Chapter 1

Question 1

Sarbanes-Oxley Act

Answer 1

pass in 2002, CEO & CFO must certify financial statements

Question 2

Financial Accounting

Answer 2

concerns the preparation and use of the accounting information provided in a company’s financial statements

Question 3

Managerial Accounting

Answer 3

focuses on the production of accounting information internal to a firm for deciding operations

Question 4

Tax Accounting

Answer 4

system of measurement used by tax authorities to determine the amount of taxes to levy on a company

Question 5

Accounts receivable

Answer 5

the amount a company expects to receive from its customers from prior purchases

Question 6

Accounts payable

Answer 6

the amount that a company expects to pay to its suppliers for purchases on credit

Question 7

Accrual basis

Answer 7

recording the financial effects of a business transaction even though the timing of the cash effects take place at a different time

Question 8

Cash basis

Answer 8

financial effects of a transaction are recorded only when the cash effect of the transaction occurs

Question 9

Income Statement

Answer 9

Profit & Loss, The income statement is important because it shows the profitability of a company during the time interval specified in its heading. The period of time that the statement covers is chosen by the business and will vary. For example, the heading may state:

“For the Three Months Ended December 31, 2012” (The period of October 1 through December 31, 2012.)

“The Four Weeks Ended December 27, 2012” (The period of November 29 through December 27, 2012.)

“The Fiscal Year Ended June 30, 2013” (The period of July 1, 2012 through June 30, 2013.)

Keep in mind that the income statement shows revenues, expenses, gains, and losses; it does not show cash receipts (money you receive) nor cash disbursements (money you pay out).

Question 10

Going-Concern Assumption

Answer 10

financial statements are prepared assuming that a business will continue operating in the future

Question 11

Statement of Cash Flow

Answer 11

Reports cash generated and obtained from operations, financing and investing during a time interval

Question 12

Balance Sheet

Answer 12

“snapshot” of the company’s financial position at a point A=L+SE

Question 13

Assets

Answer 13

resources of a company that are expected to provide future economic benefit

Question 14

Liabilities

Answer 14

the value of the company’s obligations to repay monies loaned to it, to pay for goods or services received or to fulfill commitments

Question 15

Shareholder’s Equity

Answer 15

the difference between a company’s assets and liabilities, represents shareholder’s financial stake

Question 16

Statement of Shareholder’s Equity

Answer 16

captures decision by summarizing the detailed reason for the change in each shareholder’s equity account

Question 17

Decision Usefulness

Answer 17

accounting information is used by managers, creditors and investors to make decisions

Question 18

Relevance

Answer 18

the capacity of accounting information to influence a decision

Question 19

Faithful representation

Answer 19

accounting information is free from error or biaz

Question 20

materiality

Answer 20

disclosure criterion used to decide what and how much information to provide on financial statements

Question 21

Footnotes

Answer 21

space to provide details about their accounting methods and measures

Question 22

lemons problem

Answer 22

management makes judgement about what their products are worth

Question 23

Audit Report

Answer 23

third party audit firms provide assurance of the faithful representation of the financial statements of the companies they audit

Question 24

Generally Accepted Auditing Standards

Answer 24

rules for audit firm procedures

Question 25

Generally Accepted Accounting Principles

Answer 25

generally accepted accounting procedures

Question 26

Expected return

Answer 26

expected income to be earned on investment

Question 27

Riskiness

Answer 27

uncertainty associated with the expected return

Question 28

Financial Accounting Standards Board

Answer 28

responsible for establishing GAAP

Question 29

GAAP rules for Mortgage Backed Securities & Credit Default Swaps

Answer 29

fair values are important to investors, evaluating illiquid markets only added to banking crisis

Question 30

Supply of Capital

Answer 30

allocating funds across different investment opportunities

Question 31

Demand for Capital

Answer 31

unfunded investment opportunities

Question 32

Capital Market

Answer 32

marketplace where funds are traded between suppliers of capital and firms in search of capital

Question 33

Efficient Market

Answer 33

a market in which security prices correctly reflect all publicly available information

Question 34

debt covenant

Answer 34

debtholder putting formal restrictions on the dollar value and ratios derived from financial statements

Question 35

Agency Cost

Answer 35

Two parties have different interests and the agent has more information, the principal cannot directly ensure that its agent is always acting in the principal’s best interests.

