Key Points in Chapter 1: Accounting in Action

Question 1

What is Accounting?

Answer 1

Accounting is an informative system that identifies, records, and communicates the economic events of an organization to an interested user.

Question 2

The accounting process consists?

Answer 2

identifying, recording, and communication

Question 3

What is Identifying?

Answer 3

Identifying involves choosing certain events that would be considered evidence of economic activity that is relevant to a particular business organization.

Question 4

What is Recording?

Answer 4

Recording is the system of keeping chronological diary of events, measured in currency.

Question 5

What is Communication?

Answer 5

Communication occurs through the preparation and distribution of accounting reports.

Question 6

What are INTERNAL USERS?

Answer 6

Internal users of account information are managers who plan, organize, and run a business.

B. MANAGERIAL ACCOUNTING provides this information through the internal reports.

Question 7

Who are External Users?

Answer 7

External users are individuals and organizations outside the company who want economic and financial information about the company.

A. includes investors, creditors, a taxing authorities, regulatory agencies, labor unions and customers.

B. FINACIAL ACCOUNTING provides this information in the company’s financial statement.

Question 8

What are Ethics?

Answer 8

Ethics is about Right or wrongs, fair or not fair, Honesty or dishonesty.

Question 9

What are GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)?

Answer 9

A common set of standards to follow.

Question 10

What is the FINACIAL ACCOUNTING STANDARDS BOARD (FASB)?

Answer 10

The primary accounting standard-setting body in the United States.

Question 11

What are the SECURITIES and EXCHANGE COMISSION (SEC)?

Answer 11

The agency of the United States government that oversees U.S. financial markets and accounting standard-setting bodies.

Question 12

What does the HISTORICAL COST PRINCIPLE require?

Answer 12

Requires that companies record assets at their cost.

Question 13

What is the FAIR VALUE PRINCIPLE?

Answer 13

That assets and liabilities should be reported at fair value.

Question 14

What is the MONETARY UNIT ASSUMPTION?

Answer 14

Requires that only transaction data that can be expressed in money terms and be included in accounting records.

Question 15

What is ECONOMIC ENTITIY ASSUMPTION?

Answer 15

Requires that the activities of the entity be kept separate and distant from activities of the owner and all other economic activities.

Question 16

What are three types of business enterprises?

Answer 16

The three types of enterprises are PROPRIETORSHIP, PARTNERSHIP, AND CORPORATION.

Question 17

What is Proprietorship? What does it entail?

Answer 17

Proprietorship is a business owned by one person.

A) No legal distinction between the business as an economic entity and the owner.
B) Owner has unlimited liability for the debts of the business.
C) Accounting records keep business transactions separate from personal transactions.

Question 18

What is a PARTNERSHIP?

Answer 18

A Partnership is a business owned by two or more persons associated as partners.

1) No legal distinctions between the partnership and the partners
2) Partners, individually and jointly, have unlimited liability.
3) Accounting records keep business transactions separate from personal transactions of the partners.

Question 19

What is a Corporation?

Answer 19

A CORPORATION is a business organized as a separate legal entity under state corporation law with ownership divided into transferable stock.

1) Owners( stockholders) have limited liability.
2) Corporation has unlimited life.
3) Accounting records keep corporate transaction separate from personal transactions of stockholders.

Question 20

What is the BASIC ACCOUNTING EQUATION?

Answer 20

Assets = Liabilities + Stockholder’s Equity.

Question 21

What are the key components of the BASIC ACCOUNTING EQUATION?

Answer 21

Assets, Liabilities, and Stockholders’ equity.

Question 22

In Corporations, stockholders’ equity consist of?

Answer 22

Common stock, Revenues, and Expenses.

Question 23

What is a COMMON STOCK?

Answer 23

Is the total amount paid in by the stockholders for the shares they purchase.

Question 24

What are TRANSACTIONS?

Answer 24

Economic events of the business recorded by accountants.

-can be identified by internal or external transactions.

Question 25

What is an INCOME STATEMENT?

Answer 25

Presents the revenues and expenses.

-Net income or Net loss

Question 26

What is a RETAINED EARNINGS STATEMENT?

Answer 26

Summarizes the changes in retained earnings for a specific period of time.

Question 27

What is a BALANCE SHEET?

Answer 27

Reports assets, liabilities, and stockholders’ equity at a specific time.

Question 28

What is PUBLIC ACCOUNTING?

Answer 28

Provides the services of auditing, taxation, and management consulting.

Question 29

What is AUDITING?

Answer 29

Involves examining financial statements of companies and expressing an opinion as to the fairness of their presentation.

Question 30

What is TAXATION?

Answer 30

Includes providing tax advice and planning, preparing tax returns, and representing clients before governmental agencies.

Question 31

What is PRIVATE ACCOUNTING?

Answer 31

Involves the employment of accountants within the individual companies.