting method, which recognizes transactions only when payment is exchanged.
20. Advantages and disadvantages of cash method.
-> In the realm of accounting, there are two principle methods of managing your financials: cash basis accounting and accrual basis accounting. Small businesses tend to use the cash basis accounting method, which records transactions when the cash actually changes hands rather than upon completion of a service or delivery of a product (accrual basis). In other words, income (or revenue) is recognized when you receive payment, and expenses are recognized when they are actually paid.
For example, if you’re the owner of a landscaping company and your crew finishes up a big job in May, but you don’t get paid until July, you would record the income in your July books. The only exception to this rule is when expenses are paid with a credit card. In this case, the expense is considered paid on the date it’s charged to the card.
For tax purposes, the accounting method that you use is crucial because it determines when you recognize income and deduct expenses. In some cases, as discussed below, the IRS will prohibit a business from using the cash method. However, if your business is not mandated to use the accrual method, you can decide which method of accounting to use. All accounting methods have advantages and disadvantages, and there isn’t one method that will work well for every business. As a small business owner, it’s important to understand the advantages and disadvantages of cash basis accounting to decide if it’s right for your small business.
Advantages:
Easy to Understand: Cash basis accounting tends to be simpler to understand than other accounting methods. If you choose to implement the cash method for your small business, it may not be necessary to seek the help of a professional accountant.
Shows Cash Flow: The cash method most resembles a cash flow statement. It provides an accurate picture of how much cash your business actually has on-hand.
Single-Entry System: The cash method can be done with a simple single-entry system, so a complex accounting program is not always necessary. This is, however, also one of its drawbacks, which is outlined below.
Disadvantages
Single-Entry System: While the simplicity of the single-entry system needed for the cash method is an advantage, it is also a disadvantage. The accrual method necessitates the use of a double-entry system, which is based on accounting equations. This system provides far greater control of transaction posting and reduces the chance of errors.
Short-Term Indicator: While it does indicate the cash flow of a business, it may offer a misleading picture of longer-term profitability. The cash method doesn’t show income that has been invoiced but not received. Furthermore, it doesn’t take future expenses into account. It can also be misleading. For example, your books might show one month as being extremely profitable. However, deeper insight may reveal that sales were actually slow, but a number of customers paid their outstanding bills.
Restrictions: According to the IRS, you cannot use the cash method if your business maintains inventory, is a corporation, or has gross receipts in excess of five million dollars per year. These are the general rules, but there are exceptions — so if you feel that your business falls into one of these categories, you should consult a professional.
While cash basis accounting may be more simplistic, it may also limit you from making more predictive decisions for your business. Measure out the pros and cons for this method with your particular business in mind. Remember that online accounting software can be helpful in setting up the accounting method of your choice.
21. In current COVID situation which sectors are facing set back where there a rise in these assets?
22. What is depreciation and amortization?
-> Amortization and depreciation are two methods of calculating the value for business assets over time.
A business will calculate these expense amounts in order to use them as a tax deduction and reduce their tax liability.
Amortization is the practice of spreading an intangible asset's cost over that asset's useful life.
Depreciation is the expensing of a fixed asset over its useful life.
What is meant by depletion method?
Depletion is an accrual accounting technique used to allocate the cost of extracting natural resources such as timber, minerals, and oil from the earth. Like depreciation and amortization, depletion is a non-cash expense that lowers the cost value of an asset incrementally through scheduled charges to income.
23. What is deferred revenue and can we use this money? If yes when and how?
-> Deferred revenue represents payments received by a company in advance of delivering its goods or performing its services. ... If the magazine company sells a monthly subscription at a single payment of $12 a year, the company earns a deferred revenue of $1 for each month it delivers a magazine to its customers.
The use of the deferred revenue account follows GAAP guidelines for accounting conservatism.
If the good or service is not delivered as planned, the company may owe the money back to its customer.
25. What do you mean by Profītability ratios? State the ratios?
24. Which is your favorite subject?
-> Profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings relative to its revenue, operating costs, balance sheet assets, or shareholders' equity over time, using data from a specific point in time.
26. What do your mean by Liquidity ratios?
-> Liquidity ratios measure a company's ability to pay debt obligations and its margin of safety through the calculation of metrics including the current ratio, quick ratio, and operating cash flow ratio.
27. What is current ratio? What is its significance to the company?
-> The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables.
28. If the current ratio is 1:1 than what is its significance to the company?
-> A ratio of 1:1 indicates that current assets are equal to current liabilities and that the business is just able to cover all of its short-term obligations.
If the company's current ratio is too high it may indicate that the company is not efficiently using its current assets or its short-term financing facilities. ... A current ratio of less than 1 indicates that the company may have problems meeting its short-term obligations.
29. What do you mean by Debt equity ratio?
-> The debt-equity ratio is a measure of the relative contribution of the creditors and shareholders or owners in the capital employed in business. Simply stated, ratio of the total long term debt and equity capital in the business is called the debt-equity ratio.
30. What should be the standard ratio of Debt and Equity?
-> The optimal debt-to-equity ratio will tend to vary widely by industry, but the general consensus is that it should not be above a level of 2.0. While some very large companies in fixed asset-heavy industries (such as mining or manufacturing) may have ratios higher than 2, these are the exception rather than the rule.
31. What is the difference between primary market and secondary market?
-> The primary market is where securities are created, while the secondary market is where those securities are traded by investors. In the primary market, companies sell new stocks and bonds to the public for the first time, such as with an initial public offering (IPO).
32. What is the difference between eps and diluted eps?
-> EPS takes into account a company's common shares, whereas diluted EPS takes into account all convertible securities, such as convertible bonds or convertible preferred stock, which are changed into equity or common stock
33. What is intrinsic value?-> Intrinsic value is a way of describing the perceived or true value of an asset. This is not always identical to the current market price because assets can be over- or undervalued. Intrinsic value is a common part of fundamental analysis, which investors use to assess stocks, as well being used in options pricing.
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