1. Accounting as a form of communication

Question 1

Business

Answer 1

All of the activities necessary to provide the members of an economic system with goods and services.

Question 2

Business entity

Answer 2

An organization operated to earn a profit.

Question 3

Nonbusiness entity

Answer 3

An organization operated for some purpose other than to earn a profit.

Question 4

Economic entity concept

Answer 4

The assumption that a single, identifiable unit must be accounted for in all situations. For example, a business owner must keep his own personal affairs separate from those of the business.

Question 5

Sole proprietorship

Answer 5

A form of organization with a single owner.

Question 6

Partnership

Answer 6

A business owned by two or more individuals; the organization form often used by
accounting firms and law firms.

Question 7

Corporation

Answer 7

A form of entity organized under the laws of a particular state; ownership evidenced by shares of stock.

Question 8

Business activities

Answer 8

simply stated, businesses raise money through financing which they invest in assets in order to operate the business and generate revenues, which in turn can be used for financing -> investing -> grow operating activities -> financing -> etc.

Question 9

Share of stock

Answer 9

A certificate that acts as evidence of ownership in a corporation. A corporation can issue shares of stock, allowing people to purchase a part of the corporation in order for the corporation to obtain financing.

Question 10

Stockholder

Answer 10

One of the owners of a corporation

Question 11

Bond

Answer 11

A certificate that represents a corporation’s promise to repay a certain amount of money
and interest in the future.

Question 12

Creditor

Answer 12

Someone to whom a company or person has a debt

Question 13

Capital stock

Answer 13

Indicates the owners’ contributions to a corporation.

Question 14

Asset

Answer 14

A future economic benefit; cash, buildings, land, inventory, licenses etc.

Question 15

Revenue

Answer 15

An inflow of assets resulting from the sale of goods and services.

Question 16

Expense

Answer 16

An outflow of assets resulting from the sale of goods and services; salaries, taxes, purchase of inventory etc.

Question 17

Accounting

Answer 17

The process of identifying, measuring, and communicating economic information to various users.

Question 18

Management accounting

Answer 18

The branch of accounting concerned with providing management with information to facilitate planning and control (internal users).

Question 19

Financial accounting

Answer 19

The branch of accounting concerned with the preparation of financial statements for outsider use (external users). This is what this course is mainly concerned with

Question 20

Balance sheet

Answer 20

The financial statement that summarizes the assets, liabilities, and owners’ equity at a specific point in time. Shows what obligations will be due in the near future and what assets will be available to satisfy them.

Question 21

The accounting equation

Answer 21

The foundation of the entire accounting system. Assets = Liabilities + Owner’s equity

Question 22

Liability

Answer 22

An obligation of a business.

Question 23

Owners’/stockholders’/shareholders’ equity

Answer 23

The owners’ claims on the assets of an entity.

Question 24

Income statement

Answer 24

A statement that summarizes revenues and expenses -> stating net income.

Question 25

Statement of retained earnings

Answer 25

The statement that summarizes the income earned and dividends paid over the life of a business. I.e. the statement seeks to explain the changes to retained earnings and capital stock.

Question 26

Dividends

Answer 26

A distribution of the net income of a business to its owners.

Question 27

Retained earnings

Answer 27

The part of owners’ equity that represents the income earned less dividends paid over the life of an entity, i.e. the amount the entity has earned through its entire life minus the dividends payed to all shareholders.

Question 28

Statement of cash flows

Answer 28

The financial statement that summarizes an entity’s cash receipts and cash payments during the period from operating, investing, and financing activities, i.e. where cash came from and what it was used for.

Question 29

Relationship between the four statements (of income, cash flows, etc)

Answer 29

The income statement calculates net income, which is used in the statement of retained earnings to calculate retained earnings, which in turn goes on the balance sheet. To explain the cash account on the balance sheet, the statement of cash flows is made, summarizing cash flows throughout the period.

Question 30

Cost principle/historical cost/original cost

Answer 30

Assets are recorded at the cost to acquire them.

Question 31

Going concern

Answer 31

The assumption that an entity is not in the process of liquidation and that it will continue indefinitely (liquidation: the entity shuts down and everything is turned into liquid assets (cash)).

Question 32

Monetary unit

Answer 32

The yardstick used to measure amounts in financial statements; the dollar in the United States.

Question 33

Time period

Answer 33

An artificial segment on the calendar used as the basis for preparing financial statements.

Question 34

Accounting standards

Answer 34

Several organizations govern the rules of accounting; the generally accepted accounting principles (GAAP). These include:

• Securities and Exchange Commission (SEC): The federal agency with ultimate authority to determine the rules for preparing statements for companies whose stock is sold to the public. -Financial Accounting Standards Board (FASB): The group in the private sector with authority to set accounting standards.
• American Institute of Certified Public Accountants (AICPA): The professional organization of certified public accountants.
• Certified Public Accountant (CPA): The designation for an individual who has passed a uniform exam administered by the AICPA and has met other requirements as determined by individual states.
• Public Company Accounting Oversight Board (PCAOB): The five-member body created by the Sarbanes-Oxley Act that was given the authority to set auditing standards in the United States. -International Accounting Standards Board (IASB): The organization formed to develop worldwide accounting standards.

Question 35

Auditing

Answer 35

The process of examining the financial statements and the underlying records of a company to render an opinion as to whether the statements are fairly presented.