Accounting: The Language of Business

Question 1

Why do we need accounting?

Answer 1

We need accounting so that business owners/managers/interest parties can evaluate the performance of the business.

Question 2

Definition of Accounting

Answer 2

Process where finanical information is recorded, classified, summarized, interpreted and communicated to owners, managers and other interested parties.

Question 3

What is the use of an accounting system?

Answer 3

It is used to accumulate and classify financial data then summarize them in into periodic reports called financial statements.

Question 4

4 Kinds of Accounting Careers

Answer 4

Public
Managerial / Private
Governmental
Education

Question 4

What do accountants do?

Answer 4

1. Establish records and procedures
2. Supervises the operations
3. Interprets the resulting information

…of the accounting system

Question 5

What is the difference between public , private, governmental, and education accounting?

Answer 5

Public accountants provide accounting services for other businesses. Private accountants work for a single busines exclusively. Governmental accountants work for state/government units. In education, the accountant is a member of the academe.

Question 6

3 Services of Public Accountants

Answer 6

1. Auditing
2. Tax Accounting
3. Management Advisory Services

Question 7

Definition of Auditing

Answer 7

Review of financial statements to assess fairness and adherence to generally accepted accounting principles (GAAP)

Question 8

2 Branches of Tax Accounting

Answer 8

Tax Compliance
Tax Planning

Question 9

Definition of Tax Compliance

Answer 9

Preparation of tax returns and the audit of those returns

Question 10

Definition of Tax Planning

Answer 10

Advice clients how to structure financial affairs in order to reduce tax liability

Question 11

Definition of Management Advisory Services

Answer 11

Helping clients improve information systems or business performance

Question 12

Requirements to be a CPA

Answer 12

• Certain number of college credits in accounting courses
• Demonstrate good personal character
• Pass Uniform CPA Examination
• Fulfill experience requirements of the state of practice

Question 13

Users of Financial Information (10)

Answer 13

1. Owners and Managers
2. Lenders and creditors
3. Investors
4. Employees
5. Tax Authorities
6. Customers
7. Regulatory Agencies
8. Employee Unions
9. Trade Associations
10. Financial Intermediaries

Question 14

These users are classified as internal users

Answer 14

Owners and Managers
Employees

Question 15

Entity

Answer 15

Recognized as having its own separate identity

Question 16

Economic Entity

Answer 16

A business/organization whose major purpose is to profit for its owners’

Question 17

Social Entities

Answer 17

NGOs

Question 18

Based on the nature of activities

Types of Business Enterprises

Answer 18

1. Service
2. Merchandising
3. Manufacturing

Question 19

Service Business

Answer 19

Services to clients for a fee

Question 20

Merchandising Business

Answer 20

Buys and sells goods without altering their original form

Maintains INVENTORY which are held for sale in the normal business operations

Question 21

Manufacturing Business

Answer 21

Buys raw materials, processes them into finished goods, and sells them at a higher price than the cost

Question 22

Based on ownership

Types of Business Enterprise

Answer 22

1. Sole Proprietorships
2. Partnership
3. Corporation
4. Cooperation

Question 23

Sole Proprietorships

Answer 23

• Owned by one
• Ends when the owner is no longer willing or able to keep it going
• Owner is legally responsible for debts and taxes of the business. Creditors go to them when busines cannot pay debts.
• The owner and the business’ income combined to compute the total tax responsibility of the owner to pay income taxes

Question 24

Advantages of Sole Proprietorship

Answer 24

* Ease of entry and exit * Full ownership control * All profits go directly to owners same as suffers and losses * Tax savings * Few government regulations

Question 25

Disdvantages of Sole Proprietorship

Answer 25

* Unlimited liability * Limitations in raising capital * Lack of continuity

Question 26

Partnerships

Answer 26

* A business entity owned by two or more * Partnership Agreement made at the start that details the rights, obligations, and limitations of each partner * Liability Partnership Act - a general partnership that provides some limited liability for all partners

Question 27

Often used for service-type businesses including professional practices

Answer 27

Partnerships

Question 28

Advantages of Partnerships

Answer 28

* Ease of formation * Additional sources of capital * Management base * Tax implications

Question 29

Disadvantages of Partnerships

Answer 29

* Unlimited liability * Difficulty in transferring ownership * Lack of continuity * Limitations in raising capital

Question 30

Corporations

Answer 30

* The only form of business that is a separate legal entity * Separate from owners * Has legal right to own property and do business in its own name

Question 31

Privately Owned Corporations

Answer 31

* “Closely held corporations” * Limited to specific individuals * Stock not traded on an exchange

Question 32

Publicly Owned Corporations

Answer 32

Bought and sold on stock exchanges and OTC markets

Question 33

Stock

Answer 33

In the form of stock certificates, representing ownership of corporation

Question 34

Corporate Owners are called

Answer 34

Stockholders / Shareholders

Question 35

Stockholders / Shareholders are not personally responsible for debts or taxes. If they are unable to pay the bill...

Answer 35

stockholders can lose their investment = stockholders will not lose more than the cost of the shares of stock

Question 36

Advantages of Corporations

Answer 36

* Limited liability * Unlimited life * Ease in transferring ownership * Ability to raise capital

Question 37

Disadvatages of Corporations

Answer 37

* Time and cost in formation * More regulation * Taxes

Question 38

Cooperative

Answer 38

* Owned by a group minimum of 15 serving as benefactors of business endeavors * Members can become part by purchasing shares

Question 39

Advantages of Cooperatives

Answer 39

* Unlimited life * Ease in transferring ownership * Ability to raise capital * Democratic organization * Exempt from taxes, generally * Less regulations

Question 40

Disadvantages of Cooperatives

Answer 40

* One member one vote policy * Members’ participation may be lacking

Question 41

Accounting vs. Auditing

Answer 41

* Auditing starts when accounting ends. * Accounting - to show the performance, profitability, and financial position of an organization * Auditing - to reveal to which extent the financial statements of an organization are true and fair

Question 42

Accounting vs. Bookkeeping

Answer 42

Bookkeeping is the initial stage of accounting Accountants direct and review the work of bookkeepers

Question 43

# * Accounting vs. Accountancy

Answer 43

Accountancy is the systematic body of knowledge that prescribes accounting principles followed during the accounting process.

Question 44

Financial Accounting vs. Managerial Accounting

Answer 44

Managerial accounting involves identifying, measuring, analyzing, interpreting, and communicating financial information to managers to help them set an organization's goals. Financial accounting involves recording and summarizing the stream of transactions and economic activity resulting from business operations and reporting it to investors and regulators.

Question 45

Primary Users

Answer 45

Investors and Creditors