Fundamental Accounting Principles CH1

Question 1

External Users

Answer 1

Do not directly run the organization and have limited access to info.
Lenders, Shareholders, Board of Directors, External auditors, nonmanagerial and non executive employees and labor unions, Regulators, voters and government officials, contributors, suppliers, customers

Question 2

Internal Users

Answer 2

Directly manager the organization
Purchasing managers, Human resource managers, production managers, distribution managers, marketing managers, service managers, research & development managers

Question 3

Fraud triangle

Answer 3

consists of Opportunity. Pressure, and rationalization
Opportunity: Low risk of being caught and able to commit fraud
Pressure: Incentive to create fraud
Rationalization: justifies fraud or does not see its criminal nature

Question 4

Internal Controls

Answer 4

procedures to protect assets ensure reliable accounting , promote efficiency, and uphold company policies

Question 5

Sarbanes-Oxley Act
Dodd-Frank Wall Street Reform
Consumer Protection Act

Answer 5

Clawback - mandates recovery of excessive pay

Whistleblowers - SEC pays whistleblowers 10% to 30% of sanctions exceeding $1 Million

Question 6

Accounting Principles

Answer 6

Measurement principle
revenue principle
expense recognition principle
full disclosure principle

Question 7

Measurement Principle

Answer 7

accounting info is measured as actual cost

Question 8

GAAP

Answer 8

generally accepted accounting principles

Question 9

Revenue Recognition Principle

Answer 9

Revenue is recognized when
1 - goods or services are provided to a customer
2- at the amount expected to be received.

Question 10

Expense recognition principle

Answer 10

matching principle

records expenses incurred to generate the revenue reported

Question 11

Full disclosure principle

Answer 11

reports details behind financial statements that would impact user’s decisions

Question 12

Accounting assumptions

Answer 12

going concern assumptions
monetary unit assumptions
time period assumptions
business entity assumptions

Question 13

Going-concern assumptions

Answer 13

presumes business will continue to operate instead of being closed or sold

Question 14

Monetary unit assumption

Answer 14

Transactions and events are expressed in monetary, or money units

Question 15

Time period assumptions

Answer 15

the life of a company can be divided into time periods such as months and years, and useful reports can be prepared for these periods

Question 16

Business entity assumptions

Answer 16

a business is accounted for separately from other business entities and its owner

Question 17

Sole proprietorship

Answer 17

1 owner
no additional business income tax
unlimited liability
not a separate legal entity
business ends with owner's death or by choice

Question 18

Partnership

Answer 18

2 or more owners/partners
no additional business income tax
unlimited liability
not a separate legal entity
Business ends with a partner's death or by choice

Question 19

Limited liability company (LLC)

Answer 19

1 or more owners/called members
no additional business income tax
limited liability owners/members
- not personally liable for LLC debts
a separate legal entity with same rights and responsibilities as a person
indefinite

Question 20

Cost constraint

Answer 20

cost-benefit/accounting constraint
says that information disclosed by an entity must have benefits to the user that are greater than the costs of providing it.

Question 21

Double taxiation

Answer 21

1. corporations income is taxed

2. dividends to owners are taxed as part of the owners personal income

Question 22

Liabilities

Answer 22

creditor’s claim on assets
obligations to provide assets, products, or services to others
money owed.

Question 23

Equity

Answer 23

owner’s claim on assets

= assets - liabilities

Question 24

Assets

Answer 24

resources a company owns or controls

assets = liabilities + equity

Question 25

Owner, capital

Answer 25

Owner’s investments are inflows of cash and other net assets from owner contributions which increase equity

Question 26

Owner, withdrawals

Answer 26

outflows of cash and other net assets to owners for personal use which reduce equity

Question 27

Revenues

Answer 27

increase equity (via net income) from sales of products and services to customers
EX. sales of products, services provided, facilities rented to others, and commissions from services

Question 28

Expenses

Answer 28

decrease equity (via net income) from costs of providing products and services to customers. 
Ex. employee time, advertising, utilities

Question 29

net loss

Answer 29

when expenses exceed revenues

Question 30

net income

Answer 30

when revenue exceeds expenses

also called earnings or profit.

Question 31

corporation

Answer 31

1 or more owners/called stockholders
additional corporate income tax
limited liability, stockholders are not liable as a separate legal entity
indefinite

Question 32

private accounting

Answer 32

accounting employees working for businesses

Question 33

Public accounting

Answer 33

offering audit, tax, and accounting services to others.

Question 34

Return on Assets (ROA)

Answer 34

ROA = Net Income/Total Assets

Question 35

What events or transactions change equity?

Answer 35

Owner, capital - Owner, withdrawals + Revenues - Expenses