Module 2

Question 1

cWhat is the purpose of accounting?

Answer 1

> to record, summarize and communicate economic events

Question 2

What is an economic event?

Answer 2

> an activity that can be described in monetary terms i.e. with dollars and cents

Question 3

What triggers that start of the accounting process?

Answer 3

> an economic event
there can be hundreds of economic events that are captured in our accounting system each month

Question 4

When is an activity not included in our accounting records?

Answer 4

> if it can’t be measured in terms of dollars and cents (if it is not an economic event)

Question 5

Accounting is a process that:

Answer 5

> allocates values to economic events
records and summarizes these events
and communicates this information to users

Question 6

What is an accounting period?

Answer 6

an accounting term that describes a span of time with a beginning and an end. The span is usually, but not always, a month, quarter or a year.

Question 7

What occurs at the end of an accounting period?

Answer 7

> Financial statements are prepared to summarize the information and communicate it to interested users.

Question 8

How often do companies set monthly accounting periods?

Answer 8

> in general, larger companies will set monthly accounting periods, while smaller companies may choose to report only once per year.

> regardless of size, all businesses are required to produce financial statements, at least once per year.

Question 9

Define the four steps of the accounting process:

Answer 9

1) Economic event - analyze transactions
2) Record - enter in general journal
3) summarize (post to general ledger)
4) Communicate - prepare trial balance; prepare financial statements

Question 10

Identifying and recording economic events is pointless unless we have a process for what?

Answer 10

> for summarizing and sharing this information with interested users. for summarizing and sharing this information with interested users.

Question 11

The main tools for communicating financial information or financial statements. There are three common financial statements that are used, what are they?

Answer 11

1) Statement of Cash Flows
2) Income statement
3) Balance sheet

Question 12

What is a statement of cash flows?

Answer 12

Shows where our cash came from and what we did with it.

Question 13

What is an income statement?

Answer 13

> Tell us if we are making a profit.

Question 14

What is a balance sheet?

Answer 14

> Shows what we own and what we owe.

Question 15

Financial statement users can be split into two broad categories, what are they??

Answer 15

> Internal users and external users

Question 16

What are internal users?

Answer 16

Internal users are employed by the company, I need information to answer, certain questions such as;

Is there enough cash to pay the bills what price should be set for the new product? How much money can we spend on training this year? Which production line is the most profitable?

Question 17

What are external users?

Answer 17

> external users are investors, or future investors, creditors, government, and customers.

> ## external users need information to answer questions such:is this company earning enough to give me a return on my investment?
- does the company generate enough cash for me to get my money back if I make a loan?
- do I think the company will be in business long enough to service the warranty if I make a purchase?

Question 18

What are the three main forms of business organizations?

Answer 18

> proprietorship, partnership, corporation.

Question 19

What is a proprietorship?

Answer 19

A proprietorship is categorized as a single owner business. A private business we’re owner seems complete liability, and the life of the business and with the death of the owner. Taxes are paid by the owner..

Question 20

What is a partnership?

Answer 20

A partnership is a business that is categorized by two or more owners, who assume complete liability for their business. The life of the business end with the death of the partners. Taxes are paid by the partners.

Question 21

What is a corporation?

Answer 21

A corporation is a business categorized by being owned by shareholders. If shares are traded on a stock exchange, it is a public corporation; however, if shares are not publicly traded, it is a private corporation. Corporations have an unlimited life and enjoy limited legal liability. Taxes are paid by the corporation.

Question 22

If people are going to use financial statements to make important decisions, they need to know that the information is reliable and accurate. To assist with this task, the accounting profession has develop standards to ensure that everyone is following the same rules. What are these standards known as?

Answer 22

> the standards are referred to, as generally accepted accounting principles (g.a.a.p.)

Question 23

For financial information to value to its users, it depends on what?

Answer 23

It depends on sound ethical behavior. This is an underlying foundation principle of accounting. Professional accountants have an extensive set of rules and conduct to guide their behaviour and adherence to these rules is crucial.

Question 24

In Canada, who sets our standards for accounting?

Answer 24

> in Canada or standards are set by the accounting standards Board. We call our rules. A.S.P.E. (accounting standards for private enterprise)

Question 25

Do other countries, follow our rules, their rules, or international standards?

Answer 25

> other countries can choose to follow these international standards, or set their own rules.

Question 26

There is also a set of global standards for accounting, what are they known as?

Answer 26

> International financial reporting standards (IFRS)

Question 27

:Depending on the type of business, Canadian companies must follow either ASPE or IFRS. Define when they do which:

Answer 27

> companies that are publicly traded on the stock exchange must follow the IFRS. > private companies where the stock is not publicly, traded, can choose to follow either IFRS or a ASPE.

Question 28

What allows us to assume that statements prepared between companies can be compared freely and without extraneous exceptions?

Answer 28

> Assumptions and principles

Question 29

What are the three assumptions?

Answer 29

1) Going concern Assumption 2) Economic entity assumption 3) Monetary Unit Assumption

Question 30

What is the going concern assumption?

Answer 30

The going concern assumption assumes that a business will continue to operate into the foreseeable future and the businesses assets are required for this continued operation. Because the business assets are required for continued operations, these assets are not for sale.

Question 31

What is the economic entity assumption?

Answer 31

The economic entity assumption is where a business and all business related transactions must be treated separately and distinctly from the owners,

Question 32

What is the monetary unit assumption?

Answer 32

The monitor unit assumption as we're only events resulting in transactions that can be expressed as money will be recorded. Such events are recorded in the currency of the business entity's country.

Question 33

What is the historical cost principal?

Answer 33

The historical cost principal states that economic or business transactions are always recorded using the actual cost of the consideration transferred between the parties. Assets must always be recorded at the historical cost, regardless of the current perceive fair market value.

Question 34

What is the (realization revenue) recognition principle?

Answer 34

> revenue should be recorded and recognized in the accounting records in the period in which it is earned, not when the cash is received. Costs should be recorded and recognized in the accounting records in the period they were incurred, not when the cash was paid.

Question 35

What is the matching principle?

Answer 35

The matching principle states that whenever possible, the cost incurred to generate revenue, should be matched with and recorded at the same time as the related revenue.

Question 36

What is a balance sheet?

Answer 36

> summarizes, assets, liabilities, and owners equity. > it is a snapshot of the resources (assets) obligations (liabilities, debts) of the business, as well as the owners ownership of those resources at a particular point in time.

Question 37

What is the income statement?

Answer 37

> the income statement, summarizes, revenues, and expenses for an entire accounting period. > when revenue exceeds expenses. The result is net income. > when expenses exceed revenues, the result is a net loss.

Question 38

What is the statement of retained earnings?

Answer 38

> the statement of retained earnings, summarizes all economic events that affect the equity interest of the owner of the business for the entire accounting period. > investments and revenue, increase owner equity, whereas owner, withdraws and expenses decrease it. > the statement of retained earnings is used by corporations in place of the statements owners equity - it includes all the earnings accumulated by the corporation.

Question 39

How do all three financial statements interrelate?

Answer 39

> a business makes or loses money from the economic activities that are undertaken during the year and is reflected on the income statement, which means revenues minus expenses. > profit or loss is then added to the opening balance, equity, balance, along with any investments or drawings to calculate the ending equity on the statement of owners equity. > this new equity figure is been reported on the balance sheet.

Question 40

What is the accounting equation?

Answer 40

assets = liabilities + owner's equity