CH 1: Accounting In Business

Question 1

An information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization’s business activities.

Answer 1

What is Accounting

Question 2

3 Steps of Accounting:

Answer 2

• Identify: Select transactions & events
• Recording: Input, measure & log
• Communicating: Prepare, analyze & interpret

Question 3

The recording of transactions and events, either manually or electronically

Answer 3

Recordkeeping (bookkeeping)

Question 4

Types of External Lenders

Answer 4

• Lenders
• Shareholders
• Governments
• Consumer Groups
• External Auditors
• Customers
• Regulators
• Non-executive employee

Question 5

Types of Internal Lenders

Answer 5

• Officers (CEO)
• Managers
• Internal Auditors
• Sales Staff
• Budget Officers (CFO)
• Controllers

Question 6

External Users of accounting are…

Answer 6

NOT dorectly involved in running the organization. External users have limited access to an organizations information. Yet their business decisions depend on information that is reliable, relevant, and comparable.

Question 7

Financial Accounting

Answer 7

The area of accounting aimed at serving external users by providing them with general-purpose financial statements. The term general-purpose refers to the broad range of purposes for which external users rely on these statements.

Question 8

Income Statement

Answer 8

Described a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.

Question 9

Statement of Retained Earnings

Answer 9

Explains charged in equity from net income, or loss, and from any dividends over a period of time.

Question 10

Balance Sheet

Answer 10

Describes a company’s financial position (types and amounts of assets, liabilities, and equity) at a point in time.

Question 11

Statement of Cash Flows

Answer 11

Identifies cash inflows (receipts) and cash outflows (payments) over a period of time.

Question 12

Internal Users of accounting information are…

Answer 12

Those directly involved in managing and operating in the organization such as the chief executive officer (CEO), chief financial officer (CFO), chief audit executive (CAE), treasurer, and other executive in a managerial level employees. They use the information to help improve the efficiency and effectiveness of an organization.

Question 13

Accounting’s 4 Broad Areas of Opportunities

Answer 13

• Financial
• Managerial
• Taxation
• Accounting-Related

Question 14

Fraud Triangle

Answer 14

A model created by a criminologist that asserts the following three factors must exist for a person to commit fraud: opportunity, pressure, and rationalization

Question 15

Opportunity (Fraud)

Answer 15

A person must envision away to commit fraud with a load for perceived risk of getting caught. Employers can directly reduce this risk. And example of some control on opportunity is a pre-employment background check.

Question 16

Pressure (Fraud)

Answer 16

A person must have some pressure to commit fraud. Examples are unpaid bills and addictions.

Question 17

Rationalization, or attitude (Fraud)

Answer 17

The person who rationalizes fails to see the criminal nature of the fraud or justifies the action

Question 18

GAAP

Answer 18

Generally Accepted Accounting Principles

Question 19

SEC

Answer 19

Securities and Exchange Commission

Question 20

FASB

Answer 20

Financial Accounting Standards Board

Question 21

IASB

Answer 21

International Accounting Standards Board

Question 22

IFRS

Answer 22

International Financial Reporting Standards

Question 23

Accounting Principles (4)

Answer 23

• Measurement (Cost)
• Revenue Recognition
• Expense Recognition
• Full Disclosure

Question 24

Measurement Principle (cost principle)

Answer 24

Usually prescribes that accounting information is based on actual cost. Cost is measured in cash or equal to cash basis. This means of cash is given for a service, its cost is measured as the amount of cash paid. If something besides cash is exchanged, cost is measured as the cash value of what is given up or received.

Question 25

Revenue Recognition Principle (sales)

Answer 25

The amount received from selling products and services. It provides guidance on the way to company must recognize revenue. To recognize means to record it. If revenue is recognized too early, a company would look more profitable than it is. If revenue is recognized too late, a company would look less problem than it is.

