Chapter 1

Question 1

Sole proprietorship

Answer 1

one owner- advantage easy to form, disadvantage- unlimited liability the owner is responsible for the companys debt

Question 2

Partnership

Answer 2

two or more owners, disadvantage- unlimited liability the owners are responsible for the company’s debt

Question 3

Corporation

Answer 3

sell shares of stock to investors owners are called stockholders, advantage- limited liability, continuity of life/ease in transfer of ownership, opportunity to raise large capital through stock, disadvantage- double taxation

Question 4

what is accounting?

Answer 4

to identify, measure (in $) and communicate information about a company that is useful in making economic decisions

Question 5

External user group

Answer 5

stockholders (owners of company), creditors (bank, people we owe $), competitors, government agencies (IRS, SEC),

Question 6

Internal user groups

Answer 6

MGMT, CEO, CFO (all budgeting and planning)

Question 7

Liabilities

Answer 7

debt (Accounts payable, notes payable)

Question 8

Equity

Answer 8

Ownership (Common stock, retained earnings)

Question 9

Assets

Answer 9

Cash, accounts receivable, Inventory, land, equipment, Furniture and fixtures, buildings

Question 10

Balance sheet

Answer 10

Includes liabilities, equity, assets, shows the financial position of a company at a “point” in time

Question 11

Income statement

Answer 11

includes revenue and expenses, revenue - expenses = Net Income/loss

Question 12

Order to prepare the statements

Answer 12

1. Income Statement
2. Retained Earnings Statement
3. Balance Sheet
4. Statement of Cash Flows

Question 13

The accounting equation

Answer 13

assets = Liabilities + Owners equity

Question 14

Statement of Cash Flows

Answer 14

shows sources and uses of cash
1. Operating
2. Investing
3. Financing

Question 15

Operating revenues

Answer 15

increase in assets or a decrease in liabilities as a result of delivering the product or performing a service

Question 16

Operating expenses

Answer 16

decrease in assets or increase in liabilities from ongoing operations to generate revenue

Question 17

Non operating gains or losses

Answer 17

increase in gains or decreases losses in assets as a result of an incidental transaction

Question 18

Non operating

Answer 18

interest revenue or interest expense

Question 19

Gross profit

Answer 19

Sales Revenue- COGS = Gross profit

Question 20

Retained earnings equation

Answer 20

(when no changes in a company’s stock during the period)
Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

Question 21

Statement of Stockholders Equity

Answer 21

Beginning Retained Earnings + New Stock + Net Income - Dividends = Ending SHE

Question 22

Assets in order of Liquidity

Answer 22

1. Cash
2. Marketable Security
3. Accounts Receivable
4. Inventory
5. Supplies
6. Pre Paid Expenses

Question 23

Marketable security

Answer 23

short term investment, investment in stocks and bonds of other companies that management plans to sell within 12 months

Question 24

Accounts Receivable

Answer 24

customer owes for products delivered or services provided

Question 25

Inventory

Answer 25

Goods held for resale

Question 26

Supplies

Answer 26

on hand supplies

Question 27

Pre Paid expenses

Answer 27

payment made by the company in advance for items such as rent, insurance, advertising

Question 28

PP&E

Answer 28

plant, property,& equipment fixed assets acquired for use in business rather than resale to customers

Question 29

Does NOT have a limited useful life

Answer 29

land

Question 30

HAS a limited useful life, depreciate

Answer 30

buildings, equipment, furniture and fixtures, vehicles, accumulated depreciation (contra asset)

Question 31

Intangible Assets

Answer 31

Patents, Copyright, Trademark/Tradename, Franchise/Licenses, Goodwill

Question 32

Order or current Liabilities in order of maturity

Answer 32

1. accounts payable
2. wages payable
3. unearned revenue
4. note payable

Question 33

Long Term Liability

Answer 33

1. Note Payable- Long term
2. Bond Payable
3. Mortgage Payable

Question 34

Stockholders Equity

Answer 34

Common Stock + Retained Earnings

Question 35

Working Capital

Answer 35

Current Assets - Current Liabilities

Question 36

Current Ratio

Answer 36

Current Assets/ Current Liabilites

Question 37

Gross Profit Ratio

Answer 37

Gross Profit/ Sales Revenue

Question 38

Profit Ratio

Answer 38

Net Income/ Sales Revenue

Question 39

GAAP- Generally Accepted Accounting Responsibilities

Answer 39

A common set of “rules” used to report US financial statements, very rule bases

Question 40

Financial Accounting Standards Board

Answer 40

(FASB) private sector body given responsibility to develop GAAP, for US companies

Question 41

IASB- International Accounting Standards Board

Answer 41

for non US companies, working towards a convergence of international financial reporting standards, very principle based, still has not been implemented been in the works since 03

Question 42

Public Company accounting Oversight Board

Answer 42

five member body that sets auditing standards

Question 43

Managements Responsibility

Answer 43

ultimate responsibility for the accuracy of the financial statement

Question 44

Purpose of an Audit

Answer 44

prepare a report to state an opinion on the fairness of the financial statement

Question 45

Sarbanes Oxley Act (SOX) of 02

Answer 45

sponsored by Senator Paul Sarbanes of Maryland and Congressmen Michael Oxley of Ohio, key provisions were Management, Board of Directors, External Auditors, and enforcement