Question 36

American Institute of Certified Public Accountants

Answer 36

The national professional association of certified public accountants in the US

Question 37

Comparability

Answer 37

A quality of accounting information that facilitates the comparison of financial reporting of one company to the financial reporting of another company.

Question 38

Comprehensive income

Answer 38

a statement of all income and expenses recognized during a period. The statement includes revenue, finance costs, tax expenses, discontinued operations, profit share and profit/loss.

Question 39

Conservatism

Answer 39

when recording an economic event, the one that is realistic (may be less favorable) should be adopted.

Question 40

Consolidated income statement

Answer 40

financial statements prepared to reflect the parent company and its wholly or majority-owned subsidiaries

Question 41

Contracting role

Answer 41

when accounting information is used to administer contract terms

Question 42

corporate Charter

Answer 42

written document filed with a U.S. state by the founders of a corporation detailing the major components of a company such as its objectives, its structure and its planned operations.

Question 43

Corporate governance

Answer 43

balancing the interests of the many stakeholders in a company - these include its shareholders, management, customers, suppliers, financiers, government and the community

Question 44

Corporations

Answer 44

a business enterprise owned by one or more owners (shareholders) that has a legal identity separate and distinct than of its owners.

Question 45

Covenants

Answer 45

A promise in a loan, or any other formal debt agreement, that certain activities will or will not be carried out

Question 46

distribution to owners

Answer 46

payment of earnings to owners of a business organization in the form of a dividend

Question 47

economic entity

Answer 47

the recorded activities of a business entity will be kept separate from the recorded activities of its owner(s) and any other business entities.

Question 48

equity

Answer 48

a claim against the assets of a company by creditors or the shareholders

Question 49

expenses

Answer 49

an outflow of assets, an increase in liabilities or both from transactions involving an enterprise’s principal business activity

Question 50

financial accounting foundation

Answer 50

It was organized in 1972 as a non-stock, Delaware Corporation. It is an independent organization in the private sector, operating with the goal of ensuring objectivity and integrity in financial reporting standards.

Question 51

fiscal period

Answer 51

any continuous period, usually beginning after a natural business peak

Question 52

gains

Answer 52

an increase in asset values, usually involving a sale (realized) or revaluation (unrealized), unrelated to principal revenue producing activity of a business

Question 53

information role

Answer 53

complementary relationship between reputation and accounting information

Question 54

international accounting standards board

Answer 54

An association of professional accounting bodies formed in 1973 to develop and issue international accounting and reporting standards

Question 55

international financial reporting standards

Answer 55

the accounting and reporting standards adopted and promulgated by the IASB

Question 56

investments by owner

Answer 56

Stockholder investments

Question 57

limited liability

Answer 57

the concept that shareholders in a corporation are not help personally liable for its losses and debts

Question 58

losses

Answer 58

the excess of expense over revenues for a single transaction

Question 59

monetary unit

Answer 59

Accounting is recorded in US dollar and assumed to remain constant over time

Question 60

public company accounting oversight board

Answer 60

is a private-sector, nonprofit corporation created by the Sarbanes–Oxley Act of 2002 to oversee the audits of public companies and other issuers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports

Question 61

revenues

Answer 61

the inflow of assets, reduction in liabilities or both from transactions involving an enterprise’s principal business activity

Question 62

Security and exchange commmission

Answer 62

A government agency responsible for the oversight of US securities markets; this agency specifies the form and content of all financial reports by companies issuing securities to the public.