Exam 1

Question 1

recording system + measuring economic transactions

Answer 1

ACCOUNTING

Question 2

efficient allocation of scare resources

Answer 2

ECONOMICS

Question 3

FINANCIAL ACCOUNTING

Answer 3

External + Have incentive to inflate numbers

Question 4

MANAGERIAL ACCOUNTING

Answer 4

Internal + Accurate data used (Usually)

Question 5

INTERNAL DECISION MAKERS

Answer 5

Management, employees

Question 6

EXTERNAL DECISION MAKERS

Answer 6

Stockholders, creditors, suppliers, regulators, IRS (tax)

Question 7

FASB

Answer 7

Financial Accounting Standards Board

Question 8

WHAT IS FASB?

Answer 8

• Privately funded

- GAAP (information must be relevant and useful)

Question 9

SEC

Answer 9

Securities + Exchange Commission

Question 10

WHAT IS SEC?

Answer 10

• Oversees US financial markets

- Sarbanes-Oxley (SOX) increased regulatory oversight

Question 11

ACCOUNTING ASSUMPTIONS

Answer 11

Economic Entity, Cost Principle, Monetary Unit, Going Concern

Question 12

ECONOMIC ENTITY ASSUMPTION

Answer 12

Business stands apart as a separate economic unit from its owners

Question 13

TYPES OF ECONOMIC ENTITIES

Answer 13

• Sole Proprietorship (Owner fully liable, individ. tax)
• Partnership (Owners fully liable, individ. tax)
• Corporation (Limited liability, pay corporate + personal tax)

Question 14

COST PRINCIPLE

Answer 14

Acquired assets should be recorded at their actual / historical cost (reliable & conservative)

Question 15

MONETARY UNIT ASSUMPTION

Answer 15

• Items measured in financial statements are measured in terms of a monetary unit
• Potential issues with inflation + exchange rates

Question 16

GOING CONCERN ASSUMPTION

Answer 16

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

Question 17

ACCOUNTING EQUATION

Answer 17

Asset = Liabilities + Equity

Question 18

ASSETS

Answer 18

Economic resources that are expected to benefit the business in the future (i.e. land, inventory, furniture, cash)

Question 19

LIABILITIES

Answer 19

Debts owed to creditors (i.e. accounts payable, notes payable, salaries payable)

Question 20

EQUITY

Answer 20

Equity is the owner’s residual claim against the assets of the company

Question 21

EQUITY EXPANDED

Answer 21

+Owner’s Capital
-Owner’s Withdrawal
+Revenues
-Expenses

Question 22

REVENUES

Answer 22

Economic resources that have been earned by delivering products or services to customers

Question 23

INCOME STATEMENT

Answer 23

Reports success | failure of company’s operations for a period of time (profitability)

Question 24

STATEMENT OF OWNER’S EQUITY

Answer 24

Shows amounts + causes of changes in owner’s capital during the period

Question 25

BALANCE SHEET

Answer 25

Reports assets + claims to those assets at a specific point in time

Question 26

STATEMENT OF CASH FLOWS

Answer 26

Reports cash receipts + cash payments for a period of time

Question 27

ACCOUNT

Answer 27

The detailed record of all increases and decreases that have occurred in an individual asset, liability, equity, revenue or expense during a specific period

Question 28

ASSETS (CHART OF ACCOUNTS)

Answer 28

- Cash - Accounts Receivable - Notes Receivable - Office Supplies - Furniture - Building - Land

Question 29

LIABILITIES (CHART OF ACCOUNTS)

Answer 29

- Accounts Payable - Salaries Payable - Interest Payable - Unearned Revenue - Notes Payable

Question 30

EQUITY (CHART OF ACCOUNTS)

Answer 30

- Capital, Withdrawals - Expenses (Rent, Salaries, Utilities, Advertising) - Revenues (Service, Interest)

Question 31

DEBITS / CREDITS

Answer 31

Assets (Left Debit Inc, Right Credit Dec) | Liabilities + Equity (Left Debit Dec, Right Credit Inc)

Question 32

STEPS TO RECORDING TRANSACTIONS

Answer 32

1. Determine DR and CR accounts affected. 2. Journalize transaction 3. Post to T-Accounts

Question 33

TRIAL BALANCE STEPS

Answer 33

1. Prepare Income Statement → Net Income 2. Statement of Owner's Equity 3. Balance Sheet → Assets, Liabilities, Equity

Question 34

CASH BASIS ACCOUNTING

Answer 34

- Revenue is recorded when cash is received - Expenses are recorded when cash is paid - Not allowed under GAAP

Question 35

ACCRUAL BASIS ACCOUNTING

Answer 35

- Revenue is recorded when it is earned - Expenses are recorded when incurred - Generally used by larger businesses

Question 36

TIME PERIOD CONCEPT

Answer 36

- Business's activities can be prepared for specific time periods (ex. month, quarter) - Any 12 month period is a fiscal year

Question 37

REVENUE RECOGNITION PRINCIPLE

Answer 37

- Must be actual selling price | - Revenue should be recorded when EARNED

Question 38

MATCHING PRINCIPLE

Answer 38

- Expenses are recorded when incurred | - Expenses and revenues are matched for same end of period

Question 39

PLANT ASSETS

Answer 39

- Paid for when acquired - Used up over time - Used to produce revenues

Question 40

DEPRECIATION

Answer 40

The process of systematically recording the periodic usage of plant assets to generate revenues (land is never depreciated)