Chapter 1: Accounting and the Financial Statements

Question 1

a company’s annual report

Answer 1

Form 10-K

Question 1

a summary of the results of a company’s operations

Answer 1

Financial Statements

Question 2

the process of identifying, measuring, recording, and communicating financial information about a company’s activities so decision makers can make informed decisions

Answer 2

accounting

Question 3

accounting is the “language of __________”

Answer 3

business

Question 4

Demand for accounting information coming from OUTSIDE the business is called:

Answer 4

financial accounting

Question 5

Demand for accounting information coming from INSIDE the business is called:

Answer 5

managerial accounting

Question 6

Who are the users in financial accounting?

Answer 6

Investors (owners), and creditors (lenders)

Question 7

Who are the users in managerial accounting?

Answer 7

Managers

Question 8

accounting and reporting to satisfy the outside demand (primarily investors and creditors) for accounting information

Answer 8

financial accounting

Question 9

use accounting information to evaluate the future prospects of a company and decide where to invest their money

Answer 9

investors (owners)

Question 10

use accounting information to evaluate whether to loan money to a company

Answer 10

creditors (lenders)

Question 11

What are the three other external users for financial accounting?

Answer 11

governmental agencies, labor unions, financial analysts

Question 12

What are the four basic financial statements?

Answer 12

1. The Balance Sheet
2. The Income Statement
3. The Retained Earnings Statement
4. The Statement of Cash Flows

Question 13

a business that has an identity separate from that of its owners and managers and for which accounting records are kept

Answer 13

accounting entity

Question 14

a business owned by one person

Answer 14

sole proprietorship

Question 15

Who is personally responsible for the debt of the business in a sole proprietorship?

Answer 15

the owner

Question 16

Which type of business organization does this describe?
- Accounts for more than 70% of all businesses.
- Usually small, local businesses
- Simple to set up and owner has control over business
- Can be formed or dissolved at the wishes of the owner

Answer 16

Sole Proprietorship

Question 17

a business owned jointly by two or more individuals

Answer 17

partnership

Question 18

What type of business organization does this describe?
- Small businesses and many professional practices (physicians, lawyers, accountants) often organized as this type of business
- Provide increased access to financial resources and the individual skills of each of the partners
- Each partner pays taxes at his or her individual rate
- Partners are jointly responsible for all the debt of the _________.

Answer 18

Partnership

Question 19

a company chartered by the state to conduct business as an “artificial person” and owned by one or more stockholders (ex: Apple)

Answer 19

corporation

Question 20

whose ownership interests are represented by shares of stock

Answer 20

stockholders

Question 21

What business organization do these advantages describe:
- The ability to raise capital by selling new shares
- The limited legal liability of owners
- The transferability of shares

Answer 21

corporation

Question 22

What business organization do these disadvantages describe:
- requirements to form this type of organization are more complex than the others
- owners generally pay more taxes

Answer 22

corporation

Question 23

T or F: the stockholder’s legal responsibility for the debt of the business is limited to the amount they invested in the business

Answer 23

True

Question 24

What are the two reasons owners generally pay more taxes in a corporation business organization?

Answer 24

1. The corporate income tax rare is greater than the individual income tax rate 2. A corporations income is taxed twice (called double taxation)

Question 25

What are the three types of business activities?

Answer 25

1. Financing 2. Investing 3. Operating

Question 26

obtaining funds to start a business (from owners or creditors) through either issuing stock or borrowing money

Answer 26

financing activities

Question 27

buying resources (assets) used to generate revenues

Answer 27

investing activities

Question 28

operating the business to earn a profit

Answer 28

operating activities

Question 29

T or F: when borrowing money from another entity such as a bank, the business must repay the amount borrowed

Answer 29

True

Question 30

the person to whom money is owed (ex: bank)

Answer 30

creditor

Question 31

obligation to repay a creditor; can take many forms

Answer 31

liability

Question 32

a corporation borrowing money with the promise to repay the amount borrowed plus interest at a future date

Answer 32

notes payable

Question 33

special form of note payable used by corporations to obtain large amounts of money

Answer 33

bond payable

Question 34

the dollar amount paid to a corporation for the shares of stock and represents the basic ownership interest in a corporation

Answer 34

common stock

Question 35

the corporation isn't obligated to repay the stockholder the amount invested; however many corporations distribute a portion of their earnings to stockholders in a regular basis. These distributions are called:

Answer 35

dividends

Question 36

economic resources representing expected future economic benefits controlled by the business (ex: cash, accounts receivable, inventory, land, buildings, equipment, and intangible resources)

Answer 36

assets

Question 37

the owner's claims against the assets of a corporation after all liabilities have been deducted (considered a residual interest in the assets of a corporation that remain after deducting its liabilities)

Answer 37

stockholder's equity

Question 38

What are two examples of intangible assets?

Answer 38

copyrights and patents

Question 39

the purchase and sale of assets used in operations (operating assets) are a corporation's ___________ activities.

Answer 39

investing

Question 40

T or F: All businesses want to generate revenue

Answer 40

True

Question 41

the increase in assets that results from the sale of products or services

Answer 41

revenue

Question 42

the right to collect an amount due from customers (a type of asset)

Answer 42

accounts receivable

Question 43

the cost of assets used, or the liabilities created, in the operation of the business

Answer 43

expenses

Question 44

What are the three different types of liabilities that arise from operating activities?

Answer 44

1. Account payable 2. Wages payable 3. Income Taxes payable

Question 45

if a corporation purchases goods on credit from a supplier, the obligation to repay the supplier

Answer 45

account payable

Question 46

amounts owed to employees for work performed

Answer 46

wages payable

Question 47

taxes owed to the government

Answer 47

income taxes payable

Question 48

If revenues > expenses, then a corporation has earned:

Answer 48

net income

Question 49

If expenses > revenues, then a corporation has incurred:

Answer 49

a net loss

Question 50

Revenues - expenses =

Answer 50

net income

Question 51

Expenses - revenues =

Answer 51

net loss

Question 52

a set of standardized reports in which the detailed transactions of a company's activities are reported and summarized so they can be communicated to decision-makers

Answer 52

financial statements