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Financial accounting is an evergreen filed and can be a good career option. If you are seeking career prospects in the field of financial accounting, you need to equip yourself with the well-versed knowledge of accounting. As the subject has plenty topics to cover, the job seeker will find it difficult tick the triggering interview questions of financial accounting. Browsing through accounting interview questions is a good resort to help you in this regard. The interviewer is focused on knowing the subject knowledge of the job seeker and there are few possible interview questions at wisdom jobs portal that are relied on to retrieve the same. A deep understanding of the job responsibilities, our experts have filtered out interview questions that help you crack through.
Financial accounting gathers and summarizes financial data to prepare financial reports such as balance sheet and income statement for the organization's management, investors, lenders, suppliers, tax authorities, and other stakeholders.
Since financial accounting is the process that provides financial reports to the general public, professionals in the accounting, trade and commerce, have developed and formed an accounting standard which will serve as the foundation of all accounting process and procedures performed. Such accounting standard is referred to as the Generally Accepted Accounting Principles (GAAP).
GAAP represents the rules, procedures, practice and standards followed in the preparation and presentation of the financial statements. Its purpose is to ensure consistency and comparability of reported financial information of business entities, in order to protect the users or general public, since they use financial reports in their economic decisions.
Financial accounting is different from bookkeeping. Bookkeeping is a branch of financial accounting which pertains to the procedural process of recording and maintaining the business transactions. The only function of bookkeeping is to keep the financial record of the business accurate and complete. On the other hand, financial accounting includes a broader role compared to bookkeeping. It is not merely procedural in nature but also conceptual. Financial accounting is also concern with the why, reason or justification of any action adopted. It is responsible not only in the complete and accurate recording of business transactions but also it ensures that the reported financial statement abides by the accounting standards, and all other reporting standards, such as the government.
The primary objective of the Financial Accounting is to communicate and provide information to the investors and creditors on the economic activities of the enterprise that will help them in their investment decisions.
The Financial statements are the reports that result from the process of accounting which allow the interested parties to evaluate the profitability and the solvency of the business. The major financial statements are:
The balance sheet is one of the most important financial statements of a company. It is reported to investors at least once per year. It may also be presented quarterly, semiannually or monthly. The balance sheet provides information on what the company owns (its assets), what it owes (its liabilities), and the value of the business to its stockholders (the shareholders' equity). The name, balance sheet, is derived from the fact that these accounts must always be in balance. Assets must always equal the sum of liabilities and shareholders' equity.
A company's income statement/profit and loss account statement is a record of its earnings or losses for a given period. It shows all of the money a company earned (revenues) and all of the money a company spent (expenses) during this period. It also accounts for the effects of some basic accounting principles such as depreciation. The income statement is important for investors because it's the basic measuring stick of profitability. A company with little or no income has little or no money to pass on to its investors in the form of dividends. If a company continues to record losses for a sustained period, it could go bankrupt. In such a case, both bond and stock investors could lose some or all of their investment. On the other hand, a company that realizes large profits will have more money to pass on to its investors.
The principle characteristics of financial statements are the attributes that make the information provided in the financial statements useful to the users. The principle qualitative characteristics are
The quality of financial reporting refers to how close the financial statements are to economic reality. The closer the financial statements are to economic reality, the higher is the quality of financial reporting. The less that management uses discretionary means to manipulate earnings, the higher the quality of financial reporting. Conservatism means that management should take great care not to overstate assets and revenues and not to understate liabilities and expenses. The more conservative management is in making accounting judgments, the higher will be the quality of financial reporting.
The major constraints on relevant and reliable financial statements are:
The golden Rules of Accounting are:
Accounting equation is a mathematical expression used to describe the relationship between the assets, liabilities and owner's equity of the business model. The basic accounting equation states that assets equal liabilities and owner's equity, but can be modified by operations applied to both sides of the equation, e.g., assets minus liabilities equal owner's equity.
Accounting Standards are rules and criteria of accounting measurement evolved by several accounting standard setting bodies established in developing and developed countries.
