Exam 1 Study Guide

Question 1

(Ch. 1) What is a service business?

Answer 1

provides intangible products: such as accounting, banking, consulting, cleaning, landscaping, education

Question 2

(Ch. 1) What is a merchandising business?

Answer 2

a business that purchases finished products and resells them to consumers

Question 3

(Ch. 1) What is a manufacturing business?

Answer 3

any business that uses components, parts or raw materials to make a finished good

Question 4

(Ch. 1) What are the characteristics of sole proprietorships?

Answer 4

simple to form, no limit legal liability, nontaxable entity, limitation on life of entity, limited access to capital

Question 5

(Ch. 1) What are the characteristics of partnerships?

Answer 5

simple to form, no limit legal liability, nontaxable entity, limitation on life of entity, average access to capital

Question 6

(Ch. 1) What are the characteristics of corporations?

Answer 6

complex to form, limited legal liability, taxable entity, no limitation on life of entity, extensive access to capital

Question 7

(Ch. 1) What is the difference between premium-price emphasis and low-cost emphasis?

Answer 7

low-cost: company products/services are at lower cost than competitors
premium-price: company designs/produces products/services that serve unique market needs allowing a premium price charge

Question 8

(Ch. 1) What are business stakeholders?

Answer 8

any person, organization, social group, or society at large that has a stake in the business.

Question 9

(Ch. 1) Who are internal stakeholders?

Answer 9

entities within a business (employees, managers, the board of directors, investors)

Question 10

(Ch. 1) What are assets?

Answer 10

any resource owned by an entity

Question 11

(Ch. 1) What are liabilities?

Answer 11

money owed by an entity

Question 12

(Ch. 1) What is equity?

Answer 12

capital stock + retained earnings

Question 13

(Ch. 1) What are expenses?

Answer 13

wages, cost of goods sold, rent, depreciation, advertising, professional fees, utilities, office supplies

Question 14

(Ch. 1) What are revenues?

Answer 14

sales, interest, rental income, service fees

Question 15

(Ch. 1) What is stock?

Answer 15

how much you own of a business

Question 16

(Ch. 1) What are dividends?

Answer 16

a payment made by a corporation to its shareholders (usually as a distribution of profits)

Question 17

(Ch. 2) What are examples of assets?

Answer 17

cash, inventory, receivables, prepaid expenses, equipment

Question 18

(Ch. 2) What are examples of liabilities?

Answer 18

accounts payable, notes payable, deferred revenue

Question 19

(Ch. 2) What are examples of equity?

Answer 19

common stock, retained earning

Question 20

(Ch. 2) How are accounts affected from transactions?

Answer 20

every transaction must touch a minimum of two accounts (when a company borrows money from a bank, the company’s assets will increase and its liabilities will increase by the same amount)

Question 21

(Ch. 2) What is a transaction?

Answer 21

economic event that affects the financial statements

Question 22

(Ch. 2) What is the accounting equation?

Answer 22

assets = liabilities + equity

Question 23

(Ch. 3) What are accruals?

Answer 23

revenues earned or expenses incurred which impact a company’s net income on the income statement, although cash related to the transaction has not yet changed hands

Question 24

(Ch. 3) What are deferrals?

Answer 24

any account where the asset or liability is not realized until a future date (prepaid insurance, prepaid rent, unearned rent/insurance)

Question 25

(Ch. 3) What is depreciation?

Answer 25

a non-cash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence over the period of its useful life

Question 26

(Ch. 3) What does depreciation do?

Answer 26

decreases assets/retained earnings // goes on income statement as depreciation expense

Question 27

(Ch. 3) What accounts are depreciated?

Answer 27

assets and retained earnings

Question 28

(Ch. 3) Why do we make adjusting entries?

Answer 28

to update the accounts to conform with the accrual concept

Question 29

(Ch. 3) What financial statements are effected by adjusting entries?

Answer 29

each adjusting entry usually affects one income statement account (a revenue or expense account) and one balance sheet account (an asset or liability account)

Question 30

(Ch. 3) How do you calculate the total adjustment needed to be made for the adjusting entries?

Answer 30

w

Question 31

(Ch. 3) What is an operating cash flow?

Answer 31

revenues, expenses

Question 32

(Ch. 3) What is an financing cash flow?

Answer 32

issuing stock, incurring debt, paying off debt, paying dividends

Question 33

(Ch. 3) What is an investing cash flow?

Answer 33

buying and selling assets