Entries for the Buyer & Seller; the Relationship of the Accounts

1. Assume that Company A buys $1,500 of merchandise from Company B for cash. The merchandise originally cost Company B $1,000. What entries should the buyer and seller make, and what is the relationship of the accounts for this transaction?

2. Which are prepared first: the year-end financial statements or the general journal adjusting entries? Explain.

3. As a result of the Sarbanes-Oxley Act, public companies are required to make changes in the way they do business. What practice does Sarbanes-Oxley forbid?

4. What are the major elements of a system of internal controls?

5. Why might a company offer stock options to an employee instead of simply paying the employee cash? Why might the employee accept stock options instead of asking to be paid in cash?

6. Management accounting and financial accounting provide different information for different purposes. Explain what this means and provide an example that illustrates the differences between management and financial accounting.

7. What is the major purpose of:

a. A balance sheet?

b. An income statement?

c. A statement of cash flows?

8. What are the four general types of financial statement notes typically included in annual reports to stockholders?

9. Explain the first three steps in the accounting cycle.

10. What is a chart of accounts? What is its purpose?

11. What are the three functions of an accounting system?

12. Why is it important to monitor operating ratios such as accounts receivable turnover?

13. What is the danger in focusing a financial analysis solely on the data found in the historical financial statements?

14. What can the inventory turnover ratio tell us?