Unit 2

Question 1

4 components of Accounting

Answer 1

Quantitative
Financial
Useful
Decisions

Question 2

4 steps in decision making process

Answer 2

Identify issue
Gather info
Identify alternatives
Choose best option

Question 3

Capital/Financing

Answer 3

Money needed by buy resources to run a business

Question 4

3 sources of capital

Answer 4

Investors (owners)
Creditors (lenders)
Business retained earnings

Question 5

Two roles of accountants

Answer 5

Measuring and reporting

Advising

Question 6

Accounting cycle

Answer 6

analyzing, recording, classifying, summarizing, and reporting the transactions of a business.

Question 7

Managerial vs Financial accounting

Answer 7

Managerial - for internal users, more detailed

Financial - for external, summary reporting

Question 8

3 types of financial statements

Answer 8

Balance sheet - reports assets, liabilities, equity (assets-liabilities)
Income statement - net income
Statement of cash flows - cash in/out among operations, investing, financing

Question 9

External stakeholders

Answer 9

Lenders
Investors
Competitors
Federal, State, Local Government Agencies

Question 10

Internal stakeholders

Answer 10

Management
Suppliers
Customers
Employees

Question 11

3 elements in Accounting Environment

Answer 11

Organizations
Ethics
Technology

Question 12

Organization that sets accounting standards for publicly listed firms

Answer 12

FASB
Financial Accounting Standards Board
private, no legal power to enforce
gets authority from SEC
balance revelatory needs of external users with privacy needs for firms

Question 13

Rules created by FASB

Answer 13

GAAP

Question 14

Agency that sets accounting rules for government

Answer 14

GASB

Question 15

SEC

Answer 15

make sure investors get full fair information

can take over FASB if needed, per SOX

Question 16

two uses of CPA

Answer 16

CPA individual - passed CPA exam by AICPA

CPA firm - performs accounting services, does audits

Question 17

Agency that harmonizes conflicting national accounting standards among nations

Answer 17

IASB

Question 18

3 functions of an accounting system

Answer 18

Analysis - analyze business events to determine if info should be recorded in accounting system
Bookkeeping - keeping track of info
Evaluation - summary info used to evaluate financial health and performance of a business

Question 19

Purpose of accounting cycle

Answer 19

see how accounting system turns transactions into financial statements

Question 20

4 steps in accounting cycle

Answer 20

1. Analyzing transaction - determine economic essence, need system
2. Record effects of transaction - need code that captures essence of transaction ie debits and credits
3. Summarize effects of transactions - posting journal entries, preparing trial balance, distill essence
4. Prepare Reports - Determine what decision makers need to know, adjust entries, prepare financial statements, close books

Question 21

Good rule for determining if an item has to go into the accounting records

Answer 21

measurable

framework of accounting allows us to break complex transactions into parts

Question 22

arms length transaction

Answer 22

buyer seller have equal bargaining power and can act independently

Question 23

accounting equation

Answer 23

assets = liabilities + equity

Question 24

account

Answer 24

place to record effects of all transactions that are related to a certain item
ie cash, accounts payable, employee wage expense
page in a book
colums/details in balance sheet

Question 25

Net income equation

Answer 25

revenue - expenses

Question 26

temporary account

Answer 26

revenues and expenses
revenue increase equity
expenses reduce equity