Chapter 1

Question 1

Accounting

Answer 1

a system that identifies, records, and communicates info that is relevant, reliable, and comparable about an organization’s business activities

Question 2

recordkeeping

Answer 2

the recording of transactions and events

Question 3

external users (examples)

Answer 3

customers, shareholders, govt, nonmanagerial/nonexecutive employees, labor unions

Question 4

internal users (examples)

Answer 4

mgrs, officers, sales staff, controllers

Question 5

financial accounting

Answer 5

provides external users with financial statements

used to decide how to interact with the company

Question 6

managerial accounting

Answer 6

provides internal users with info to make decisions

used to decide how to manage the company

Question 7

four areas of opportunity in accounting

Answer 7

1. financial (prep)
2. managerial (internal auditing)
3. taxation (regulatory)
4. accounting-related (consultants)

Question 8

private accounting

Answer 8

employee working for a business

Question 9

public accounting

Answer 9

auditing/taxation/advisory services; not necessarily public-sector

Question 10

steps to make ethical decisions

Answer 10

1. identify ethical concern
2. analyze options
3. make ethical decision

Question 11

fraud triangle

Answer 11

three factors that push a person to commit fraud

1. opportunity
2. incentive
3. rationalization

Question 12

internal controls

Answer 12

procedures set to:

• protect assets
• ensure reliable accting
• promote efficiency
• uphold company policies

Question 13

GAAP definition

Answer 13

concepts and rules that govern financial accting practice

Question 14

GAAP components

Answer 14

1. relevant info (affects decision of its users)
2. reliable info (trusted by users)
3. comparable info (used in comparisons across years/companies)

Question 15

securities and exchange commission (SEC)

Answer 15

USA govt agency that has legal authority to establish reporting requirements and GAAP for companies that issue stock to the public

Question 16

financial accounting standards board (FASB)

Answer 16

private group that sets both broad and specific principles; given task to set GAAP from the SEC

Question 17

international accounting standards board (IASB)

Answer 17

issues international standards that identify preferred accting practices in other countries (100+)

Question 18

international financial reporting standards (IFRS)

Answer 18

similar to, but sometimes different from USA GAAP

Question 19

general principles

Answer 19

assumptions, concepts, and guidelines for prepping financial statements

Question 20

specific principles

Answer 20

detailed rules used in reporting business transactions and events

Question 21

measurement/cost principle

Answer 21

accting info is based on atual cost

Question 22

revenue recognition principle

Answer 22

provides guidance on when a company must recognize revenue

1. when goods/services are provided to customers
2. at the amt expected to be received from selling products/services

Question 23

matching principle/expense recognition

Answer 23

company must record its expenses incurred to generate the revenue

Question 24

full disclosure principle

Answer 24

a company must report details behind financial statements that would impact users’ decisions

Question 25

going-concern assumption

Answer 25

accting info reflects a presumption the business will continue operating

Question 26

monetary unit assumption

Answer 26

transactions can be expressed in money

Question 27

time period assumption

Answer 27

life of a company can be divided into time periods

Question 28

business entity assumption

Answer 28

business is accounted for separately from its owner/other business entities

Question 29

business entity forms

Answer 29

1. sole proprietorship (1)
2. partnership (2+)
3. corporation (1+ shareholders)
4. limited liability company - LLC (1+)

Question 30

cost-benefit constraint

Answer 30

info disclosed by an entity must have benefits to the user that are greater than the costs of providing it

Question 31

sarbanes-oxley act (SOX)

Answer 31

what: requires public companies to apply both accounting oversight and stringent internal controls
why: in response to publicized accounting scandals (enron, tyco)

desired result: more transparency, accountability, and truthfulness in reporting transactions

Question 32

accounting equation

Answer 32

assets = liabilities + equity

Question 33

expanded acct equation

Answer 33

assets = liabilities + cont. capital - dividends + revenues - expenses

Question 34

transaction analysis

Answer 34

process used to analyze transactions and events

Question 35

external transaction

Answer 35

exchange of value between two entities

ex: sale of applecare by apple

Question 36

internal transaction

Answer 36

exchanges within any entity

ex: target’s use of its supplies - reported as expenses when used

Question 37

events

Answer 37

happenings that affect an entity’s acct equation and can be reliable measured

ex: natural event (like a fire) that destroys assets

Question 38

income statement

Answer 38

describes a company’s revenue and expenses along with resulting net income/loss over a period of time

revenues - expenses = net income

Question 39

statement of retained earnings

Answer 39

explains changes in retained earnings from net income/loss and any dividends over a period of time

beg. retained earnings + net income - dividends = end retained earnings

Question 40

balance sheet

Answer 40

describes a company’s financial position at a point in time

assets = liabilities + equity

Question 41

statement of cash flows

Answer 41

+/- operating cash flow +/- investing cash flow +/- financing cash flow = change in cash

Question 42

return on assets (ROA)

Answer 42

(net income) / (avg total assets)