Chapter 1

Question 1

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

Answer 1

accounting

Question 2

what three basic activities does accounting consist of?

Answer 2

identify
record
communicate

Question 3

what happens when a company identifies?

Answer 3

a company identifies economic events relevant to it business

Question 4

what happens when a company records?

Answer 4

• Once a company identifies economic events it records those events in order to provide a history of its financial activities
• This consists of keeping a systematic chronological diary of events

Question 5

what happens when a company communicates?

Answer 5

• The company communicates the collected information to interested users by means of accounting reports
• An important point in communicating is the ability to analyze and interpret the reported information

Question 6

the most common accounting report is known as

Answer 6

a financial statement

Question 7

a part of the accounting process that involves only the recording of economic events

Answer 7

bookkeeping

Question 8

what are the two groups of users of financial information?

Answer 8

• internal users

- external users

Question 9

managers who plan, organize and run the business.

This includes marketing managers, production supervisors, finance directors and company officers

Answer 9

internal users

Question 10

individuals and organizations outside a company who want financial information about the company

Answer 10

external users

Question 11

the field of accounting that provides international reports to help users make decisions about their companies

Answer 11

Managerial Accounting

Question 12

What are the two main groups of external users?

Answer 12

Investors and Creditors

Question 13

(owners) use accounting information to decide whether to buy, hold or sell ownership shares of a company

Answer 13

investors

Question 14

(such as suppliers and bakers) use accounting information to evaluate the risks of granting credit or lending money

Answer 14

creditors

Question 15

the field of accounting that provides economic and financial information for investors, creditors and other external users

Answer 15

financial accounting

Question 16

what type of people ask for financial information and what do they want to know?

Answer 16

• Tax Authorities want to know whether the company complies with tax laws
• Regulatory Agencies want to know whether the company is operating within prescribed rules
• Customers are interested in whether a company will continue to honor product warranties and support its product lines
• Labor Unions want to know whether the owners have the ability to pay increased wages and benefits

Question 17

Law passed by congress intended to reduce unethical corporate behavior and to help increase confidence in corporate accounting

Answer 17

Sarbanes Oxley Act (SOX)

Question 18

the standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not fair

Answer 18

ethics

Question 19

common standards that indicate how to report economic events

Answer 19

Generally Accepted Accounting Principles (GAAP)

Question 20

A private organization that establishes generally accepted accounting principles in the United States and is considered to be the primary accounting standard setting body in the US

Answer 20

Financial Accounting Standards Board (FASB)

Question 21

A governmental agency that oversees US financial markets and accounting standard setting bodies

Answer 21

Securities and Exchange Commission (SEC)

Question 22

An accounting standard setting body that issues standards adopted by many countries outside of the US (the primary one)

Answer 22

International Accounting Standards Board (IASB)

Question 23

International accounting standards set by the international Accounting Standards Board

Answer 23

International Financial Reporting Standards (IFRS)

Question 24

the process of reducing the differences between US GAAP and IFRS

Answer 24

convergence

Question 25

what two measurement principles does GAAP use?

Answer 25

- Historical Cost Principle (cost principle) | - Fair Value Principle

Question 26

an accounting principle that states that companies should record assets at their cost ( This is true for when the asset is purchased and over the time it is held)

Answer 26

Historical Cost Principle (cost principle)

Question 27

an accounting principle stating that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)

Answer 27

fair value principle

Question 28

Financial information that is capable of making a difference in a decision

Answer 28

relevance

Question 29

Numbers and descriptions match what really existed or happened (they are factual)

Answer 29

faithful representation

Question 30

what provides a foundation for the accounting process?

Answer 30

assumptions

Question 31

an assumption stating that companies include in the accounting records only transaction data that can be expressed in terms of money

Answer 31

Monetary Unit Assumption

Question 32

an assumption that requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities

Answer 32

Economic Entity Assumption

Question 33

a business owned by one person

Answer 33

proprietorship

Question 34

a business owned by two or more persons associated as partners

Answer 34

partnership

Question 35

a business organized as a separate legal entity under state corporation law having ownership divided into transferable shares of stock

Answer 35

corporation

Question 36

resources a business owns

Answer 36

assets

Question 37

creditor claims against total assets (owes)

Answer 37

liabilities

Question 38

the ownership claim on total assets

Answer 38

owner's equity (residual equity)

Question 39

What is the basic accounting equation?

