Chapter 1 - Accounting In Business

Question 1

Assets

Answer 1

• What a company owns or controls
• Future benefits

Ex:

• Cash
• Supplies
• Equipment
• Land

Question 2

Liabilities

Answer 2

• What the company owes in FUTURE payments, products, or services.
• Must be paid before Equity (claim of owners)

Question 3

Equity

Answer 3

• What the company owes to it’s owners

- Or what the owners can claim as theirs.

Question 4

Receivable

Answer 4

An ASSET that promises a FUTURE INFLOW of resources

Question 5

Payable

Answer 5

A LIABILITY that promises a FUTURE OUTFLOW of resources.

Question 6

Return

Answer 6

Monies received from an investment; often in percent form.

Question 7

Risk

Answer 7

Uncertainty about an expected return

Question 8

Return on assets =

Answer 8

Net income / Average total assets

Question 9

Accounting

Answer 9

Identify, record, and communicate information about a businesses’ activities.

Question 10

What are the three accounting functions?

Answer 10

Identifying - Select transactions and events
Recording - Input, measure, and log
Communicating - Prepare, analyze, and interpret

Question 11

External users

Answer 11

Do not directly run the organization, have limited access to accounting information

Examples:

• Lenders
• Shareholders
• Directors
• Non-executive employees
• Suppliers
• Customers

Question 12

Internal Users

Answer 12

Directly manage and operate the organization

Example:

• CEO
• Managers

Question 13

Ethics

Answer 13

Beliefs that distinguish right from wrong. Accepted standards of good and bad behavior.

Question 14

GAAP

Answer 14

Generally Accepted Accounting Principles

Question 15

Fraud Triangle

Answer 15

Opportunity, rationalization, pressure

Question 16

Accounting Principles

Answer 16

1. Cost principle (aka Measurement)
2. Revenue recognition
3. Expense recognition (aka Matching)
4. Full disclosure

Question 17

Cost Principle

Answer 17

An accounting principle that states that accounting information is based on actual cost.

Question 18

Revenue Recognition

Answer 18

An accounting principle that states that revenue is earned when goods or services are provided.

Question 19

Expense recognition

Answer 19

An accounting principle that’s states a company record the expenses it incurs.

Question 20

Full disclosure

Answer 20

An accounting principle that states a company must report details from financial statements that impact user decisions.

Question 21

Accounting Assumptions

Answer 21

1. Going concern
2. Monetary unit
3. Time period
4. Business entity

Question 22

Going concern

Answer 22

An accounting assumption that assumes the business will continue operating.

Question 23

Monetary unit

Answer 23

An accounting assumption that assumes transactions and events are expressed in money units.

Question 24

Time period

Answer 24

An accounting assumption that assumes company lifespan can be divided into periods such as months and years.

Question 25

Business entity

Answer 25

An accounting assumption that assumes a business is accounted for separately from other entities, including owner.

Question 26

3 legal forms of Business Entity

Answer 26

1. Proprietorship aka sole proprietor
2. Partnership
3. Corporation

Question 27

Accounting equation

Answer 27

Assets = Liabilities + Equity

Question 28

4 elements of Equity

Answer 28

1. Common stock
2. Dividends
3. Revenues
4. Expenses

Question 29

Common stock

Answer 29

An INFLOW of resources from stockholders in exchange for stock.

Question 30

Dividends

Answer 30

An OUTFLOW of resources to stockholders. REDUCES Equity.

Question 31

Revenue

Answer 31

INCREASES Equity from SALES of products or services.

Question 32

Expenses

Answer 32

DECREASES Equity from COSTS of providing products and services.

Question 33

Income Statement

Answer 33

• Report of the company’s revenue and expenses
• Results are Net income or loss
• Over a period of time

Question 34

Statement of Retained Earnings

Answer 34

• Explains changes in retained earnings from net income and dividends
• Over a period of time

Question 35

Balance Sheet

Answer 35

• Describes the company’s financial position
• Includes assets, liabilities, and equity
• At a specific date in time

Question 36

Statement of Cash Flows

Answer 36

• Identifies cash inflows (receipts) and outflows (payments)
• Over a period of time