Ch 1 Accounting in Action

Question 1

account

Answer 1

A record of increases and decreases in a specific asset, liability, or owner’s equity item. (p. 19)

Question 2

accounting

Answer 2

The information system that identifies, records, and communicates the economic events of an organization to a wide variety of interested users. (p. 4)

Question 3

accounting equation

Answer 3

Assets = Liabilities + Owner’s equity (p. 17)

Question 4

Accounting Standards for Private Enterprises (ASPE)

Answer 4

A set of standards developed by the Accounting Standards Board (AcSB) that may be used for financial reporting by private enterprises in Canada. (p. 15)

Question 5

accounting transaction

Answer 5

An economic event that is recorded in the accounting records because it changes the assets, liabilities, or owner’s equity items of the organization. (p. 13)

Question 6

accounts payable

Answer 6

A liability created by buying services or products on credit. It is an obligation to pay cash to a supplier in the future. (p. 17)

Question 7

accounts receivable

Answer 7

An asset created when selling services or products to customers who promise to pay cash in the future. (p. 16)

Question 8

annual report

Answer 8

Information that a company gives each year to its shareholders and other interested parties about its operations and financial position. It includes the financial statements and auditors’ report, in addition to information and reports by management. (p. 29)

Question 9

assets

Answer 9

Resources controlled by a business as a result of past events and from which future economic benefits are expected to flow to the business. (p. 16)

Question 10

balance sheet

Answer 10

A financial statement that reports the assets, liabilities, and owner’s equity at a specific date. (p. 16)

Question 11

cash flow statement

Answer 11

A financial statement that provides information about the cash receipts and cash payments for a specific period of time. (p. 19)

Question 12

comparability

Answer 12

An enhancing qualitative characteristic that accounting information has if it can be compared with the accounting information of other companies because the companies all use the same accounting principles. (p. 12)

Question 13

conceptual framework of accounting

Answer 13

A coherent system that guides the development and application of accounting principles. (p. 11)

Question 14

consistency

Answer 14

The use of the same accounting policies from year to year. Consistency is part of the comparability enhancing qualitative characteristic of accounting information. (p. 12)

Question 15

corporation

Answer 15

A business organized as a separate legal entity under corporation law, with ownership divided into transferable shares. (p. 8)

Question 16

creditors

Answer 16

All of the persons or entities that a company owes money to. (p. 6)

Question 17

drawings

Answer 17

Withdrawals of cash or other assets from an unincorporated business for the owner’s personal use. Drawings result in a decrease in an asset and a decrease in owner’s equity. (p. 19)

Question 18

elements of the financial statement

Answer 18

The components in the financial statements: assets, liabilities, owner’s equity, revenues, and expenses. (p. 20)

Question 19

ethics

Answer 19

The standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not fair. (p. 9)

Question 20

expenses

Answer 20

The cost of assets consumed or services used in a company’s ordinary business activities. Expenses are decreases in assets or increases in liabilities, excluding withdrawals made by the owners, and result in a decrease to owner’s equity. (p. 18)

Question 21

fair value

Answer 21

Generally the amount the asset could be sold for in the market assuming the company is a going concern, not the amount that a company would receive in an involuntary liquidation or distress sale. (p. 13)

Question 22

faithful representation

Answer 22

A fundamental qualitative characteristic of accounting information meaning information accurately depicts what really happened. (p. 12)

Question 23

Generally accepted accounting principles (GAAP)

Answer 23

An accepted set of accounting standards that includes broad principles, procedures, concepts, and standards. GAAP guide the reporting of economic events. (p. 9)

Question 24

going concern assumption

Answer 24

An assumption that a company will continue to operate in the foreseeable future. (p. 12)

Question 25

historical cost

Answer 25

An accounting concept that states that assets should be recorded at their historical (original) cost. (p. 13)

Question 26

income statement

Answer 26

A financial statement that presents the revenues and expenses and resulting profit (or loss) for a specific period of time. (p. 18)

Question 27

International Financial Reporting Standards (IFRS)

Answer 27

A set of global standards developed by the International Accounting Standards Board (IASB) used for financial reporting mostly by publicly accountable enterprises but also by certain private entities. (p. 14)

Question 28

investments by the owner

Answer 28

The increase in owner’s equity that results from assets put into the business by the owner. (p. 19)

Question 29

investors

Answer 29

Owners or potential owners of a business. (p. 6)

