Chapter 1: Accounting and the Business Enviroment

Question 1

Accounting is…

Answer 1

the language of business

Question 2

Accounting

Answer 2

The information system that measures business activities, processes that information into reports, and communicates the results to decision makers

Question 3

Financial Statements

Answer 3

Documents thats report on a business in monetary amounts, providing information to help people make informed business decisions

Question 4

Financial Accounting

Answer 4

The branch of accounting that focuses on information for people outside the firm

Provides data for outsiders

Question 5

Managerial Accounting

Answer 5

The branch of accounting that focuses on information for internal decision makers of a business

Provides data for insiders

Question 6

The Various People Who Use Accounting Information to Make Important Decisions Include…

Answer 6

Individuals, business owners, managers, investors, creditors (bank), and tax authorities

Question 7

CPAs

Answer 7

Certified Public Accountants: licensed accountants who serve the general public rather than one particular company

Question 8

CMAs

Answer 8

Certified Management Accountant: A certified accountant who works for a single company

Question 9

FASB

Answer 9

Financial Accounting Standards Board: The private organization that determines how accounting is practiced in the United States

Question 10

GAAP

Answer 10

Generally Accepted Accounting Principles: Accounting guidelines - formulated by the Financial Accounting Standards Board - that govern how accountants measure, process, and communicate financial information.

Main U.S. accounting rule book

Question 11

IFRS

Answer 11

International Financial Reporting Standards: Accounting guidelines - formulated by the International Accounting Standards Board - that govern how accountants measure, process, and communicate financial information.

Less specific and based more on general principles = more room for professional judgement

international accounting rulebook

Question 12

IASB

International Accounting Standards Board

Answer 12

The organization that determines how accounting is practiced internationally

Question 13

An Audit

Answer 13

An examination of a company’s financial records

Question 14

5 Types of Business Organizations (TItles Only)

Answer 14

1. Propietorships
2. Partnerships
3. Corporations
4. Limited-Liability Partnerships(LLPs) & Limited-Liability Companies (LLCs)
5. Not-for-Profits

Question 15

Propietorships

Answer 15

a business with a single owner called a propietor

Question 16

Partnerships

Answer 16

a business with two or more owners called partners (co-owners)

not organized as a corporation

Question 17

Mutual Agency

Answer 17

The ability of partners in a partnership to commit other partners andt he business to a binding contract

Mutual agency means that one partner can make all partners mutually liable.

Question 18

Corporations

Answer 18

A business owned by stockholders or shareholders

It has one or more owners called shareholders

A corporation begins when the state grants a charter to the company, and approves its articles of incorporation and the first share of stock is issued.

It is a legal entity, an “artifical person,” in the eyes of the law

Question 20

Stockholders aka Shareholders

Answer 20

People who own shares of stock in a corporation

Question 21

Stock

Answer 21

A certificate representing ownership interest in a corporation.

The holders of stock are called stockholders or shareholders

Question 22

a Charter

Answer 22

Document that gives the state’s permission to form a corporaiton

Question 23

the articles of incorporation

Answer 23

Articles approved by the state that govern the management of the corporation

Question 24

Limited-Liability Partnerships

• LLPs -

Answer 24

Company in which each partner is only liable for his or her own actions or those under his or her control.

Question 25

Limited-Liability Companies - LLCs -

Answer 25

Company in which each member is only liable for his or her own actions or those under his or her control has one or more owners called members

Question 26

Not-for-Profits

Answer 26

Organization that has been approved by the Internal Revenue Service to operate for a religious, charitable, or educational purpose has no owners

Question 27

fudiciary responsibility

Answer 27

an ethical and legal obligation to perform a person's duties in a trustworthy manner

Question 28

several features that distinguish a proprietorship from other types of business organizations including... (hint: 7)

Answer 28

**Separate Legal Entity** **No Continuous Life or Transferability of Ownership** **Unlimited Liability of Owner** **Unification of Ownership and Management** **Business Taxation** **Government Regulation** **Organization of a Corporation**

Question 29

Authorization

Answer 29

the acceptance of the state by the Corporate by-laws

Question 30

Bylaws are...

Answer 30

are the rule book that guides the corporation The incorporators agree to a set of bylaws, which act as the constitution for governing the corporation

Question 31

Accounting Concepts & Principles: 5

Answer 31

The Entity Conept The Faithful Representation Principle The Cost Principle The Going-Concern Conept The Stable Monetary Unit Concept

Question 32

The Entity Principle

Answer 32

* The most basic concept on accounting is that of the entity * An accounting entity, is an organization that stands apart as a separate economic unit. Boundaries are drawn around each entity to keep its affairs distinct from those of other entities * An entity refers to one business, separate from its owners

Question 33

The Faithful Representation Principle

Answer 33

* Accounting information is based on the fact that the data faithfull represents the measurement or description of that data. * Faithfully represented data are compelte, neutral, and free from material error.

