CH.1 Accounting In Action

Question 1

Define accounting

Answer 1

Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users.

A. The first part of the process, IDENTIFYING, involves selecting those events that are considered evidence of economic activity relevant to a particular business organization.

B. RECORDING is the keeping of a chronological diary of events, measured in dollars and cents.

C. COMMUNICATION occurs through the preparation and distribution of accounting reports.

Question 2

The accounting process consists of:

Answer 2

Identification -> Recording -> Communication

Question 3

Who are the internal users?

Answer 3

Internal users of accounting information are managers who plan, organize, and run a business. These include marketing managers, production supervisors, finance directors, and company officers.

Question 4

Who are the external users?

Answer 4

External users include investors, creditors, taxing authorities, regulatory agencies, labor unions, customers, and economic planners outside the business.

Question 5

Define ethics

Answer 5

The standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not fair, are ETHICS.

The process of analyzing ethical issues is to recognize that an ethical issue is involved, identify and analyze the principle elements in the situation (especially those harmed or benefited), identify the alternatives and weigh the impact of each alternative on the various stakeholders, then select the most ethical alternative.

Question 6

Explain GAAP

Answer 6

Generally accepted accounting principles are a common set of guidelines (standards) used by accountants in reporting economic events.

Question 7

Define SEC

Answer 7

The Securities and Exchange Commission is an independent regulatory agency of the United States government.

The SEC has the legal power to enforce the form and content of financial statements of corporations that wish to sell securities to the public.

Question 8

Define FASB

Answer 8

The Financial Accounting Standards Board has been granted the power from the SEC to establish GAAP.

Question 9

Explain Cost Principle

Answer 9

Under the cost principle assets should be recorded at their cost. Cost is the value exchanged at the time something is acquired.

Question 10

Explain Monetary Unit Assumption

Answer 10

The monetary unit assumption requires that only transaction data that can be expressed in terms of money be included in the accounting records.

Question 11

Explain Economic Entity Assumption

Answer 11

The economic entity assumption requires that the activities of the entity be kept separate and distinct from (1) the activities of its owner and (2) all other economic entities.

Question 12

What are the 3 types of business enterprises?

Answer 12

A. Proprietorship is a business owned by one person.
B. Partnership is a business owned by two or more persons associated as partners.
C. Corporation is a business organized as a separate legal entity under state corporation law with ownership divided into transferable shares of stock.

Question 13

State the accounting equation and define assets, liabilities, and owner’s equity.

Answer 13

The basic accounting equation is:
Assets = Liabilities + Stockholder’s Equity

A. Assets are resources owned by a business.
B. Liabilities are claims against assets.
C. Stockholder’s equity are the claims of the stockholders.

Question 14

List the 5 subdivisions of stockholders’ equity found in corporations

Answer 14

A. Paid-in capital is the stockholders’ investment in the business.
B. Revenues are the gross increases in stockholders’ equity resulting from business activities entered into for the purpose of earning income.
C. Expenses are the cost of assets consumed or services used in the process of earning revenue.
D. Dividends are distributions of cash or other assets to stockholders.
E. Retained earnings is determined by revenues, expenses, and dividends.

Question 15

Explain how revenues and expenses determine if a net income or net loss occurs

Answer 15

A. Revenues > Expenses = Net Income

B. Revenues < Expenses = Net Loss

Question 16

Define Transactions

Answer 16

Transactions are the economic events of the enterprise recorded. Transactions may be identified as either external or internal transactions.

Each transaction must be analyzed in terms of its effect on the components of the basic accounting equation. The analysis must also identify the specific items affected and the amount of the change in each item.

Question 17

Each transaction has a dual effect on the equation. Give an example.

Answer 17

For example, if an individual asset is increased, there must be a corresponding:
A. decrease in another asset, or
B. increase in a specific liability, or
C. increase in stockholders’ equity

Question 18

A tabular summary may be prepared to show the cumulative effect of transactions on the basic accounting equation. The summary demonstrates that:

Answer 18

A. Each transaction must be analyzed in terms of its effect on (1) the three components of the equation and (2) specific types of items within each component.
B. The two sides of the equation must always be equal.
C. The Common Stock and Retained Earnings column indicate the causes of each change in the stockholders’ claim on assets.

Question 19

Explain how the four financial statements are prepared from the summarized accounting data.

Answer 19

A. An Income Statement presents the revenues and expenses and resulting net income (or net loss) of a company for a specific period of time.
B. A Retained Earnings Statement summarizes the changes in retained earnings for a specific period of time.
C. A Balance Sheet reports the assets, liabilities, and stockholders’ equity of a business enterprise at a specific date.
D. A Statement of Cash Flows summarizes information concerning the cash inflows (receipts) and outflows (payments) for a specific period of time.

Question 20

Explain how the financial statements are interrelated

Answer 20

A. Net income (or net loss) shown on the income statement is added (subtracted) to (from) the beginning balance of retained earnings in the retained earnings statement.
B. Retained earnings at the end of the reporting period shown in the retained earnings statement is reported in the balance sheet.
C. The amount of cash shown on the balance sheet is reported on the statement of cash flows.

Question 21

Explain the career opportunities in accounting

Answer 21

Public Accounting provides the services of auditing, taxation, and management opinion as to the fairness of their presentation.
A. Auditing involves examining financial statements of companies and expressing an opinion as to the fairness of their presentation.
B. Taxation includes providing tax advice and planning, preparing tax returns, and representing clients before governmental agencies.
C. Management consulting involves providing advice for managers on such matters as financial planning and control and the development of computer systems.

Private Accounting involves the employment of accountants within individual companies. The private accountant performs a wide variety of duties such as general accounting, cost accounting, budgeting, accounting information systems, tax accounting, and internal auditing.

Not-for-profit Accounting pertains to not-for-profit organizations such as governmental units, foundations, hospitals, colleges, universities, and charities.

Other opportunities for careers in accounting are available in governmental and forensic accounting.