CH 1: Accounting in Our Economic Environment

Question 1

Who needs accounting? (examples)

Answer 1

• Entrepreneurs
• Investors
• Bankers and other lenders
• Government
• Managers
• Donors

Question 2

((Why do you need Accounting Information?))

Answer 2

((You need accounting information to make wise choices about your future – earnings, spending, investments, etc.))

Question 3

((What is accounting?))

Answer 3

Accounting is a communication and decision-making tool - ((The language of business))

Provides insight on the
* result of operations for a period of time
* financial position of an entity at a particular point in time

Question 4

What is a business, and what are the 3 types of businesses?

Answer 4

An entity organized to accomplish a goal

For-profit businesses, Nonprofit entities, Governmental Entities

Question 5

((What is the goal of for-profit businesses?))

Answer 5

((Profits Maximization - to make money))

Question 6

((What is the goal of nonprofit entities?))

Answer 6

((Accomplish a mission, fulfill a need or purpose))

Question 7

((What is the goal of Governmental Entities))

Answer 7

(To serve and protect citizens and residents))

Question 8

((How does accounting serve all departments?))

Answer 8

Accounting is a bridge to better decision making across ((all business departments)) – all have budgets/all need and expend resources.

Marketing Dept.
* Human Resources Dept.
* Production & Operations Dept.
* Finance Dept.
* Information Management Dept.
* Every Other Department

Question 9

Business Organization Forms - ((What is a sole proprietor?))

Answer 9

((One [single] owner))
* All profits and losses go to owner; owner has unlimited liability
* Owner may be sued for both personal and business assets

Question 10

Business Organization Forms - ((What is a partnership?))

Answer 10

((At least two owners))
* Access to more capital than sole proprietor
* Agreements can be adapted to profit sharing and liability
* Responsible for debts of partnership (still unlimited liability)

Question 11

Business Organization Forms - ((What is a corporation?))

Answer 11

((One or more owners))
* Owners are called stockholders
* Loss up to investment only not personal assets (limited liability)

Question 12

((Who is Luca Pacioli?))

Answer 12

Known as the ((Father of double entry accounting))
*wrote ((Summa de Arithmetica)) – it included a chapter on accounting and business practices - resulted in the “double entry” bookkeeping currently being used

Question 13

((What is the double entry system?))

Answer 13

((Double-entry means that financial transactions impact at least two accounts by equal amounts
on corresponding sides.))

Every account has two sides: a debit [left] side and a credit [right] side

Question 14

((What is the Accounting Equation?))

Answer 14

The Accounting Equation: ((Assets = Liabilities + Stockholders’ Equity))

If you increase Asset, then Liabilities and/or Equity increases by the same amount

Question 15

History of Need for Accounting Standards

Answer 15

Post WWI: booming economy, lots of public investing and public confidence

Markey prices accelerated rapidly, quick return

Question 16

((Stock Market Crash))

Answer 16

((BLACK THURSDAY)): October 24 1929 - stock market had signifiant price drops and the plummeting prices to the worst drop on October 29 1929

Great Depression followed in the 1930s

Question 17

((Public Outcry))

Answer 17

We need transparency in reporting ((accounting standards)) and regulation over the capital markets ((buy/sell stock))

Results:
- government stepped in
- requirements for companies selling stock to public
-attempts to protect public ((financial)) interests
- SEC established

Question 18

((What is the SEC?))

Answer 18

((Securities & Exchange Commission)) ((U.S.))

Question 19

((What is the FASB?))

Answer 19

((Financial Accounting Standards Board)) ((U.S))

Question 20

((What is the IASB?))

Answer 20

((International Accounting Standards Board)) ((Global))

Question 21

((SEC))

Answer 21

1. Formed to protect investors, governed by 5 commissioners (appointed by president)
2. Established by the ((Securities Exchange Act of 1934))

Question 22

((SEC PURPOSE))

Answer 22

1. to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation
2. Any company offering securities for [public] investment dollars must reveal ((the truth)) about the business
3. brokers, dealers, and exchangers - engaged in the trade of securities, must treat investors fairly and honestly, ((putting investors interests first))

Question 23

((SEC GOALS))

Answer 23

Promote/restore public confidence in [stock] market system

Question 23

((US GAAP))

Answer 23

Generally Accepted Accounting Principles - standards issued by FASB

Question 23

((FASB))

