Module 6

Question 1

What would owners want to know from accounting information?

Answer 1

• Has the company earned satisfactory income on its total investment?
• Should an investment be made in this company?
• Should the present investment be increased, decreased, or retained at the same level?
• Can the company install costly pollution control equipment and still be profitable?

Question 2

What do employees and unions want to know from accounting info?

Answer 2

• Does the company have the ability to pay increased wages?

* Is the company financially able to provide long-term employment for its workforce?

Question 3

What do governmental units wants to know from accounting info?

Answer 3

• Federal and State Government require tax returns and other documents often prepared by accountants.
• Is the company, such as a local public utility, charging a fair rate for its services?

Question 4

What do creditors and lenders want to know from accounting info?

Answer 4

• Banks or lending institutions may use accounting information to guide decisions such as whether to lend or how much to lend a business.
• Should a loan be granted to the company?
• Will the company be able to pay its debts as they become due?

Question 5

What do customers want to know from accounting info?

Answer 5

• Does the company offer useful products at fair prices?

* Will the company survive long enough to honour its product warranties?

Question 6

What does the general public want to know about accounting info?

Answer 6

• Investors will also use accounting information to guide investment decisions
• Is the company providing useful products and gainful employment for citizens without causing serious environmental problems?

Question 7

What is the entity concept?

Answer 7

an entity is considered to be separate from the owner(s) and from any other business.
Thus, each business is an entity and has its own accounting system and accounting records.

Question 8

Why is it important to treat each entity separately?

Answer 8

a. Combining business and personal related items would make it hard to tell which items are intended for business and personal use
b. With a separate accounting system for a business, it is much easier to identify, measure and record activities, and to prepare financial statements.

Question 9

What is a transaction?

Answer 9

an exchange of property or service with another entity. This is when the accounting process begins

Question 10

What is a source document?

Answer 10

A source document is a business record that is used as evidence that a transaction has occurred. eg. sales receipt

Question 11

What is an accounting use of a source document?

Answer 11

Although the accounting process begins when a transaction occurs, the identification, measurement and recording of information are based on an analysis of the related source documents.

Question 12

What is the monetary unit concept?

Answer 12

When the source documents for a transaction show the value of the exchange in terms of money.

Question 13

What is the historical cost concept?

Answer 13

states that a business records its transactions based on the dollars exchange (the cost) at the time the transaction occurred.
Under GAAP, businesses generally do not record the change in the value of either the currency or the individual goods and services and instead, use this concept

Question 14

What is the accounting equation?

Answer 14

The accounting equation is used to record all the transaction of a business.
Economic resources = claims on economic resources
or
assets = liabilities + owner’s equity

Question 15

What are assets?

Answer 15

Assets – are a business’s economic resources that will provide future benefits to the business
o Cash
o Accounts receivable
o Property plant and equipment

Question 16

What are liabilities?

Answer 16

A business’s economic obligations (debts) owed to its creditors. Legal documents are often evidence of liabilities as they establish a claim by the creditors against the assets of a company.

Question 17

What is owner’s equity?

Answer 17

Owner’s Equity – Owner’s current investment in the assets of a business.

Question 18

What is the dual effect of transactions?

Answer 18

Dual effect of transactions – To keep the accounting equation in balance, a business must make at least two changes in its assets, liabilities or owner’s equity when it records each transaction.

Question 19

What is the expanded accounting equation?

Answer 19

Assets = liabilities + owner’s equity
Owner’s equity = capital + net income
net income = revenues - expenses

Question 20

What is the expanded accounting equation?

Answer 20

To modify the accounting system for a sole proprietor the owner’s equity part of the equation can be split into two sections:

1. Owner’s capital’ account – lets the owner record transactions relating to their investments and withdrawals of capital from the business.
2. Net income (revenues and expenses) – For recording both types of transactions, the equality of the accounting equation is maintained because of the dual effects of transactions. The expanded accounting equation is as follows:

Question 21

What are revenues?

Answer 21

Revenues – the amounts earned by charging customers for goods or services the business provided during a specific time period.

Question 22

What are expenses?

Answer 22

Expenses – the costs of providing the goods or services to customers during the time period

Question 23

What is the matching principle?

Answer 23

Matching principle – To determine its net income for an accounting period, a business computes and deducts the total expenses from the total revenues earned during the period.

Question 24

What is the purpose of the matching principle?

Answer 24

What is the purpose of the matching principle? – By matching expenses against revenues, a business has a good idea of how much better off it is at the end of an accounting period as a result of its operations during that period.

Question 25

What is going concern?

Answer 25

Going concern – An assumption that an entity is able to continue as a viable entity for the foreseeable future.

Question 26

What is accrual accounting?

Answer 26

Recording revenues and related expense transactions in the same accounting period that goods or services are provided, regardless of when cash is received or paid.