Test 1

Question 1

What are the three primary forms of business organizations?

Answer 1

1. Sole Proprietorship (owned by one person)
2. Partnership (owned by two people)
3. Corporations (a separate legal entity owned by stockholders)

Question 2

What are the advantages of Sole Proprietorship?

Answer 2

a. simple to establish
b. owner-controlled
c. profits and losses are part of owners taxable income

Question 3

What are the disadvantages of Sole Proprietorship?

Answer 3

a. proprietor is personally liable

b. transfer of ownership

Question 4

What are the advantages of a Partnership?

Answer 4

a. simple to establish
b. shared control– no loss
c. more economic resources and a broader skill set

Question 5

What are the disadvantages of a Partnership?

Answer 5

a. partners personally liable

b. transfer of ownership

Question 6

What are the advantages of Corporations?

Answer 6

a. easy to transfer ownership
b. easy to raise money
c. lower legal liablility for “owners”

Question 7

What is the disadvantage of Corporations?

Answer 7

a. Double taxation: taxed at corporate lvl and individual lvl

Question 8

What are companies goals?

Answer 8

to earn profits for owners

Question 9

What is the purpose of financial information?

Answer 9

to provide inputs for decision making

Question 10

What is accounting?

Answer 10

an information system that identifies, records and communicates economic events of an organization to interested users

Question 11

Who are considered internal users?

Answer 11

a. proprietors/Partners
b. management
c. board of directors
d. employees

Question 12

Who are considered external users?

Answer 12

a. investors
b. creditors
c. regulatory and taxing agencies
d. unions

Question 13

What was the purpose of the Sarbanes-Oxley Act?

Answer 13

to reduce unethical behavior and decrease likelihood of future corporate scandals

Question 14

What happened after the Sarbanes-Oxley Act was enacted?

Answer 14

certify accuracy of financial information, penalties for fraud became more severe and an increased independence of auditing CPA’s to help avoid conflicts of interest

Question 15

Define financing activities

Answer 15

getting funds to start of expand buisness

Question 16

What is debt financing?

Answer 16

borrowing money

Question 17

What is equity financing?

Answer 17

selling stock

Question 18

Define investing activities

Answer 18

purchase resources needed to operate the business

Question 19

Define operating activities

Answer 19

basic transaction for which organization is in business

Question 20

Define revenues

Answer 20

generated from sales or performing service

Question 21

Define exspenses

Answer 21

costs incurred in earning revenue

Question 22

What are the three types of financial statements?

Answer 22

1. Income Statement
2. Statement of Return Earnings
3. Balance Sheet

Question 23

What is an income statement?

Answer 23

it summarizes all revenue and expenses for a period of time (month, quarter, or year)

Question 24

If revenue is greater than expenses, then what is the result?

Answer 24

Net Income

Question 25

If revenue is less than expenses, then what is the result?

Answer 25

Net loss

Question 26

What is a statement of return earnings?

Answer 26

it shows the amount of past and current profits

Question 27

What is a balance sheet?

Answer 27

shows the relationship between assets and liabilities plus stockholders equity

Question 28

What is the accounting equation?

Answer 28

Assets= Liabilities + Stockholders Equity

Question 29

Define assets

Answer 29

resources owned by the company

Question 30

What are examples of assets

Answer 30

- cash - receivables - inventory - supplies - prepaid insurance - prepaid rent - land - accumulated depreciation - equipment - buildings - copyrights - goodwill - patents

Question 31

Define liabilities

Answer 31

amounts owed by the company

Question 32

What are examples of liabilities?

Answer 32

- payables | - unearned service revenue

Question 33

Define stockholder's equities?

Answer 33

ownership claim on the buisness value of firm after debts have been paid

Question 34

What are examples of liabilities?

Answer 34

- common stock | - retained earnings

Question 35

The accounting equation must...

Answer 35

always remain balanced

Question 36

What do revenues represent?

Answer 36

the recepit of assets for goods solde or services rendered. The receipt of assets from owner is an investment

Question 37

Revenues are?

Answer 37

recognized when earned, NOT when cash is received

Question 38

Expenses are?

Answer 38

- recognized when costs are incurred, not when the cash is paid - are costs incurred to generate revenues

Question 39

Statement of cash flows

Answer 39

shows cash increases and decreases for the three types of primary business activities

Question 40

What is an annual report?

Answer 40

publicly traded companies required to provide stockholders with an annual report

Question 41

What happens during management and discussion analysis?

Answer 41

management explains how it will pay short-term liabilities, explains how it will pay for itself to operate/expand, explains how profitable it has been, discusses recent trends and future expectations

Question 42

What is the purpose of a footnote?

Answer 42

to clarify information contained in the financial statement

Question 43

What are do footnotes do?

Answer 43

- describe how some numbers are computed | - describe account policies used

Question 44

Define an auditor report

Answer 44

an auditor is a professional accountant who conducts an