The advantages are:
The financial statements are prepared under the historical cost convention, in accordance with Indian Generally Accepted Accounting Principles ( GAAP ) comprising of the accounting standards issued by the Institute of Chartered Accountants of India and the provisions of the Companies Act, 1956, as adopted consistently by the company.
All income and expenditure having a material bearing on the financial statements are recognized on the accrual basis. The preparation of the financial statements in conformity with GAAP requires, that the management of the company ( Management ) make estimates and assumptions, that affect the reported amounts of revenue and expenses of the period, reported balances of assets and liabilities and disclosures relating to contingent assets and liabilities as of the date of the financial statements. Examples of such estimates include, expected contract costs to be incurred to complete software development, provision for doubtful debts, future obligations under employee retirement benefit plans and the useful lives of fixed assets. Actual results could differ from those estimates.
Accounts Receivable, normally abbreviated as A/R, is the money that is currently owed to a company by its customers. The reason why the customers owe money is that the product has been delivered but has not been paid for yet. Companies routinely buy goods and services from other companies using credit. Although typically A/R is almost always turned into cash within a short amount of time, there are instances where a company will be forced to take a write-off for bad accounts receivable if it has given credit to someone who cannot or will not pay. This is why you will see something called allowance for bad debt in parentheses beside the accounts receivable number.
Accounts Payable is the money that the company currently owes to its suppliers, its partners and its employees. Basically, these are the basic costs of doing business that a company, for whatever reason, has not paid off yet. One company's accounts payable is another company's accounts receivable, which is why both terms are similarly structured. A company has the power to push out some of its accounts payable, which often produces a short-term increase in earnings and current assets.
Goodwill is considered to be one of the largest intangible assets, the value of which companies want to reflect correctly in their financial statements. Accounting for this asset, poses many challenges for accountants, as it is an unidentifiable intangible asset.
Goodwill as an intangible asset can be defined from two approaches:
Under this method, goodwill is taken to be the difference between the purchase price and the fair market value of an acquired companys assets.
Excess profits approach
Under this method, the present value of the projected future excess earnings over normal earnings for similar businesses is recorded as goodwill. Due to uncertainty of future earnings, valuing goodwill using this method is difficult.
The companies (Amendment) Act 2000 require every company to create debenture redemption reserve for redemption of debentures out of appropriation of profits every year until redemption. This reserve cannot be utilized by the company except for the purpose of redemption.
Deferred revenue expenditures represent types of assets whose usefulness do not expire in the year of their occurrence but generally expires in the near future. These types of expenditures are carried forward and are written off in future accounting periods.
Sometimes, we make some revenues expenditure but it eventually becomes a capital asset (generally of an intangible nature). Example, if we undertake substantial repairs to the existing building, the deterioration of the premises may be avoided. If we charge the whole expenditure during the current, the current year expenses are affect. However, since the benefit of this expenditure is enjoyed over a number of years. So, to overcome this only a part of the expenditure is charged current year and the balance carried forward and written off gradually during the future periods.
These are liabilities, which materialize on the happening or non-happening of an event.
Contingent liabilities are not real liabilities and as such do not appear in the liability side of balance sheet. But are disclosed by way of a note in the balance sheet.
It is common knowledge that when an asset is used over a period of time, it looses its value. This loss in value is called depreciation. Pickles defines it as "the permanent and continuing diminution in the quality, quantity or value of an asset" Depreciation is the continuous shrinkage of book value of an asset.
Few method of depreciation are
Straight line Method: An equal amount is written off every year during the working life of an asset so as to reduce the cost of the asset to nil or its residual value at the end of its useful life.
Reducing Balance Method: A fixed percentage of the diminishing value of the asset is written off each year so as to reduce to its break up value at the end of its life.
Machine hour method: If it is practicable to keep a record of the actual running hours of each machine, depreciation may be calculated on the basis of the hours for which the concerned machine worked.
Account in which posting data for contracts or contract items are processed for which the same collection/payment agreements apply. Contract accounts are managed on an open item basis within contract accounts receivable/payable.
