Chapter 1

Question 1

What are the 3 different ways businesses can be organized?

Answer 1

1. service business
2. merchandising business
3. manufacturing business

Question 2

What are the 3 types of business organizations?

Answer 2

1. sole proprietorship
2. partnership
3. corporation

Question 3

Who are the users of accounting information?

Answer 3

1. external users - shareholders, investors, banks

2. internal users - board of directors, senior managers

Question 4

What assumptions are made when considering financial accounting & the conceptual framework?

Answer 4

1. monetary unit assumption - purchasing power of the dollar is stable
2. economic entity assumption - the organization is economically separate from the owners
3. going concern assumption - the entity is expected to stay in business for the foreseeable future
4. time period assumption - life of a business can be divided into meaningful time periods

Question 5

What are the 3 accounting principles?

Answer 5

1. historical cost/ fair value - all elements are recorded at cost
2. revenue + expense recognition - point where R & E are recognized affects how the business is measured
3. full disclosure principle - all relevant info should be included

Question 6

What is materiality?

Answer 6

the significance or relevance of information made to the decision made by financial statement users - if omitting an item would affect users decision, it is material

Question 7

What are the qualitative characteristics of a financial statement?

Answer 7

1. relevance
2. reliability
3. comparability (to previous periods & other companies)
4. consistency (same principles each period)
5. understandability (to basic users)

Question 8

Define asset

Answer 8

things of value the company owns

Question 9

Define liability

Answer 9

money owed to third parties

Question 10

Define shareholders’ equity

Answer 10

the amount of assets owned by the shareholders of the company

Question 11

What is the accounting equation?

Answer 11

assets = liabilities + shareholders’ equity (common shares + retained earnings [revenue - expenses - dividends])

Question 12

Define dividends

Answer 12

a decrease in retained earnings that is the result of the owners receiving assets (usually cash) from the business

Question 13

What are the 3 main types of financial statements that are prepared?

Answer 13

1. income statement
2. statement of changes in equity
3. statement of financial position