Lesson 1

Question 1

Define “Partnership”

Answer 1

Has multiple owners called partners, each put income on their own returns, unlimited liability.

Question 2

Define “Corporation”

Answer 2

Has multiple owners called shareholders, separate legal entity, files it’s own income tax return, limited liability.

Question 3

Define “Sole-Proprietorship”

Answer 3

One owner, each put income on their returns, unlimited liability.

Question 4

Define “Record keeping / bookkeeping”

Answer 4

Is the recording of financial transitions, either manually or electronically, for the purpose of creating a reliable bank of data.

Question 5

Define “Accounting”

Answer 5

Is an information system that identifies, measures records, and communicates relevant information that faithfully represents an organizations economic activities.

Question 6

Define “External users”

Answer 6

External users are not directly involved in running the organization and include shareholders, lenders directors, customers, suppliers and brokers.

Question 7

Define “Financial Accounting”

Answer 7

Financial accounting is the area of accounting aimed at serving external users.

Question 8

Define “Internal users”

Answer 8

Internal users of accounting information are those individuals directly involved in managing and operating an organization.

Question 9

Define “Managerial accounting”

Answer 9

It provides special-purpose reports aimed at serving the decision-making needs of internal users.

Question 10

Define “Internal controls”

Answer 10

They are procedures set up to protect assets (like cash, equipment, and buildings), ensure that accounting reports are free from error, neutral and complete, promote efficiency, and ensure that company policies are followed.

Question 11

Four fields in which accountants work:

Answer 11

Financial, Managerial, Taxation, Accounting-related

Question 12

Define “Audit”

Answer 12

It is an independent review and test of an organization’s accounting system and records; it is performed to add credibility to the financial statements.

Question 13

Define “External Audit”

Answer 13

To perform the audit function at the request of the board of directors to protect shareholder interests.

Question 14

What are the four general areas of ethics:

Answer 14

1. ) High level of professional competence
2. ) Treat sensitive information as confidential
3. ) Exercise personal integrity
4. ) Be objective in matters of financial disclosure

Question 15

What is the Rotary 4 way test:

Answer 15

1. ) Is it the truth?
2. ) Is it faire to all concerned?
3. ) Will it build goodwill and better friendships/
4. ) Will it be beneficial to all concerned?

Question 16

Define “Social responsibility”

Answer 16

It is a concern for the impact of our actions on society as a whole.

Question 17

Define “General Accepted Accounting Principles / GAAP”

Answer 17

The rules that make up acceptable accounting practices. Primary purpose is to make information in financial statements useful.

Question 18

What makes financial information useful?

Answer 18

Relevance and faithful representation

Question 19

What are the four traits of GAAP?

Answer 19

1. ) Comparable (companies using similar practices)
2. ) Verifiable (people can agree that info is truthful)
3. ) Timely (available to decision makers)
4. ) Understandable (information is clear)

Question 20

Define “Cost principle”

Answer 20

All transactions are recorded based on the actual cash amount received or paid. In the absence of cash, the cash equivalent amount of the exchange is recorded.

Question 21

Define “Going-concern principle”

Answer 21

Financial statement users assume that the statements reflect a business that is going to continue its operations instead of being closed or sold.

Question 22

Define “Monetary unit principle”

Answer 22

Transactions are expressed using unites of money as the common denominator. Assumed that unit is stable and not adjusted for changes in currency value or inflation.

Question 23

Define “Revenue recognition principle”

Answer 23

Revenue is recorded at the time that it is earned regardless of whether cash or another asses has been exchanged.

Question 24

Define “Business entity principle”

Answer 24

Each economic entity or business of the owner must keep accounting records and reports that are separate from those of the owner and any other economic entity of the owner.

Question 25

What are the four types of statements?

Answer 25

1. ) Income Statement
2. ) Statement of changes in equity
3. ) Balance Sheet
4. ) Statement of cash flows

Question 26

Define “fiscal year”

Answer 26

It is a period used for calculating annual (“yearly”) financial statements in businesses

Question 27

Define “Calendar year”

Answer 27

Jan 1 to Dec 31

Question 28

Define “Natural year”

Answer 28

12 month period that ends when business activity is at its lowest (after holiday sales).

Question 29

Define “Income Statement”

Answer 29

It reports revenues earned less expenses incurred by a business over a period of time.

Question 30

Define “Statement of changes in equity”

Answer 30

It reports on changes in equity over the reporting period by adjusting beginning equity for owner investments less owner withdrawals and net loss plus net income.

Question 31

Define “Owner investments”

Answer 31

They occur when the owner transfers personal assets, such as cash and equipment, into the business.

Question 32

Define “Owner withdrawals”

Answer 32

They are distributions of net income to the owner and occur when the owner takes cash or other assets from the business.

Question 33

Define “Balance Sheet”

Answer 33

It reports the financial position of a business at a point in time by listing assets, liabilities and equity.

Question 34

Define “Equity / net assets”

Answer 34

Equity, or net assets, is the residual interest in the assets of a business that remains after deducting liabilities.

Question 35

Define “Statement of cash flows”

Answer 35

It describes the sources and uses of cash for a reporting period and is organized by a company’s major activities: operating, investing, and financing activities.

Question 36

Define “Account payable”

Answer 36

It is a liability created by buying products or services on credit. It reflects amounts owed to others.

Question 37

Define “Note payable”

Answer 37

It is a liability expressed by a written promise to make a future payment at a specific time.