Chapter 1: Review of Syllabus

Question 1

Sarbanes Oxley Act

Answer 1

SOA

• enacted in 2002
• Determined the internal control standards for U.S. Publicly traded companies
• Protects investors from fraudulent financial reporting by corporations
• Includes criminal penalties for officers who knowingly sign off on false reports
• Created Public Company Accounting Oversight Board (PCAOB) to monitor autditors

Question 2

Faithful representation

Answer 2

Information presented must be:

• complete
• neutral
• free from error

it must accurately depict events/ transactions

Question 3

Monetary Unity Assumption

Answer 3

Only transaction data that can be expressed in terms of money is included in accounting records

Assumes that the purchasing power of the dollar is stable - does not account for inflation.

Question 4

Economic Entity Assumption

Answer 4

Activities of the entity must be kept separate from the activities of the owner/ other economic entities

Every economic entity can be SEPARATELY identified and accounted for

Question 5

Going Concern Assumption

Answer 5

Assumes the entity in question will remain in operation for the foreseeable future

Question 6

SEC

Answer 6

Government Entity: Securities and Exchange Commission

SEC has the power to mandate guidelines where no accounting principles exist

Oversees FASB and Markets

Question 7

Financial vs. Managerial Accounting

Answer 7

Financial: used by external decision makers

Managerial: used by internal decision makers

Question 8

FASB

Answer 8

Financial Accounting Standards Board
Privately funded board

responsible for the creation and governance of accounting standards

Question 9

Time Period Assumption

Answer 9

AKA Periodicity Assumption

Economic life of a business is divided into artificial time periods (month/ quarter/ fiscal year)

Best to end fiscal year with minimum inventory

Question 10

Financial Statement Order

Answer 10

1) Trial Balance
2) Income Statement
3) Statement of Owner’s Equity (Statement of Retained Earnings?)
4) Balance Sheet
5) Statement of Cash Flows

Question 11

Statement of Owner’s Equity

Answer 11

Covers same period as income statement

Investments
+ income
- Drawings/ losses

Question 12

Statement of Cash Flows

Answer 12

covers same period of time as income statement
Shows:
- where the cash came from
- what the cash was used for
- total change in cash balance

Question 13

Balance Sheet

Answer 13

Snapshot of company position at a single point in time

Shows that the accounting equation (A=L+OE) balances

Shows current balance of all accounts in the general ledger

Question 14

Statement of Retained Earnings

Answer 14

Retained Earnings (at the start of period)
+ Net Income (- Net Loss)
- Dividends
= Retained Earnings (end of period)

Question 15

Income Statement

Answer 15

AKA: Profit and Loss, or Statement of Earnings

Income (revenue)
Less: Expenses
= Net income or loss

Done for a specific period

Question 16

Basic Accounting Equation

Answer 16

Assets = Liabilities + Owner’s Equity

MUST ALWAYS BALANCE

Assets are what a business has
Liabilities and Equity are who has claim to those assets