Answer 39

assets = liabilities + owner's equity

Question 40

assets an owner puts into the business also known as owner’s capital

Answer 40

investments by owner

Question 41

the gross increase in owner’s equity resulting from business activities entered into for the purpose of earning income

Answer 41

revenues

Question 42

withdrawals of cash or other assets from an unincorporated business for the personal use of the owners

Answer 42

drawings (disinvestment)

Question 43

the cost of assets consumed or services used in the process of earning revenue

Answer 43

expenses

Question 44

what is the expanded accounting equation?

Answer 44

Assets = Liabilities + Owner’s Capital - Owner’s drawings + Revenue - Expenses

Question 45

the economic events of a business that are recorded by accountants

Answer 45

transactions (business transactions)

Question 46

what are the two types of transactions?

Answer 46

internal and external transactions

Question 47

Involve economic events between the company and some outside enterprise

Answer 47

internal transactions

Question 48

Economic events that occur entirely within one company

Answer 48

external transactions

Question 49

what are the four different financial statements that companies prepare?

Answer 49

- income statements - owner's equity statement - balance sheet - statement of cash flow

Question 50

a financial statement that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time

Answer 50

income statement

Question 51

the amount by which revenue exceeds expenses

Answer 51

net income

Question 52

the amount by which expenses exceeds revenue

Answer 52

net loss

Question 53

a financial statement that summarizes the changes in owner’s equity for a specific period of time

Answer 53

owner's equity statement

Question 54

A financial statement that reports the assets liabilities and owner’s equity at a specific date

Answer 54

balance sheet

Question 55

a financial statement that summarizes information about the cash inflows (receipts) and cash outflows (payments) for a specific period of time

Answer 55

statement of cash flow

Question 56

an area of accounting in which the accountant offers expert service to the general public

Answer 56

public accounting

Question 57

The examination of financial statements by a certified public accountant in order to express an opinion as to the fairness of presentation

Answer 57

auditing

Question 58

an area of public accounting involving tax advice, tax planning, preparing tax returns and representing clients before governmental agencies

Answer 58

taxation

Question 59

an area of public accounting ranging from development of accounting and computer systems to support services for marketing projects and merger acquisition activities

Answer 59

management consulting

Question 60

an area of accounting within a company that involves such activities as cost accounting budgeting design and support of accounting information systems and tax planning and preparation

Answer 60

private (managerial) accounting

Question 61

an area of accounting that uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud

Answer 61

forensic accounting

Question 62

what are the 5 different steps of accounting as an information system?

Answer 62

- gather - classify - record - report - audiences

Question 63

What are the 5 major account groups?

Answer 63

- assets - liabilities - owner's equity - revenues - expenses

Question 64

what does the word receivable imply

Answer 64

that it is an asset

Question 65

what does the word payable imply

Answer 65

that it is a liability

Question 66

what affects the owner's equity statement?

Answer 66

- contributions - withdrawals - revenues - expenses

Question 67

what groups are included in an income statement?

Answer 67

Revenues and expenses

Question 68

what groups are included in an owner's equity statement

Answer 68

owners capital, investments, net income, and drawings

Question 69

what groups are included in a balance sheet?

Answer 69

assets, liabilities and owner's capital

Question 70

what is the order in which the four financial statements should be prepared?

Answer 70

- income statement - owner's equity statement - balance sheet - statement of cash flows

Question 71

why do liabilities appear before owner's equity in the accounting equation?

Answer 71

because liabilities are paid first if a business is liquidated

Question 72

what does the statement of cash flow report?

Answer 72

- the cash effects of a company's operations during a period - its investing activities - its financing activities - the net increase or decrease in cash during the period - the cash amount at the end of the period