Chapter 1: Accounting in the Business Environment

Question 1

What does return on assets (ROA) measure?

Answer 1

How profitably a company uses its assets

Question 2

How is ROA calculated?

Answer 2

Net income divided by average total assets

Question 3

What is the Economic Entity Assumption?

Answer 3

An organization that stands apart as a separate economic unit

Question 4

What are the features of a corporation?

Answer 4

• Separate legal entity
• Continuous life and transferability of ownership
• No mutual agency
• Limited liability of stockholders
• Separation of ownership and management
• Corporate taxation
• Government regulation

Question 5

What is the definition of a sole proprietorship?

Answer 5

A business with a single owner

Question 6

What is the taxation status of a partnership?

Answer 6

Partnership is not taxed; partners pay tax on their share of earnings

Question 7

What does the term ‘equity’ refer to in a business context?

Answer 7

Owners’ claims to the assets of the business

Question 8

What are the two components of equity?

Answer 8

• Contributed capital
• Retained earnings

Question 9

What is the accounting equation?

Answer 9

Assets = Liabilities + Equity

Question 10

What is the purpose of the income statement?

Answer 10

Provides information about profitability for a particular period

Question 11

What does the statement of retained earnings inform users about?

Answer 11

How much of the earnings were kept and reinvested in the company

Question 12

What is the role of the Financial Accounting Standards Board (FASB)?

Answer 12

Oversees creation and governance of accounting standards

Question 13

What does the Sarbanes-Oxley Act (SOX) require companies to do?

Answer 13

Review internal controls

Question 14

What is the cost principle in accounting?

Answer 14

Acquired assets and services should be recorded at their actual cost

Question 15

What is the going concern assumption?

Answer 15

Assumes that the entity will remain in operation for the foreseeable future

Question 16

What is an audit?

Answer 16

An examination of a company’s financial statements and records

Question 17

What does the statement of cash flows report?

Answer 17

Business’s cash receipts and cash payments for a period

Question 18

What is the typical personal liability of stockholders in a corporation?

Answer 18

Stockholders are not personally liable

Question 19

What is the role of the Public Company Accounting Oversight Board (PCAOB)?

Answer 19

Monitors the work of independent accountants who audit public companies

Question 20

What are the primary users of financial accounting information?

Answer 20

• Outside investors
• Creditors
• Taxing authorities

Question 21

What are some examples of liabilities?

Answer 21

• Accounts Payable
• Notes Payable
• Salaries Payable

Question 22

What are the increases in equity attributed to?

Answer 22

• Contributed capital
• Revenues

Question 23

What are the decreases in equity attributed to?

Answer 23

• Dividends
• Expenses

Question 24

What is the definition of an asset?

Answer 24

An economic resource that is expected to benefit the business in the future

Question 25

What are some examples of assets?

Answer 25

* Cash * Merchandise Inventory * Furniture * Land

Question 26

What does managerial accounting provide information for?

Answer 26

Internal decision makers

Question 27

What is the purpose of Generally Accepted Accounting Principles (GAAP)?

Answer 27

To provide a framework for financial reporting

Question 28

What is the monetary unit assumption?

Answer 28

Items on financial statements must be measured in terms of a monetary unit

Question 29

How do you analyze a transaction?

Answer 29

1. Identify the accounts and account type 2. Decide if each account increases or decreases 3. Determine if the accounting equation is in balance

Question 30

What is the financial statement that reports net income or loss?

Answer 30

Income Statement

Question 31

What is the number of owners in a corporation?

Answer 31

One or more (called stockholders)

Question 32

Fill in the blank: The accounting equation is _______.

Answer 32

Assets = Liabilities + Equity

Question 33

True or False: A Limited-Liability Company (LLC) is taxed as a separate entity.

Answer 33

False

Question 34

What is the effect of Sheena Bright's contribution of $30,000 cash to Smart Touch Learning on the accounting equation?

Answer 34

Increase in assets and equity by $30,000 ## Footnote This transaction reflects the inflow of cash and the issuance of stock, increasing both assets (cash) and equity.