1) Explain what we mean when we say that each of the financial statements tells a different part of the score of the business and that they are all interconnected? What part does each one tell and how does the interconnection actually work?
2) Explain what is meant by the terms "double-entry accounting" and "balanced accounting equation". Why are these concepts important?
3) What do we mean when we refer to accrual accounting? Specifically, why do we have accrued and deferred revenue and expense items, and why is this important to accurate financial statements which reflect the "matching principle?"
4) One of the most common types of fraud in a merchandising business involves overstatement of inventory - basically an intentional (over actual) miscount or using the wrong (too high) prices to value the items counted. Explain how doing so causes the balance sheet and income statement to both be misstated in a way that makes the score of the business look better than it really is?
5) Why are internal controls important in a business to ensure preservation of the assets of the enterprise AND to ensure that there is accurate accounting and reporting? (Hint: think of the type of fraud discussed in question 4 above or the two examples we covered in the discussion boards.) Also, there is a concept called "cost-benefit" that comes into play in consideration of internal controls. Why is this also important?
6) Why is it important to use a reasonably accurate method for valuing accounts receivable each year to create an appropriate charge off to bad debt expense and create an allowance? Also, why is it important to value inventories in accordance with the concept of "Lower of Cost or Market?" How do these two techniques improve the accuracy of financial statements, and further compliance with the accounting principles of "matching" and "conservatism?" (Note: Please answer both parts of the question.)
7) Why is it important that we use the accounting practice of capitalizing major asset acquisitions of items with multiple-year useful lives and then depreciating them over time? How does this improve valuation of the business on the balance sheet and ensure compliance with the matching principle on the income statement (a) when the asset is acquired, (b) in one of the middle years of use of an asset with a multi-year life, and (3) when the asset is eventually disposed of via sale to an outside party.