Chapter 1

Question 1

What are the four financial statements?

Answer 1

1. the income statement
2. statement of changes in equity
3. balance sheet
4. statement of cash flow

Question 2

what is share capital?

Answer 2

the money an entity raises by selling stocks.

Question 3

what is a statement in changes of equity?

Answer 3

provides information about how the balances in share capital and retained earnings changed during the period

Question 4

what are retained earnings?

Answer 4

the accumulated portion of a businesses profits that are not distributed as dividends to shareholders but instead reinvested back into the company.

Question 5

what is a balance sheet?

Answer 5

also called statement of financial position, shows a businesses assets, liabilities and equity at a point in time

Question 6

what are net assests?

Answer 6

assests minus liabilities

Question 7

what equation represents a balance sheet?

Answer 7

assets = liabilites + equity

Question 8

what is an income statement?

Answer 8

tracks a companies revenues, expenses, gains and losses during a set period.

Question 9

what is a statement of cash flow?

Answer 9

tracks the inflow and outflow of cash providing insights into a companies financial health

Question 10

what is the accounting equation?

Answer 10

assets = liabilities + equity

Question 11

how do accountants view transactions?

Answer 11

as economic events that change components within the accounting equation

Question 12

what are source documents?

Answer 12

sales invoices and bills for creditors

Question 13

what is double entry accounting?

Answer 13

a system where every financial transaction is recorded at least twice.

Question 14

what are the GAAP?

Answer 14

a set of accounting principles, concepts and guidlines that guide the rules, practices and standards

Question 15

what are the nine GAAP?

Answer 15

1. Business Entity Principle
2. Consistency
3. Cost
4. Recognition principle
5. Going concern principle
6. Full disclosure
7. Matching principal
8. materiality
9. monetary unit

Question 16

what is the business entity principal?

Answer 16

requires that each economic entity maintains separate records.

Question 17

what is the monetary unit principal?

Answer 17

a specific unit of currency must be used when the company records transactions. Such as euro, cad etc

Question 18

what is the cost principal?

Answer 18

requires that each economic transaction be based on the actual original cost

Question 19

what is the matching principal?

Answer 19

requires that financial transactions be reported in the period in which they occured/were realized)

Question 20

what is the going concern principal?

Answer 20

when a company is considered to operate indefinitely into the future, which means that certain expenses can be deffered to a future date.

Question 21

what is full disclosure principal?

Answer 21

companies must have full transparency with all financial details and have them available to the public. ensures companies do not indulge in unethical behavior.

Question 22

what is the consistency principal?

Answer 22

requires that a business use the same accounting policies and procedures from period to period

Question 23

what is the principal of materiality?

Answer 23

requires that a business to apply proper accounting only for items that will affect desicions by users.

Question 24

what is the principal of recognition?

Answer 24

requires the revenues be recorded when earned and expenses be recorded when incurred.

Question 25

how does the matching concept more accurately determine the net income of a business?

Answer 25

The matching concept states that revenue is recognized in the time period when goods and services are provided and that the assets of the entity that have been used up during the time period (expenses) must be matched with the asset inflows (revenues) during the same period.

Question 26

when are revenues recognized?

Answer 26

revenue should be recognized in the period that it is earned, irrespective of wether a cash transaction has occured

Question 27

what defines accounting?

Answer 27

identifying, measuring, recording and communicating an organizations economic activities

Question 28

What are the qualities that accounting information is expected to have?

Answer 28

1.revelence 2. faithful representation 3. comparability 4. verfiability 5. timeliness 6. understandability

Question 29

What are the limitation on the disclosure of useful accounting information?

Answer 29

Accounting information should only be disclosed if it is material - that is, of sufficient size or importance to influence the judgement of a reasonably knowledgeable user. Accounting information should also be disclosed in such a manner that the benefits of doing so outweigh the costs.

Question 30

what are assets?