The analysis of a balance sheet can identify potential liquidity problems. These may signify the company's inability to meet financial obligations. An investor could also spot the degree to which a company is leveraged, or indebted. An overly leveraged company may have difficulties raising future capital. Even more severe, they may be headed towards bankruptcy. These are just a few of the danger signs that can be detected with careful analysis of a balance sheet.
Beyond liquidity and leverage, there are certain very important benchmarks and aspects, which are helpful in the analysis of balance sheet.
FIFO is the inventory cost flow assumption that treats the first goods in as the first goods sold. LIFO is the inventory cost flow assumption that treats the last goods in as the first goods sold. In a period of rising prices, FIFO values inventory at current costs. However, LIFO would value inventory at costs that the company could have incurred years ago. The analyst should take the LIFO cost flow assumption into account and consider adjusting the inventory of a company using LIFO upward to account for inflation.
Marketable securities are cash substitutes. Marketable securities are investments with short-term maturities with little risk due to interest rate fluctuations. Examples of marketable securities include Treasury Bills, Negotiable Certificates of Deposit, and Commercial Paper.
Deferred tax assets and liabilities should be distinguished from assets and liabilities representing current tax for the period. Deferred tax assets and liabilities should be disclosed under a separate heading in the balance sheet of the enterprise, separately from current assets and current liabilities.
The break-up of deferred tax assets and deferred tax liabilities into major components of the respective balances should be disclosed in the notes to accounts.
Incentive for amalgamation extended to hotels and certain banks - Sec. 72A. The benefit of carry forward and set off of accumulated losses and unabsorbed depreciation would be extended in the case of amalgamation of a company owning a hotel with another company or an amalgamation of a banking company with the State Bank of India or its subsidiary or other specified banks. Two additional conditions for amalgamating a company will have to be fulfilled, viz. that it should have been engaged in the business for at least 3 years during which the accumulated loss has occurred or the unabsorbed depreciation has accumulated and it has held continuously as on the date of amalgamation at least 3/4ths of the book value of fixed assets held by it two years prior to the date of amalgamation.
Under the accrual basis of accounting, revenues are reported on the income statement when they are earned. (Under the cash basis of accounting, revenues are reported on the income statement when the cash is received.) Under the accrual basis of accounting, expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid. The result of accrual accounting is an income statement that better measures the profitability of a company during a specific time period.
Financial accounting: has its focus on the financial statements which are distributed to stockholders, lenders, financial analysts, and others outside of the company. Courses in financial accounting cover the generally accepted accounting principles which must be followed when reporting the results of a corporation's past transactions on its balance sheet, income statement, statement of cash flows, and statement of changes in stockholders' equity.
Managerial accounting: has its focus on providing information within the company so that its management can operate the company more effectively. Managerial accounting and cost accounting also provide instructions on computing the cost of products at a manufacturing enterprise. These costs will then be used in the external financial statements. In addition to cost systems for manufacturers, courses in managerial accounting will include topics such as cost behavior, break-even point, profit planning, operational budgeting, capital budgeting, relevant costs for decision making, activity based costing, and standard costing.
I would use the liability account Accounts Payable for suppliers' invoices that have been received and must be paid. As a result, the balance in Accounts Payable is likely to be a precise amount that agrees with supporting documents such as invoices, agreements, etc.
I would use the liability account Accrued Expenses Payable for the accrual type adjusting entries made at the end of the accounting period for items such as utilities, interest, wages, and so on. The balance in the Accrued Expenses Payable should be the total of the expenses that were incurred as of the date of the balance sheet, but were not entered into the accounts because an invoice has not been received or the payroll for the hourly wages has not yet been processed, etc. The amounts recorded in Accrued Expenses Payable will often be estimated amounts supported by logical calculations.
Financial Accounting Related Tutorials
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Financial Accounting Related Interview Questions
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Financial Accounting Related Practice Tests
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Financial Statement Analysis
Fund Flow Statement Analysis
Cash Flow Statement Analysis
Cost Accounting & Preparation Of Cost Statement
Time Value Of Money
Sources Of Long Term Finance
Capital Market Developments In India
Indian Financial System
Sebi In Capital Market Issues
Risk And Return
Cost Of Capital
Capital Structure Theories
Working Capital Management
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