3 concepts are important to revenue recognition:

1) revenue is recognized one earned it. The earnings process is normally complete when services are performed or a seller transfers ownership of products to the buyer.
2) proceeds from selling products and services need not be in cash. A common nine cash proceeds received my seller is a customer’s promise to pay at a future date, called credit sales.
3) revenue is measured by the cash received plus the cash value of any other items received.

Question 26

Expense Recognition Principle (matching principle)

Answer 26

Prescribes that a company record the expense it incurred to generate the revenue reported. The principles of matching and revenue recognition are key to modern accounting.

Question 27

Full Disclosure Principle

Answer 27

Prescribes that a company report the details behind financial statements that would impact users’ decisions. Those disclosures are often in footnotes to the statements.

Question 28

Accounting Assumptions (4):

Answer 28

• Going-concern
• Monetary Unit
• Time Period
• Business Entity

Question 29

Going-Concern Assumption

Answer 29

Means that accounting information reflects a presumption that the business will continue operating instead of being closed or sold. This implies, for example, that property is reported at cost instead of, say, liquidation value closure.

Question 30

Monetary Unit Assumption

Answer 30

Means that we can express transactions and events in monetary, or money, units. Money is the common denominator in business. Examples of monetary units are the dollar in the United States, Canada, Australia and Singapore; and the peso in Mexico, the Philippines, and Chile. The monetary unit a company uses in its accounting reports usually depends on the country where he operates, for many companies today are expressing reports in more than one monetary unit.

Question 31

Time Period Assumption

Answer 31

Presumes that live in the company can be divided into time periods, such as months and years, and that useful reports can be prepared for those periods.

Question 32

Business Entity Assumption

Answer 32

Means that your business is accounted for separately from other business entities, including its owner. The reason for this assumption is that separate information about each business is necessary for good decisions. A business entity can take one of three legal forms: proprietorship, partnership, corporation.

Question 33

Accounting Constraints (2)

Answer 33

• Materiality Constraint

- Cost-Benefit Constraint

Question 34

Materiality Constraint

Answer 34

Prescribes that only information that would influence the decisions of a reasonable person need be disclosed. This constraint looks at both the importance and relative size of an amount.

Question 35

Cost-Benefit Constraint

Answer 35

Prescribes that only information with benefits of disclosure greater than the costs of providing it need be disclosed.

Question 36

Assets

Answer 36

Resources a company owns or controls. These resources are expected to yield future benefits. The term “receivable” is used to referred to an asset that promises a future in fluid resources.

Examples:
Cash
Supplies
Equipment
Land

Question 37

Liabilities

Answer 37

Creditors’ claim on assets. These claims reflect company obligations to provide assets, products, or services to others. The term “payable” refers to a liability that promises a future outflow of resources.

Examples:
Wages payable to workers
Accounts payable to suppliers
Notes payable to banks
Taxes payable to the government

Question 38

Accounting Equation (Balance Sheet Equation)

Answer 38

Equality involving a company’s assets, liabilities, and equity;

Assets = Liabilities + Equity

Question 39

Equity

Answer 39

The owner’s claim on assets, and is equal to assets minus liabilities. This is the reason equity is also called “net assets” or “residual equity.”

Assets - Liabilities = Equity

Question 40

Common Stock

Answer 40

Reflects inflows of resources such as cash and other net assets from stockholders in exchange for stock.

(A part of Contributed Capital.)

Question 41

Dividends

Answer 41

The outflow of resources such as cash and other assets to stockholders

(A part of Retained Earnings)

Question 42

Revenues

Answer 42

Revenues increased equity (via net income) from sales of products and services to customers

(A part of Retained Earnings)

Examples:
sales of products
consulting services provided
facilities related to others
commissions from services

Question 43

Expenses

Answer 43

Expenses decrease equity (via net income) from cost of providing products and services to customers.

(A part of Retained Earnings)

Examples:
Costs of employee time
Use of supplies
Advertising
Utilities
Insurance fees

Question 44

Net Income

Answer 44

Revenues exceed expenses

Net income increases equity

Question 45

Net Loss

Answer 45

Expenses exceed revenues