Chapter 1

Question 1

Accounting Definition

Answer 1

The system that measures business activities, processes that information into reports and financial statements, and communicates the findings to decision makers.

Question 2

Financial Statements

Answer 2

Business documents that report financial information about an entity to persons and organizations outside the business.

Question 3

Investors

Answer 3

A person or business that provides capital (usually money) to a business with the expectation of receiving financial gain.

Question 4

Creditors

Answer 4

Businesses or individuals to which payment is owed.

Question 5

Financial Accounting

Answer 5

The branch of accounting that provides information to people outside the business.

Question 6

Management Accounting

Answer 6

The branch of accounting that generates information for internal decision makers of a business.

Question 7

Proprietorship

Answer 7

An unincorporated business with a single owner.

Question 8

Partnership

Answer 8

An unincorporated business with two or more owners.

Question 9

Limited Liability Partnership (LLP)

Answer 9

A form of partnership in which each partner’s personal liability for the business’s debts is limited to a certain amount.

Question 10

Corporation

Answer 10

A business owned by shareholders that begins when the federal or provincial government approves its articles of incorporation. A corporation is a legal entity, an “artificial person,” in the eyes of the law.

Question 11

Shareholder

Answer 11

A person or company who owns one or more shares of stock in a corporation.

Question 12

Generally Accepted Accounting Principles (GAAP)

Answer 12

Accounting guidelines, formulated by the Accounting Standards Board, that specify the standards for how accountants must record, measure, and report financial information.

Question 13

Private Enterprise

Answer 13

A corporation that does not offer its shares for sale to the public

Question 14

Publicly Accountable Enterprise

Answer 14

A corporation that has its shares traded on a stock exchange or for which a strong public interest exists.

Question 15

Economic Entity Assumption

Answer 15

The accounting assumption that an organization or a section of an organization stands apart from other organizations and individuals as a separate economic unit for accounting purposes.

Question 16

Going Concern Assumption

Answer 16

An accounting assumption that the business will continue operating in the foreseeable future.

Question 17

Stable Monetary Unit Assumption

Answer 17

Accountants’ basis for ignoring the effect of inflation and making no adjustments for the changing value of the dollar.

Question 18

Cost Principle of Measurement

Answer 18

States that assets and services are recorded at their purchase cost and that the accounting record of the asset continues to be based on cost rather than current market value.

Question 19

Cost-Benefit Constraint

Answer 19

An accounting constraint that says the benefits of the information produced should exceed the costs of producing the information.

Question 20

Materiality

Answer 20

The accounting constraint that says information should be reported if it is material to the user—that is, if knowing it might affect a decision maker’s decision.

Question 21

Accounting Equation

Answer 21

Assets = Liabilities + Owner’s Equity/Shareholder’s Equity

Question 22

Asset

Answer 22

An economic resource a business owns that is expected to be of benefit in the future.

Question 23

Prepaid Expense

Answer 23

A category of assets that are paid for first, then expire or get used up in the near future.

Question 24

Liability

Answer 24

An economic obligation (a debt) payable to an individual or an organization outside the business.

Question 25

Note Payable/Receiveable

Answer 25

A Liability/Asset evidenced by a written promise to make a future payment/receive cash in the future.

Question 26

Owner’s Equity

Answer 26

In a proprietorship, the claim of an owner of a business to the assets of the business. Also called capital.

Question 27

Partner’s Equity

Answer 27

The name for owner’s equity when there is more than one owner. In this case, the owners are called partners.

Question 28

Shareholder’s Equity

Answer 28

The name for owner’s equity when the business is a corporation. In this case, the owners are called shareholders.

Question 29

Dividends

Answer 29

Distributions by a corporation to its shareholders

Question 30

Transaction

Answer 30

An event that has a financial impact on a business and that can be reliably measured.

Question 31

Income Statement

Answer 31

A list of an entity’s revenues, expenses, and net income or net loss for a specific period. Also called the statement of earnings or statement of operations.

Question 32

Net Income

Answer 32

Excess revenue over expenses

Question 33

Net Loss

Answer 33

Excess expenses over revenue

Question 34

Statement of Owner’s Equity

Answer 34

A summary of the changes in an entity’s owner’s equity during a specific period.

Question 35

Balance Sheet

Answer 35

A list of an entity’s assets, liabilities, and owner’s equity (proprietorship) or shareholders’ equity (corporation) as of a specific date. Also called the statement of financial position.

Question 36

Cash Flow Statement

Answer 36

Reports cash receipts and cash payments classified according to the entity’s major activities: operating, investing, and financing.