Question 30

liabilities

Answer 30

Present obligations, arising from past events, the settlement of which will include an outflow of economic benefits. (p. 16)

Question 31

limited liability

Answer 31

The legal principle that the owners’ liability for the debts of the business is limited to the amount they invested in the business. (p. 8)

Question 32

loss

Answer 32

The amount by which expenses are greater than revenues. A loss decreases owner’s equity. (p. 18)

Question 33

matching concept

Answer 33

The accounting concept that prescribes when a cost incurred by a business should be recognized as an expense. The general concept states that, if a direct association exists between a cost incurred and a revenue recognized, the cost should be recognized as an expense in the same period as the revenue is recognized. (p. 13)

Question 34

measurement

Answer 34

The process of determining the amount that should be recognized. (p. 13)

Question 35

monetary unit concept

Answer 35

A concept that states that only transaction data that can be expressed as an amount of money may be included in the accounting records. It is also assumed that the monetary unit is stable. (p. 13)

Question 36

neutral

Answer 36

The characteristic of accounting information when it is not biased toward one position or another. Neutrality is part of the faithful representation fundamental qualitative characteristic of accounting information. (p. 12)

Question 37

note payable

Answer 37

A liability supported by a written promise to pay a specific amount, at a specific time, in the future. (p. 17)

Question 38

objective of financial reporting

Answer 38

The goal of providing useful information to investors and creditors (external users) to make decisions about providing resources to a business. (p. 7)

Question 39

owner’s equity

Answer 39

The owner’s claim on the assets of the company, which is equal to total assets minus total liabilities. (p. 17)

Question 40

partnership

Answer 40

An association of two or more persons to carry on as co-owners of a business for profit. (p. 8)

Question 41

performance obligation

Answer 41

The obligation of a company to perform a service or deliver goods to a customer. (p. 13)

Question 42

periodicity concept

Answer 42

The accounting concept that guides organizations in dividing up their economic activities into distinct time periods. The most common time periods are months, quarters, and years. (p. 12)

Question 43

prepaid expense

Answer 43

The asset created when a business pays cash for costs incurred in advance of being used or consumed. (p. 16)

Question 44

profit

Answer 44

The amount by which revenues are greater than expenses. Profit increases owner’s equity. (p. 18)

Question 45

proprietorship

Answer 45

A small business owned by one person. (p. 8)

Question 46

publicly accountable enterprises

Answer 46

Publicly traded companies, as well as securities brokers and dealers, banks, and credit unions, whose role is to hold assets for the public as part of their primary business. (p. 14)

Question 47

recognition

Answer 47

The process of recording a transaction in the accounting records. (p. 13)

Question 48

relevance

Answer 48

A fundamental qualitative characteristic that accounting information has if it makes a difference in a decision. (p. 12)

Question 49

reporting entity concept

Answer 49

The concept that the accounting for a reporting entity’s activities should be kept separate and distinct from the accounting for the activities of its owners and all other reporting entities. (p. 11)

Question 50

revenue recognition principle

Answer 50

The principle that guides the recognition of revenue when a performance obligation is satisfied, not when cash is exchanged. (p. 13)

Question 51

revenues

Answer 51

The result of business activities that are undertaken to earn profit, such as performing services, selling merchandise inventory, renting property, and lending money. Revenues result in an increase in assets, or decrease in liabilities, and an increase in owner’s equity. (p. 18)

Question 52

statement of owner’s equity

Answer 52

A financial statement that summarizes the changes in owner’s equity for a specific period of time. (p. 18)

Question 53

timeliness

Answer 53

An enhancing qualitative characteristic that accounting information has if information is made available to decision makers before it loses its capacity to influence decision. (p. 12)

Question 54

understandability

Answer 54

An enhancing qualitative characteristic that requires information to be presented in a clear and concise fashion, so that reasonably informed users of that information can interpret it and comprehend its meaning. (p. 12)

Question 55

unearned revenue

Answer 55

The liability created when a customer pays in advance of being provided with a service or product. (p. 17)

Question 56

unlimited liability

Answer 56

The principle that the owners of a business are personally liable (responsible) for all debts of the business. (p. 8)

Question 57

verifiability

Answer 57

Information is verifiable if independent observers, using the same methods, obtain similar results. Verifiability is an enhancing qualitative characteristic. (p. 12)