CH.8 Financial Statements

Question 1

Explain Sole Proprietorship

Answer 1

• Owned by Single Individual
• Owner liable for all debts personally
• Not a separate legal entity: Does not pay income tax
  -Profits go directly to owner, taxed on personal income

Question 2

General Partnership

Answer 2

• 2 or more people
• Income goes to partners (Profits are shared)
• Taxed on personal income

Question 3

Limited Partnership

Answer 3

• 1 or more general partners with unlimited liability (Managing Partners)
• 1 or more limited partners (Cant take part in day to day ops.) limited liability to amount paid into partnership
• Both partnerships taxed on personal income

Question 4

Explain Corporation

Answer 4

• Separate legal entity
• company subject to income tax
• shareholders have limited liability

Question 5

Generally Accepted Accounting Principles

Answer 5

Cost Principle: States actual amount paid to acquire an asset is recorded in books of account
Revenue Recognition Principle: Revenue recognized when earned, NOT when cash is received
Matching Principle: Any expenses associated with revenue should be recognized in same period as revenue recognized. Expenses recognized when incurred, not paid.