Chapter 1-basic accounting

Question 1

What is Accounting?

Answer 1

Accounting is the information system that identifies and records the economic events of an organization, and then communicates them to a wide variety of interested users.

Question 2

Why does accounting matter to these users?

Answer 2

The world’s economic systems depend on highly transparent, reliable, and accurate financial reporting.

Because of this, accounting has long been labelled “the language of business.”

Question 3

Users of accounting information can be divided broadly into two types. Who are they?

Answer 3

Internal and External

Question 4

Who are the INTERNAL users of accounting information? And what reports are they interested in looking at to make their departmental decisions??

Answer 4

-financial comparisons of operating alternatives,
-projections of income from new sales campaigns,
-analyses of sales costs, and
-Overview of cash needs.
**Internal users want managerial numbers to review because they work at senior level within the company.

Question 5

Who are some EXTERNAL users of accounting information?

Answer 5

Investors,
Creditors,
Suppliers,
Potential employees and the tax man.
***these are not people that manage the company.

Question 6

What are the 3 types of businesses?

Answer 6

Sole Proprietorship
Partnership
Corporation

Question 7

What type of liability does a sole proprietorship have?

Answer 7

Unlimited liability (on the hook for it all)

Question 8

What type of liability does a partnership have?

Answer 8

Unlimited

Question 9

Objective of reporting an ENTITY CONCEPT?

Answer 9

to ensure that the entity’s financial statements faithfully represent only its economic activities. This applies to all 3 forms of business: sole owner, partner and corporation.

Question 10

What type of liability does a corporation have/

Answer 10

Limited

Question 11

What do you need when creating a partnership?

Answer 11

Written partnership agreement. Spelling out the expectations and profit split between partners.

Question 12

What is the definition of a corporation?

Answer 12

separate legal entity owned by shareholders

Question 13

What is the other name for Shares?

Answer 13

Stocks

Question 14

When does a Shareholders have liability in a corporation?

Answer 14

Shareholders are not responsible for corporate debts unless they have provided a personal guarantee

Question 15

Why do corporations have an easy time selling shares?

Answer 15

The company is an entity and will live forever (indefinite life), ease of transferring ownership when selling shares, and limited liability and more favorable tax returns.

Question 16

How often do publicly traded corporations have to disclose financials?

Answer 16

Quarterly and Annually

Question 17

Do Private Corporations also issues stocks?

Answer 17

Yes but they are not publicly advertised and do not issue financial statements.

Question 18

Other names for :
Investors…
Lenders….
Stocks…..

Answer 18

Shareholders another name for investors
Creditors another name for lenders.
Shares is another name for stocks.

Question 19

What does GAAP stand for?
IFRS stand for?
ASPE stand for?

Answer 19

Generally accepted accounting practices.
Internationals financial reporting standards,
accounting standards for private enterprises.

Question 20

What type of accounting practices does a PUBLICLY traded company have to follow?

Answer 20

IFRS
Publicly traded corporations must use International Financial Reporting Standards (IFRS), a set of global accounting standards developed by the International Accounting Standards Board

Question 21

What accounting practices do PRIVATE companies use?

Answer 21

Private companies have a choice between using IFRS (International Financial Reporting Standards) or ASPE (Accounting Standards for Private Enterprises)

Question 22

What are the reasons why a PRIVATE company goes to IFRS instead of the standard ASPE form of accounting?

Answer 22

-it is considering accessing public debt or equity markets in the future,
- it wants to be able to compare its financial results with competitors that use IFRS, or
- it has foreign subsidiaries that are required to use IFRS and it wants a common set of accounting standards across the company

Question 23

GAAP can differ for Private vs Public companies.

Answer 23

GAAP includes broad policies and practices as well as rules and procedures that have substantive authoritative support and agreement about how to record and report economic events.

Question 24

How to tell if a company is a corporation or not?

Answer 24

Corporations in Canada and the United States are identified by “Ltd”, “Inc”, “Corp” or in some cases, “Co.”

In Brazil and France, the letters used are “SA” ; in Japan, “KK” ; in the Netherlands, “NV”; in Italy, “SpA” ; and in Sweden, “AB”.

Question 25

What are the 3 types of business activity all businesses do?

Answer 25

Finance
Invest
Operation

Question 26

What are 2 financing activities all businesses do?

Answer 26

1-Issuing shares
2-Borrowing money (bank)

Question 27

What does ROI stand for?

Answer 27

Return on investment.
(what shareholders make as a profit)

Question 28

What does Dividend mean?

Answer 28

Payments that distribute a portion of income to shareholders are called dividends.
(some of the profits the company makes distributed to shareholders)

Question 29

What is a liability?

Answer 29

Amounts owed to creditors.

Question 30

Who is a creditor?

Answer 30

The persons/companies that a corporation owes money to.

Question 31

What is the difference between “debt” financing vs “equity” financing?

Answer 31

Debt financing refers to taking out a conventional loan through a traditional lender like a bank.
Equity financing involves securing capital in exchange for a percentage of ownership in the business.

Question 32

Examples of bank indebtedness are?

Answer 32

operating line of credit, and overdrafts

Question 33

Examples of long term debt.

Answer 33

mortgages payable,
bonds payable,
finance lease obligations, and other types of debt securities borrowed for longer periods of time.

Question 34

Short term bank loan can also be called what?

Answer 34

Note payable