Chapter 1 Accounting

Question 1

Why is Accounting the language of buisness?

Answer 1

-It measures business activities
- processes data into reports
- Communicates results to decision makers

Question 2

Who uses accounting information?

Answer 2

-Individuals/ Managers
- Investors/Creditors
-Taxing Authorities
- Non-Profit Organizations

Question 3

What are the types of users in Accounting?

Answer 3

• Internal Users: People inside the company like managers and accountant themselves
  -External Users: People outside the company like investors/creditors

Question 4

What is a Financial Statement and some types there are? (Note: Write them in order they occur)

Answer 4

Financial Statement is a business document companies use to report the result of their business activities to various user groups and some types are:

-Income Statement (Shows whether the company has been profitable over a period of time)
-Statement of Changes in Equity (Recon. between Beg. and Ends. balance of shareholders equity)
-Balance Sheet (Shows financial position of the company and answers the question that can the company pay it’s debt?)
- Statement of Cash flow (Shows where the majority of cash came from and where it’s being spent)
- General Ledger (Keeps track of financial transactions to make financial reports)
Statement of Retained Earnings (shows the starting balance and ending period over the period)

Question 5

What are some Financial Reporting Responsibilities?

Answer 5

1. Company management is responsible for preparing financial statements.
2. Audio then gathers evidence and check if the information in financial statements complies with GAAP (Generally Accepted Accounting Principles)
3. Finally, Auditor provides a signed report that states it’s opinions on the fairness of companies financial statement relative to GAAP

Question 6

What is the Accounting Equation?

Answer 6

Assets = Liabilities + Shareholders Equity
(What I own) (Expenses/Debts) (Owners claims on assets of business)

Question 7

How to Calculate Retained Earnings?

Answer 7

1. Revenue Minus Expenses = Net Income
2. Beg. Balance Retained Earnings +or- Net Income. - Dividends
3. = Ending balance of Retained Earnings

Question 8

Definition: Assets?

Answer 8

Economic Assets that are expected to produce future Benefits

Question 9

Definition: Liabilities?

Answer 9

Economic Debts payable to outsiders called creditors.

Question 10

Definition: Creditors?

Answer 10

Someone who loans money/products/resources to another and expects to be re-paid plus interest.

Question 11

Where is the companies cash coming from? How is cash being used?

Answer 11

Look at cash flow statement. Look at operating activities and you should know how the cash is being used.

Question 12

Can Company sell it’ s Products?

Answer 12

Look at revenue in the income statement

Question 13

Definition: Investors?

Answer 13

Someone who buys shares to have increase in price in their shares

Question 14

Definition: Managers?

Answer 14

Someone who makes the business decisions and are leaders. They should ask “how well is the company doing”?

Question 15

Definition: A/R?

Answer 15

Services the company will receive money later. (Debit)

Question 16

Definition: A/P?

Answer 16

Service the company will have to play later. (Credit)

Question 17

Definition: Dividends?

Answer 17

A part of profit given to shareholders

Question 18

Can company collects it’ s receivables?

Answer 18

Compare % interest of A/R and % interest in sales
(To calculates percent interest, subtract two years and divide with pervious year)

Question 19

Can company pay it’s (a) Current Liabilities (b)Current and long term liabilities

Answer 19

(a) On the balance sheet compare current assets and liabilties
(b) On the balance sheet compare total assets and total liabilities

Question 20

What are the four accounting assumptions?

Answer 20

1. The separate entity assumption: (The business is a separate economic unit)
2. The going-concern assumption: (This means business will run in a foreseeable future)
3. The Historical Cost assumption: (The actual cost of assets should be recorded)
4. The stable monetary unit assumption: (The value of currency is stable)

Question 21

Definition: Shareholders Equity? What are the two types of shareholder’s equity and their meaning?

Answer 21

Shareholders equity is owners interests/claims of assets an business. The two types are share capital and retained earnings

Share Capital: amounts contributed by shareholders in exchange of shares
Retained Earnings: Profit the company has left over after paying all their expenses and debts

Question 22

Ethical Analysis?

Answer 22

Accountants goal is to make a decision that fulfills their ethical responsibilities and they need to apply accounting standards that faithfully represent company’s financial position and operating performance.

Question 23

Decision Framework?

Answer 23

Making tough ethical adjustments requires decision framework which can be done answering four questions and tough decisions can help.

Question 24

How Accounting Standards are set?

Answer 24

1. Accountants follow professional guidelines
2. The rules that govern accounting are called GAAP (generally accepted accounting principles)

Question 25

What is financial Accounting?

Answer 25

Financial Accounting summarizes business transactions of business entity for a some period. It has internal users and external decision makers.

Question 26

What is Management Accounting?

Answer 26

Financial and operating data of an organization activities, processes and the whole business. It has internal decision makers. It can be generated using assumption and it is future oriented.

Question 27

What are the types of business?

Answer 27

1. Sole proprietorship: one person manages and runs the whole business
2. Partnerships: two or Moore people handle and run the business
3. Corporations: A legal entity owned by shareholders and is counted as one.

Question 28

What are the positions in corporations?

Answer 28

1. Shareholders: Someone who owns the business
2. Board of directors: Elected by shareholders to manage the company
3. President/ C.E.O : elected by board of directors to run the company.