Answer 30

An asset is anything of value that is owned by the entity. Assets are economic resources controlled by an entity. they have some future value to the entity, usually for generating revenue.

Question 31

To what do the terms liability and equity refer?

Answer 31

A liability is an obligation to pay an asset or to provide services or goods in the future. Until the obligations are paid, creditors have claims against the assets of the entity. Equity represents the amount of assets owing to the owners of the entity. The total assets of an entity belong either to the shareholders or to the creditors.

Question 32

Explain the term financial transaction. Include an example of a financial transaction as part of your explanation.

Answer 32

The exchange of assets or obligations by a business entity, expressed in monetary terms like dollars, is called a financial transaction. the exchange of cash for land or a building is an example of such a transaction.

Question 33

Identify the three forms of business organization.

Answer 33

proprietorships, partnership and corporation

Question 34

What is the business entity concept of accounting? Why is it important?

Answer 34

the business entity concept requires that each economic entity retain separate records. The entity must exist separately from the owners. The concept is important because if the records of the business are mixed up with owners personal records, the accounting information loses its usefulness.

Question 35

what is the general purpose of financial statements? Name the four financial statements.

Answer 35

financial statements communicate information to external users. The four types are: a balance sheet, income statement, statements of cash flows and statement of changes in equity

Question 36

Each financial statement has a title that consists of the name of the financial statement, the name of the business, and a date line. How is the date line on each of the four financial statements the same or different?

Answer 36

The date line on the income statement, statement of changes in equity, and statement of cash flows represents a period of time. The income statement details the revenues and expenses that occurred over a given period of time. The statement of changes in equity shows how equity changed over a given period of time. The statement of cash flows shows how the balance in cash changed over a period of time. The date line on the balance sheet is a point in time because each account listed on the balance sheet identifies the account balance on a specific date.

Question 37

how does an income statement and balance sheet interrelate?

Answer 37

The net income figure in the income statement is added to the retained earnings line item in the balance sheet, which alters the amount of equity listed on the balance sheet. The increase or decrease in net assets of an entity arising from the profit or loss reported in the income statement is incorporated in the balances reported in the balance sheet at the period end.

Question 38

Define the terms revenue and expense.

Answer 38

Revenue is an increase in an entity's assets or a decrease in liabilities in return for services performed or goods sold. An expense is an asset belong to the entity that is used up or obligations incurred in selling goods or performing services.

Question 39

What is net income? What information does it convey?

Answer 39

Net income is the difference between revenues and expenses. It communicates whether the activities of the entity are being conducted profitably. Thus it is one measure of the success of the entity. Net income is one of the criteria used to determine the amount of dividends to be declared.

Question 40

Why are the financial statements prepared at regular intervals? Who are the users of these statements?

Answer 40

Financial statements are prepared at regular intervals to keep a number of interested groups informed about the financial performance of an entity. The timing is determined in response to the needs of running the entity or of outside parties, such as, shareholders, or others interested in evaluating the progress of the entity. They are generally used as a means to inform investing and lending decisions.

Question 41

explain double entry accounting

Answer 41

The double entry accounting system reflects the fact that each financial transaction affects at least two items in the accounting equation, in order to maintain the balance of the equation.

Question 42

What is a year end? How does the timing year-end financial statements differ from that of interim financial statements?

Answer 42

the year end is the last day of the fiscal year for the entity.The income statement, statement of cash flows, and statement of changes in equity reflect financial transactions for the year up to this date. The balance sheet reflects the financial position of the entity at the year-end date. Interim financial statements may be prepared more frequently, say quarterly or monthly; these are prepared for each entity only if required by certain users, usually shareholders of large corporations with many shareholders. Year-end financial statements must be prepared for all entities.

Question 43

how does a fiscal year differ from a calender year?

Answer 43

A fiscal year refers to a 12-month accounting period and that may not coincide with the calendar year. A company whose fiscal year-end coincides with the calendar year has a December 31 year-end.