Chapter 1

Question 1

In your own words, what is Accounting?

Answer 1

• The language of business
• The information system that measures business activities, processes the information into reports, and communicates the results to decision makers
• Used every day to help make business decisions

Question 2

Who are the typical users of Financial Accounting information?

Answer 2

• Provides information for external decision makers

- Outside investors, lenders, customers, and the federal government

Question 3

Who are the typical users of Managerial Accounting information?

Answer 3

• Focuses on information for internal decision makers

- Company’s managers and employees

Question 4

Financial Accounting Standards Board (FASB)

Answer 4

• A privately funded organization that oversees the creation and governance of accounting standards
• Works with governmental regulatory agencies such as the Securities and Exchange Commission (SEC)
• Also works with congressionally created groups and private groups

Question 5

Securities and Exchange Commission (SEC)

Answer 5

• US governmental agency that oversees the US financial markets
• Oversees those organizations that set standards like Financial Accounting Standards Board (FASB)

Question 6

Generally Accepted Accounting Principles (GAAP)

Answer 6

• The guidelines for accounting information
• The main US accounting rule book and is currently created and governed by the FASB
• Rests on the conceptual framework that identifies the objectives, characteristics, elements, and implementation of financial statements and creates the acceptable accounting practices

Question 7

Sole Proprietorship

Answer 7

• A business with a single owner
• Small business, owner is personally liable
• Owner pays tax on the earnings

Question 8

Partnership

Answer 8

• A business with two or more owners, not organized as a corporation
• Personally liable
• Not taxed, partners pay tax on their share of the earnings
• Professional organizations such as attorneys, accountants, or physicians

Question 9

Corporation

Answer 9

• A business organized under state law that is a legal separate entity
• Not personally liable
• Pays taxes
• From small business to multinational businesses

Question 10

Limited-Liability Company (LLC)

Answer 10

• A company in which each member is only liable for his or her own actions
• Members are not personally liable
• LLC is not taxed, members pay taxes on their share of earnings
• An alternative to the partnership

Question 11

What is the Sarbanes-Oxley Act?

Answer 11

• Intended to curb financial scandals
• Requires management to review internal control and take responsibility for the accuracy and completeness of their financial reports
• Made it a criminal offense to falsify financial statements

Question 12

What is the accounting equation?

Answer 12

-Assets=Liabilities+Equity

Question 13

List 3 examples of Assets

Answer 13

• An economic resource that is expected to benefit the business in the future
• Cash, Merchandise Inventory, Equipment, Land

Question 14

List 3 examples of Liabilities

Answer 14

• Debts that are owed to creditors

- Accounts Payable, Notes Payable, Salaries Payable

Question 15

What is Equity?

Answer 15

-The owner’s claims to the assets of the business; the company’s net worth

Question 16

What is transaction?

Answer 16

-An event that affects the financial position of the business and can be measured with faithful representation

Question 17

Which accounts would be affected by each of the following transactions and identify if the account would increase or decrease.

The company received cash in exchange for the issuance of common stock

Answer 17

• Cash would increase and common stock would increase

Question 18

Which accounts would be affected by each of the following transactions and identify if the account would increase or decrease.

The company paid cash for land

Answer 18

-Cash decreases and Land increases

Question 19

Which accounts would be affected by each of the following transactions and identify if the account would increase or decrease.

Performed services for clients on account

Answer 19

-Revenue increases and Accounts Receivable increases

Question 20

Which accounts would be affected by each of the following transactions and identify if the account would increase or decrease.

Purchased Office Supplies on account

Answer 20

-Office Supplies would increase and Accounts Payable would increase

Question 21

What two types of accounts appear on the income statement?

Answer 21

-Revenues and expenses

Question 22

Included on the statement of retained earnings is the net income and which accounts?

Answer 22

-Retained earnings and dividends

Question 23

What does the balance sheet tell an investor?

Answer 23

-It’s a snapshot of the entity. It allows the investor to quickly asses the overall health of a business by viewing the balance sheet

Question 24

What are the three sections of the statement of cash flows?

Answer 24

-Operating, investing, and financing

Question 25

What is the formula for return on assets?

Answer 25

• Net Income/Average Total Assets

- Average Total Assets= (Beginning Total Assets+Ending Total Assets)/2

Question 26

Net income is $10,000 and total assets are $150,000 for the current year. Total assets for the previous year was $100,000. What is the ROA?

Answer 26

(150,000+100,000)/2=125,000

10,000/125,000=.08= 8%