Chapter 1

Question 1

Who uses accounting information?

Answer 1

Individuals.

Investors and Creditors. Investors and creditors provide the money to finance businesses.

Taxing Authorities.

Nonprofit Organizations.

Question 2

What are the two different types of accounting and explain the differences?

Answer 2

Financial accounting provides information for people outside the firm, such as investors, bankers, government agencies, and the public. This information must meet standards of relevance and reliability. (EXTERNAL)

Management accounting generates inside information for managers. Management information doesn’t have to meet external standards of reliability because only company employees use these data. (INTERNAL)

Question 3

What are the different forms a business can take?

Answer 3

A business can take 1 of several forms:
■ proprietorship 
ONE OWNER, SOLE LIABILITY
■ partnership
TWO OR MORE, PARTNERS ARE LIABILITY
■ limited-liability company (LLC)
MEMBERS , MEMBERS ARE PERSONALLY NOT LIABLE
■ corporation
MANY OWNERS, STOCKHOLDERS ARE NOT PERSONALLY LIABLE

Question 4

What are the different types of assets?

Answer 4

CASH
MERCHANDISE INVENTORY
LONG LIVED ASSETS 
PROPERTY, PLANT, AND EQUIPMENT PPE
FIXED ASSETS

Question 5

What are the different types of liabilities?

Answer 5

ACCOUNT PAYABLE-is a liability for goods or services purchased on credit and supported by the credit
standing of the purchaser

NOTE PAYABLE - is a written promise to pay on a certain date.

LONG TERM DEBT- is a liability that’s payable beyond 1 year from the date of the financial statements.

Question 6

What is the formula for owner’s equity?

Answer 6

is a liability that’s payable beyond 1 year from the date of the financial statements.

Question 7

A corporation’s equity is also called stockholder’s equity. What are the two parts of stockholder’s equity and what is the formula for stockholder’s equity?

Answer 7

paid-in capital and retained earnings

Assets = Liabilities + Stockholders’ Equity
Assets = Liabilities + Paid-in Capital + Retained Earnings

Question 8

What is paid in capital?

Answer 8

is the amount the stockholders have invested in the corporation.
The basic component of paid-in capital is common stock, which the corporation
issues to the stockholders as evidence of their ownership. All corporations have
common stock.

Question 9

What is retained earnings?

Answer 9

is the amount earned by income-producing activities and kept for use in the business. Two types of transactions include revenues and expenses.

Question 10

What is revenues?

Answer 10

increase retained earnings by delivering goods or services to customers.

Question 11

What is expenses?

Answer 11

decrease retained earnings due to operations. Expenses are the cost of doing business; they are the opposite of revenues.
Expenses include building rent, salaries, and utility payments

Question 12

What is net income, net earnings and net profit?

Answer 12

When revenues exceed total expenses.

Question 13

What is net loss?

Answer 13

When expenses exceed revenues.

Question 14

What are dividends?

Answer 14

Distributions to stockholders
of assets (usually cash) generated by net income.  Dividends are not expenses. Dividends never affect net income.

Question 15

What is an income statement?

Answer 15

Also known as settlement of operations and reports revenues and expenses for the period.

Question 16

What is the formula for net income?

Answer 16

Net Income = Total Revenues and Gains − Total Expenses and Losses

Question 17

What is retained earnings?

Answer 17

The portion of net income the company has kept.

Question 18

What increases and decreases retained earnings?

Answer 18

Net income increases retained earnings, and dividends decrease retained earnings.

Question 19

What is a balance sheet?

Answer 19

It reports 3 items: assets, liabilities, and stockholder’s equity.

Question 20

What are current assets?

Answer 20

Current assets are
assets that are expected to be converted to cash, sold, or consumed during the next
12 months or within the business’s operating cycle if longer than a year. Current
assets consist of Cash, Short-Term Investments, Accounts and Notes Receivable,
Merchandise Inventory, and Prepaid Expenses

Question 21

What are the 3 basic types of activities? And explain?

Answer 21

1. Operating activities
   Companies operate by selling goods and services to customers.
2. Investing activities
   Companies invest in long-term assets.
3. Financing activities
   Companies need money for financing.