Answer 23

- established July 1973 -((private, nonprofit)), standard-setting body, with ((seven)) full time ((independent)) board members

Question 23

((FASB PURPOSE))

Answer 23

- ((given authority by SEC)) to set accounting standards for public companies in the US - ((issues standards)) that are relevant to public, private, nonprofit (based on certain criteria)

Question 23

((US GAAP PURPOSES))

Answer 23

-governs the preparation of financial statements - how accounting data is reported - applicable to ((public entities (registered with SEC))) in the US to issue securities to the public - ((private companies may choose)) to follow US GAAP

Question 24

((Global impact of US GAAP))

Answer 24

more than ((90 countries adopted)) a similar set of reporting standards

Question 25

((IASB))

Answer 25

International Accounting Standards Board - similar to US FASB but membership is global and broad

Question 26

((IFRS))

Answer 26

International Financial Reporting Standards -reflection of interdependent economies -permissible by the SEC for multinational companies that buy/sell securities on US exchanges

Question 27

Impact of ((Technology)) on evolution of accounting

Answer 27

- efficiency, speed, robotics - proliferation of data that is analyzed and recorded - information management systems

Question 28

Impact of ((Globalism)) on evolution of accounting

Answer 28

-world is interdependent and interconnected -has become smaller

Question 29

Impact of ((E-business, E-commerce, and the Internet)) on evolution of accounting

Answer 29

- shopping everywhere, pushing traditional retailers out of business - business transactions online

Question 30

What are ((Internal Controls))

Answer 30

((policies and procedures)) with three objectives

Question 31

((3 objectives)) of internal controls

Answer 31

1. promote operational ((efficiency)) 2. ensure ((accuracy)) of accounting information 3. encourage ((compliance)) with laws and regulation

Question 32

((Example Internal Controls Procedures))

Answer 32

1. proper ((authorization)) for transactions 2. ((separation)) of duties 3. maintenance of adequate ((documentation)) 4. control over physical ((access)) to assets 5. providing ((independent checks))

Question 33

((ICFR))

Answer 33

Internal Controls over Financial Reporting -requires public companies to have independent auditor give an opinion on the effectiveness of the ICFR

Question 34

((4 Assumptions in Accounting))

Answer 34

1. ((Monetary Unit)): information is reported in currency form 2. ((Periodicity)): reports are prepared for discrete periods of time 3. ((Going Concern)): an entity will continue into foreseeable future - assume business will stay in business 4. ((Economic Entity)): the business and owner' financial transactions are separated - separate business and personal

Question 35

((Decision-making for For-Profit Businesses))

Answer 35

1. Is the business ((profitable))? 2. Can we ((sustain operations)) through next year? 3. Does company have ((sufficient cash))? 4. Can we afford the ((expand operations or hire additional)) employees? revenues/expenses assets, liabilities, stockholders equity

Question 36

((Role of Donors in the Non-Profit Organization))

Answer 36

- ((non profits do not have owners : are accountable to donors and contributors)) - donor reports focus on ((how contributed resources were used)), how effectively entity is accomplishing mission - use of donations towards ((administrative [overhead] vs. program [the mission] expenses))

Question 37

((Accounting for Governmental Entities))

Answer 37

- ((taxes are revenue)) for government entities - governmental entities have ((fiscal accountability)) as opposed to for profit - ((budget is used as a tool to control government spending)) - released to public

Question 38

Why accounting?

Answer 38

- ((Decisions are best made with relevant information and faithful representation of an entity's performance and position)) 1.organized information 2. decision making

Question 39

How does ((accounting enable)) people?

Answer 39

1. evaluate results of operations 2. assess financial position 3. decide on the path ahead - operations, products, employees

Question 40

((RIRPAF))

Answer 40

Report of the Independent Registered Public Accounting Firm where an auditor offers an opinion on financials and internal controls

Question 41

Goal of RIRPAF and the Independent Accountant

Answer 41

- ((independent accountants are often referred to as auditors in an audit)) - ((can't ensure 0 fraud)) but try to provide reasonable assurance to users that 1. financial statements are prepared according to US GAAP 2. financial statement contains no material misstatement 3. ICFR are effective

Question 42

What happens if you invest 100% of your savings into stock and they go bankrupt?

Answer 42

You lose everything you put in - you can only lose what you put in