Chapter 1 - Accounting In Action

Question 1

Accounting consists of 3 basic activities- what are they?

Answer 1

Identification
Recording
Communication

Question 2

A company Identifies?

Answer 2

economic events relevant to its business

Question 3

Recording in accounting means…

Answer 3

a systematic, chronological diary of events

Question 4

What is the Sarbanes-Oxley Act (SOX)?

Answer 4

An act passed by Congress to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals.

Question 5

GAAP

Answer 5

Generally Accepted Accounting Principles - standards indicate how to report economic events

Question 6

FASB

Answer 6

Financial Standards Accounting Board

Question 7

IASB

Answer 7

International Accounting Standards Board

Question 8

IFRS

Answer 8

International Financial Reporting Standards - standards set by IASB

Question 9

Convergence

Answer 9

Reduction in differences between GAAP & IFRS to make them more comparable.

Question 10

Relevance

Answer 10

Means that financial information is capable of making a difference in a decision.

Question 11

Faithful representation

Answer 11

Means that the numbers and descriptions match what really existed or happened- they are factual.

Question 12

What are the two measurements of GAAP Accounting and why are they useful?

Answer 12

Relevance and faithful representation are two primary qualities that make accounting information useful for decision making.

Question 13

Historical cost principle

Answer 13

Dictates that companies record assets at their cost.

Question 14

Fair value principle

Answer 14

States that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).

Question 15

What are the two main assumptions in accounting?

Answer 15

Monetary Unit Assumption

&

Economic Entity Assumption

Question 16

What is the Monetary Unit Assumption?

Answer 16

Requires companies include in the accounting records only transaction data that can be expressed in money terms.

Question 17

What is the Economic Entity Assumption?

Answer 17

It requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.

Think Toyota and Lexus.

Question 18

What is a Proprietorship?

Answer 18

A business owned by one person. The owner receives any profits, suffers any losses, and is personally liable for all debts of the business.

Question 19

What is a partnership?

Answer 19

A business owned by two or more persons associated as partners.

Question 20

What is a corporation?

Answer 20

A business organized as a separate legal gal entity under state corporation law and having ownership divided into transferable shares of stock.

Question 21

What is the formula that represents the basic accounting equation?

Answer 21

Assets = Liabilities + Stockholders Equity

*Liabilities and stockholders equity must equal assets

Question 22

Claims of those who the company owes money (creditors) are called?

Answer 22

Liabilities

Question 23

Claims of owners in a company is called?

Answer 23

Stockholders’ Equity

Question 24

Resources a business owns are called what?

Answer 24

Assets

*the common characteristic of all assets is THE CAPACITY TO PROVIDE FUTURE SERVICES OR BENEFITS.

Question 25

Claims against assets- that is, existing debts and obligations are known as what?

Answer 25

Liabilities

Question 26

Merchandise purchased using credit are obligations known as what?

Answer 26

Accounts Payable * Campus pizza, for instance, purchases cheese, sausage, flour, and beverages on credit from suppliers.

Question 27

Note Payable

Answer 27

Promissory note to pay as agreed a certain amount of cash. *Campus pizza has a loan on the truck to the bank.

Question 28

Who’s claims get paid first- creditors or ownership?

Answer 28

Creditors

Question 29

The ownership claim on a corporation’s total assets is?

Answer 29

Stockholders’s Equity (common stock & retained earnings) *it is equal to total assets minus liabilities Stockholders Equity = Assets - Liabilities

Question 30

The equity “left over” after creditors’ claims are satisfied is known as what?

Answer 30

Residual Equity

Question 31

Revenues, expenses, and dividend make up what?

Answer 31

Retained Earnings

Question 32

Increases in assets or decreases in liabilities resulting from the sale of goods or the performance of services in the normal course of business is known as?

Answer 32

Revenues (sales, fees, services, commissions, interest, dividends, royalties, and rents). Revenues usually result in an increase in an asset.

Question 33

The cost of assets consumed or services used in the process of generating revenues is known as what?

Answer 33

Expenses (wages, utilities, rent expense, interest expense, property tax expense, supplies expense, etc) *They are a decrease in stockholders equity that result in operating the business.

Question 34

The distribution of cash or other assets to stockholders is called what?

Answer 34

Dividends *They reduce the earnings, BUT ARE NOT AN EXPENSE.

Question 35

The system of collecting and processing transaction data and communicating financial information to decision-makers is known as what?

Answer 35

th Accounting Information System

Question 36

A businesses economic events recorded by accountants are know as what?

Answer 36

Transactions (business transactions)

Question 37

How is stockholders equity affected by the payment of a liability related to an expenses previously recorders?

Answer 37

It does not affect stockholder equity - $250 in asset column - $250 in liabilities column

Question 38

Your company receives a $600 cash payment from a customer who had previously been billed. How is this transaction recorded?

Answer 38

+$600 cash -$600 accounts receivable No change to liabilities or stockholders equity- the revenue was recorded at billing

Question 39

What increases stockholders equity?

Answer 39

Investments by stockholders | Revenues

Question 40

What decreases stockholder equity?

Answer 40

Dividends to stockholders | Expenses

Question 41

What financial statement presents the revenues and expenses and resulting net income or net loss for a specific period of time?

Answer 41

Income Statement The income statement does not include investment and dividend transactions between stockholders and the business in measuring net income.

Question 42

What financial statement summarized the changes in retained earnings for a specific period of time?

Answer 42

A retained earnings statement

Question 43

What financial statement reports the assets, liabilities, and stockholders equity of a company for a specific period of time?

Answer 43

The balance sheet

Question 44

What financial report summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time?

Answer 44

A statement of cashflows Reports the cash effects of a company’s operating, investing, and financing activities.

Question 45

How do you calculate net income?

Answer 45

Revenues less Expenses = Net Income The balance sheet uses this formula

Question 46

How do you calculate retained earnings?

Answer 46

Beginning earnings Add: net income Less: Dividends = Retained Earnings This the retained earnings statement