Chapter 1

Question 1

What is a sole proprietorship?

Answer 1

A business owned by one person

Question 2

What are the advantages of a sole proprietorship?

Answer 2

• Simple to set up
• Gives you control
• Tax advantages

Question 3

What is a partnership?

Answer 3

A business owned by two or more people.

Question 4

What are the advantages of a partnership?

Answer 4

• easier initial start up due to money
• having two people would bring different skills
• Tax advantages

Question 5

What is a corporation?

Answer 5

A business organized as a separate legal entity owned by stockholders

Question 6

What are the advantages of a corporation?

Answer 6

• simple to transfer ownership
• Easier to raise funds
• no liability

Question 7

What is accounting?

Answer 7

The information system that identifies, records, and communicates the economic events of an organization to interested users?

Question 8

What two groups can users of accounting information be divided into?

Answer 8

Internal and external users

Question 9

What are internal users?

Answer 9

Managers, production supervisors, finance directors, and company officers

Question 10

What does accounting provide for internal users?

Answer 10

Internal reports, such as financial comparisons of operating alternatives, projected income, forecasts of cash needs, financial statements

Question 11

What are external users?

Answer 11

Investors (owners) and Creditors

Question 12

What does the Sarbanes-Oxley Act do?

Answer 12

• Management must certify the accuracy of financial info

- Much higher penalties

Question 13

What are the 3 types of business activities?

Answer 13

Financing, investing, and operating

Question 14

What is financing?

Answer 14

This is when a person uses personal savings or a loan

Question 15

What is investing?

Answer 15

This is when money is used to purchase equipment to run the business

Question 16

What is operating?

Answer 16

Activities of making and selling a product

Question 17

What is the accounting information system?

Answer 17

This keeps track of the results of each of the various business activities

Question 18

What are creditors?

Answer 18

Persons or entities that a company owes money to

Question 19

What are liabilities?

Answer 19

The amount owed to creditors

Question 20

What is a note payable?

Answer 20

Money owed to a bank

Question 21

What are Bonds Payable?

Answer 21

debt securities sold to investors that must be repaid at a particular date

Question 22

What is common stock?

Answer 22

Term used to describe the total amount paid in by stockholders for the shares they purchased

Question 23

What are dividends?

Answer 23

Cash payments to stockholders

Question 24

What are assets?

Answer 24

Resources owned by a business

Question 25

What is revenue?

Answer 25

The increase in assets or decrease in liabilities resulting from the sale of goods

Question 26

What are accounts receivable?

Answer 26

The right to receive money from a customer at a later time

Question 27

What are expenses?

Answer 27

Costs inquired when purchasing items when generating revenue

Question 28

When does net income happen?

Answer 28

When revenue exceeds expenses

Question 29

When does net loss happen?

Answer 29

When expenses exceed revenue

Question 30

What are the four types of financial statements?

Answer 30

- Income statement - Retained earnings - Balance sheet - Statement of cash flows

Question 31

What is an income statement?

Answer 31

This is used to show how successfully a business performed during a period of time

Question 32

What is a retained earnings statement?

Answer 32

This is used to indicate how much of previous income was distributed to you and other owners in the form of dividends

Question 33

What is a balance sheet?

Answer 33

This is used to present a picture at a point of time of what your business owns and owes

Question 34

What is a statement of cash flows?

Answer 34

Used to show where your business obtained cash during a period and how that cash was used

Question 35

What are retained earnings?

Answer 35

The net income retained in the corporation

Question 36

What is stockholder's equity?

Answer 36

The owners claim to assets. Consists of retained earnings and common stock

Question 37

What is the basic accounting equation?

Answer 37

Assets = Liabilities + Stockholders Equity

Question 38

What are the notes to the financial statements?

Answer 38

These clarify the financial statements and provide additional detail

Question 39

What is an auditor's report?

Answer 39

It states the auditor's opinion as to the fairness

Question 40

What is the formula for Ending Stock Holder's Equity?

Answer 40

Beginning SE + Revenue - Expense (Net Income) - Dividends