Chapter 1

Question 1

Sarabanes Oxley Act of 2002 (SOX)

Answer 1

1. Top mgmt must certify financial statements
2. Greater independence of auditors
3. Increased responsibility for BOD
4. Greater need for well documented internal controls

Question 2

GAAP

Answer 2

Generally Accepted Accounting Principles

Question 3

What are the GAAP?

Answer 3

SEC
FASB
IASB

Question 4

SEC

Answer 4

Provides gov oversight for companies that trade stocks on public exchanges

Question 5

FASB (Financial Accounting Standards Board)

Answer 5

non-gov agency that provides the broad reporting standards and specific accounting rules

Question 6

IASB (International Accounting Standards Board)

Answer 6

FASB and IASB currently have an ongoing “convergence project”; they are trying to get both sets of standards to be the same

Question 7

GAAP, compared to IFRA tends to be more

Answer 7

Rules-based

Question 8

IFRS

Answer 8

International Financial Reporting Standards

Question 9

Internal users of accounting data

Answer 9

Board of Directors, marketing department, finance director, etc.

Question 10

External users of accounting data

Answer 10

Investors, creditors, IRS, etc.

Question 11

Cost principle

Answer 11

Transactions recorded at cost (what was given up to acquire something)

Question 12

Fair value principle

Answer 12

What price would be received if an asset were sold or would be paid if a liability were settled

Question 13

Monetary unit assumption

Answer 13

An event must be able to be quantified monetarily, and the unit stays the same

Question 14

Economic entity assumption

Answer 14

The activities of the business are separate from the owner and other businesses

Question 15

Proprietorships

Answer 15

Sole owner who is personally liable for all debts of business

Question 16

Partnership

Answer 16

2+ sole proprietorships where each owner if fully liable for all debts with a written or oral contract

Question 17

Corporation

Answer 17

Separate legal entity; ownership split into shares of stock

Question 18

Basic Accounting Equation

Answer 18

Assests= Liabilities + Owner’s Equity

Question 19

Assets

Answer 19

Resources owned by a business–capacity to provide future services or benefits

Question 20

Liabilities

Answer 20

Existing debts and obligations

Question 21

Owner’s Equity

Answer 21

Owner’s claim on the assets

Question 22

What four things change OE?

Answer 22

1. • investment by owner
2. • withdrawal or drawing by owner
3. • revenue
4. • expenses

Question 23

Expanded ACC equation

Answer 23

A = L + OE
A = L + (Owner's Capital-Owner's Drawings + Revenue - Expenses)

Question 24

Revenue

Answer 24

Act of providing services or sale of goods; doesn’t necessarily mean collection of cash

Question 25

Expense

Answer 25

Goods or services used up to operate the business; no future benefit

Question 26

Income Statement

Answer 26

Revenues and expenses resulting in net income or loss for specific period

Question 27

Owner’s Equity Statement

Answer 27

Summarizes the 4 changes in owner’s equity

Question 28

Balance Sheet

Answer 28

Reports assets, liabilities, and ending owner’s equity at a specific date

Question 29

Statement of Cash Flows

Answer 29

Summarizes info about cash inflows and outflows

Question 30

4 Financial Statements

Answer 30

1. Income Statement
2. Owner’s Equity Statement
3. Balance Sheet
4. Statement of Cash Flows