Question 34

The Cost Principle

Answer 34

* A principle that states that aquired assets and services should be recordded at thier actual cost * This principle also holds that the accounting records should continue reporting the historical cost of an asset over its useful life. ***actual cost = historical cost*** \*Note that generally, unlike GAAP, **IFRS** allows periodic revaluation of certain assets and liabilities to restate them to market value, rather than historical cost\*

Question 35

The Going Concern concept

Answer 35

This cocept assumes that the entity will remain in operation for the foreseeable future

Question 36

The Stable Monetary Unit Concept

Answer 36

The concept that says that accountants assume that the dollar's purchasing power is stable *stable currency buying power*

Question 37

The Accounting Equation

Answer 37

The basic tool of accounting that measures the resources of a business and the claims to those resources ***Assets = Liabilities + Equity***

Question 38

Assets | (include examples)

Answer 38

Economic resources that are expected to benefit the business in the future Something the business owns that has value *_examples_ = Cash, merchandise inventory, furniture, land*

Question 39

Liabilities | (include examples)

Answer 39

something the business owes Economic obligations (debts) payable to outsiders (individual or organization) who are known as creditors examples = Accounts payable, Notes payable, Salary payable

Question 40

Equity

Answer 40

The claim of a company's owners to the assets of the business. Called *owner's equity* for propietorships & partnerships Called *shareholder's equity* or *stockholder's equity* for a corporation It is the companies net worth ***Equity = Assets (owned) - Liabilities (owed) ***

Question 41

Capital

Answer 41

The net amount invested in the business by the owner An owner can contribute cash or other net assets to the business and recieve capital

Question 42

Two types of events that affect capital

Answer 42

Revenues - **Increases capital ** Expenses - **Decrease capital** **Revenues** = earnings =** **Amounts earned by delivering goods or services to customers **Expenses** = Decrease in equity that occurs from using assets or increasing liabilities in the course of delivering goods or services to customers = Incurred costs that you will have to pay for, either now or later

Question 43

Types of Revenue

Answer 43

* Sales revenue * Service revenue * Interest revenue * Dividend revenue

Question 44

Types of Expenses

Answer 44

* Store (or office) rent expense * Salary expense for employees * Advertising expense * Utilities expense - water, electricity, gas * Insurance expense * Supplies expense * Interest expense on loans payable * Property tax expense * etc...

Question 45

Net Income

Answer 45

What business strive for... PROFIT * Excess of total revenues * -------------------------*over*----------------------- * total expenses also called: **Net Earnings** or **Net Profit**

Question 46

Net Loss

Answer 46

* **Excess of total expeses** * ------------------*over*-------------------- * **Total revenues**

Question 47

Drawings

Answer 47

Distributions of capital (usually of cash) by a company to its owner. DO NOT represent expenses because they are not related to the earning of revenue. THUS they do not affect the business's net income or net loss. After earning net income, the business may distribute cash or other assets to the owner, a 3rd type of transaction that affects capital.

Question 48

Components of Capital

Answer 48

* Beginning Capital * **+** * Owner Investments * **+** /** -** * Net Income / Net Loss * **-** * Drawings * **=** * Ending Capital

Question 49

Owner's equity of parnerships - main difference (in comparison to propietorships)

Answer 49

There are separate capital accounts for each partner

Question 50

Stockholder's Equity has two components:

Answer 50

**Paid-in capital or Contributed captal** amount invested in the corporation by its owners, the stockholders. Basic component = stock = which the corporation issues to the stockholders as evidence of thier ownership **Retained Earnings** represent the net earnings - the amount earned over the life of a business by income-producing activites - and kept (retained) for use in the business.

Question 51

Common Stock

Answer 51

Represents the basic ownership of every corporation

Question 52

A Transaction

Answer 52

An event that affects the financial position of a particular entity *AND* can be measured and recorded reliably Affects what the company owns, owes, and its net worth

Question 53

Many events affect a company - **such as ?** - BUT they are not recorded by an accountant. **WHY?**

Answer 53

Events not recorded by accountants include economic recessions and economic booms. These are NOT recorded because accountants only record events that have dollar amounts that can be measured reliably, such as the pirchase of a building, a sale of merchandise, and the payment of rent.

Question 54

Income Statement

Answer 54

summary of an entity's revenues, expenses, and net income or net loss for a specific period. \*very important because reports if company is making a profit also called **the statement of earnings** or **the statement of operations**

Question 55

Statement of Owner's Equity

Answer 55

Summany of the changes in an owner's capital account during a specific period - Can answer what the business did wtih any profits earned - **capital increases when the business has...** owner contributions of capital a net income **capital decreases when the business has...** a net loss owner withdrawls of cash or other assets

Question 56

Balance Sheet

Answer 56

An entity's assets, liabilities, and owner's equity as of a specific date it mirrors the accounting equation also called **the statement of financial position**

Question 57

Statement of Cash Flows

Answer 57

Report of cash receipts and cash payments during a period Stating if cash increased or decreased - which can tell a banker if the agency generates enough cash to pay its bills.