Unit 1

Question 1

What is accounting?

Answer 1

An information system that identifies, records, and communicates an organization’s economic events.

Question 2

What is the purpose of accounting?

Answer 2

To provide financial information to decision makers.

Question 3

What are the main activities of accounting?

Answer 3

Identifying, recording, and communicating economic events.

Question 4

Who are the internal users of accounting information?

Answer 4

Owners, managers, and employees.

Question 5

Who are the external users of accounting information?

Answer 5

Investors, government, and creditors.

Question 6

What is a business?

Answer 6

An organization that produces or sells goods or services to satisfy consumer needs for profit.

Question 7

What are the three forms of business ownership?

Answer 7

Sole-proprietorship, partnership, and corporation.

Question 8

What are the advantages of a sole-proprietorship?

Answer 8

Easy to set up, all profits go to the owner, total control, and fewer regulations.

Question 9

What are the disadvantages of a sole-proprietorship?

Answer 9

Limited skills, difficult to raise money, owner takes all risks, and unlimited liability.

Question 10

What is a partnership?

Answer 10

A business owned by two or more individuals who share responsibilities.

Question 11

What are the advantages of a partnership?

Answer 11

Easy to set up, pooling of skills and money, and risk is spread.

Question 12

What are the disadvantages of a partnership?

Answer 12

Conflicts between partners, shared profits, and mutual agency.

Question 13

What is a corporation?

Answer 13

An artificial person with rights, powers, and duties, owned by shareholders.

Question 14

What are the advantages of a corporation?

Answer 14

Easy to raise money, easy to transfer ownership, limited liability, and unlimited lifespan.

Question 15

What are the disadvantages of a corporation?

Answer 15

High startup costs, complex organization, more regulations, and double taxation.

Question 16

What are accounting standards?

Answer 16

Rules and practices that guide accounting activities.

Question 17

What is GAAP?

Answer 17

Generally Accepted Accounting Principles used by Canadian and American accountants.

Question 18

What replaced GAAP in Canada?

Answer 18

IFRS (International Financial Reporting Standards) on January 1, 2011.

Question 19

What is the Economic Entity Concept?

Answer 19

Personal finances of the owner should be kept separate from the business finances.

Question 20

What is the Going Concern Assumption?

Answer 20

The assumption that the economic entity will continue to operate in the foreseeable future.

Question 21

What is the purpose of financial statements?

Answer 21

To provide information about a company’s resources and ability to earn profit.

Question 22

What are the types of financial statements?

Answer 22

Balance Sheet, Income Statement, Statement of Owner’s Equity, and Cash Flow Statement.

Question 23

What is reported on a Balance Sheet?

Answer 23

Assets, Liabilities, and Owner’s Equity.

Question 24

What are short-term assets?

Answer 24

Items of value owned by a business that are expected to be converted to cash within a year.

Question 25

What are long-term assets?

Answer 25

Items of value owned by a business that are expected to provide value for more than one year.

Question 26

What are liabilities?

Answer 26

The total amount owed to creditors.

Question 27

What is Owner’s Equity?

Answer 27

The owner’s claim to the company’s assets.

Question 28

What does the Income Statement show?

Answer 28

Net income or loss for a period of time.

Question 29

What are the components of the Income Statement?

Answer 29

Revenue, Expenses, and Net income (profit).

Question 30

What is the Statement of Owner’s Equity?

Answer 30

A financial statement that summarizes changes in Owner’s Equity for a specific period.

Question 31

What does the Cash Flow Statement reveal?

Answer 31

Cash inflows and outflows during a fiscal period.

Question 32

What are the three categories of cash flows?

Answer 32

Operating Activities, Investing Activities, and Financing Activities.

Question 33

What is recognition in accounting?

Answer 33

The process of recording Assets, Liabilities, Revenue, or Expenses.

Question 34

What is the Cost Principle?

Answer 34

Requires that assets are shown at their Historical Cost.

Question 35

What is the Revaluation Model?

Answer 35

Allows recording assets at their Fair Value rather than Historic Value.

Question 36

What is the Monetary Unit Assumption?

Answer 36

Only transaction data that can be expressed as money may be included in accounting records.

Question 37

What is a transaction?

Answer 37

An event that occurs during the operation of a business resulting in a change in financial position.

Question 38

What is a source document?

Answer 38

An original record of a transaction that provides proof it occurred.

Question 39

What is the Objectivity Principle?

Answer 39

Requires accounting to be recorded based on clear, verifiable evidence.

Question 40

What is a receipt?

Answer 40

Records the purchase of goods/services.

Question 41

What is a bill?

Answer 41

Records goods/services that need to be paid.

Question 42

What are cheque copies?

Answer 42

Records that a payment was made by a cheque (printed form used instead of money to make payment from bank account).

Question 43

What are cash register summaries?

Answer 43

Records the sale of goods/services for a day.

Question 44

What are credit card slips?

Answer 44

Records credit given for the value of merchandise returned.

Question 45

What is the Objectivity Principle?

Answer 45

Requires a business’s accounting to be recorded based on clear, verifiable evidence. ## Footnote Source documents satisfy the Objectivity Principle (a GAAP principle).

Question 46

What is an Equation Analysis Sheet?

Answer 46

One method to analyze transactions.

Question 47

How do accountants analyze transactions?

Answer 47

Accountants do not use an Equation Analysis Sheet; they use a Journal.

Question 48

In what order are financial statements prepared?

Answer 48

1. Income Statement 2. Statement of Owner’s Equity 3. Balance Sheet 4. Cash Flow Statement.

Question 49

What is determined by the Income Statement?

Answer 49

Net profit.

Question 50

What is determined by the Statement of Owner’s Equity?

Answer 50

Ending capital.

Question 51

What does the Balance Sheet do?

Answer 51

Transfers the cash amount to the Cash Flow Statement.

Question 52

What is the Annual Report?

Answer 52

Information that a corporation gives each year to its shareholders and other interested parties about its operations and financial position. ## Footnote It includes the financial statements and auditor’s report, in addition to information and reports by management.