Chapter 1 Summary

Question 1

What is an external user?

Answer 1

External users do not directly run the organization and have limited access to accounting information.

Ex. lenders, shareholders, external auditors, non-executive employees, labor unions, regulators, voters, donors, suppliers, and customers.

Question 2

Give some examples of external users.

Answer 2

• Lenders
• Shareholders,
• External auditors
• Non-executive employees
• Labor unions
• Regulators
• Voters
• Donors
• Suppliers
• Customers

Question 3

What are internal users?

Answer 3

Internal users directly manage the organization

Purchasing managers, Human resource managers, Production managers, Distribution managers, Marketing managers, Service managers, and Research & Development managers.
(budgeting, consulting, controller, treasurer, and strategy are examples of managers)

Question 4

List examples of Internal Users

Answer 4

CEO and other executives.

Managers such as:
Purchasing managers, Human resource managers, Production managers, Distribution managers, Marketing managers, Service managers, and Research & Development managers.

(budgeting, consulting, CONTROLLER, treasurer, and strategy are examples of managers)

Question 5

What is the fraud triange?

Answer 5

Three factors that push a person to commit fraud.

Question 6

List the three factors of the fraud triangle

Answer 6

• Opportunity: must be able to commit fraud with low risk of being caught
• Pressure: must feel pressured or have an incentive to commit fraud.
• Rationalization: or attitude. justifies the fraud or does not see it in its criminal nature.

Question 7

What are the four business entities?

Answer 7

• Sole proprietorship
• Partnership
• Corporation
• Limited Liability Company (LLC)

Question 8

Which business entities have additional business income tax?

Answer 8

Only the Corporation has additional business income tax.

Question 9

How many owners does sole Proprietorship have?

Answer 9

One.

Sole owner. just one.

Question 10

How many owners does a partnership have?

Answer 10

2 or more, called partners.

easy to set up.

Question 11

How many owners does a Corporation have?

Answer 11

1 or more called shareholders.

can get many investors by selling stock or shares of corporate ownership.

Question 12

How many owners does a Limited Liability Company have (LLC)?

Answer 12

1 or more, called members.

Question 13

Business taxation for Sole proprietorship?

Answer 13

NO additional business income tax

Question 14

Is there business taxation for Partnership?

Answer 14

NO additional business income tax

Question 15

Is there Business taxation for a Corporation?

Answer 15

YES, Additional business income tax!

Question 16

Is there Business Income tax for a Limited Liability Company (LLC)?

Answer 16

NO additional business income tax

Question 17

What is the owner liability for Sole Proprietorship?

Answer 17

UNLIMITED LIABILITY. The owner is PERSONALLY responsible for proprietorship debts.

Question 18

What is the owner liability for a Partnership?

Answer 18

UNLIMITED LIABILITY. Partners are JOINTLY responsible for partnership debts.

Question 19

What is the owner liability for a Corporation?

Answer 19

Limited Liability. Owners (called, shareholders or stockholders) are NOT liable for corporate acts or debts.

Question 20

What is the owner liability for a Limited Liability Company (LLC)?

Answer 20

Limited Liability.

Owners, (called Members), are NOT personally liable for LLC debts.

Question 21

Legal Entity status of a Sole Proprietorship

Answer 21

Sole Proprietorship is NOT a separate legal entity.

Question 22

Legal Entity status of a Partnership:

Answer 22

NOT a Separate Legal Entity

Question 23

Legal Entity status of a Corporation

Answer 23

A SEPARATE legal entity with the same rights and responsibilities as a person.

Question 24

Legal Entity status of a Limited Liability Company (LLC)

Answer 24

A SEPARATE legal entity with the same rights and responsibilities as a person.

Question 25

What is the business life of a Sole Proprietorship?

Answer 25

Business ends with the owner death or choice.

Question 26

What is the business life of a Partnership?

Answer 26

Business ends with a partner death or choice.

Question 27

What is the business life of a Corporation?

Answer 27

The business life is INDEFINITE.

Question 28

What is the business life of a Limited Liability Company (LLC)?

Answer 28

The business life is INDEFINITE.

Question 29

Define Assets:

Answer 29

Resources a company owns or controls that are expected to yield future benefits.

Question 30

Define Liabilities:

Answer 30

Creditors’ claims on assets.

These are obligations to provide assets, products, or services to others.

A “payable” is a liability (Accounts payable, wages when they are “payable”, loans etc. Like, it’s money owed but not paid.)

Question 31

Define Equity:

Answer 31

Owners Claim On Assets.

net assets or residual equity

Question 32

What is the (basic) accounting equation format?

Answer 32

Assets = Liabilities + Equity

Question 33

When does the accounting equation apply?

Answer 33

The accounting equation applies to all transactions and events, to all companies and organizations, and to all points in time.

Question 34

What is the Expanded Accounting Equation?

Answer 34

• • • • • • • • • • • • • • • [————————————Equity——————————]
                              Assets =Liabilities + Owner, Capital - Owner, Withdraws + Revenues - Expenses

Question 35

What is categorized under the Owner Capitol in the equation?

Answer 35

Owner investments (these are inflows of cash and other net assets from owner contributions.

INCREASES Equity.

Question 36

What is categorized under the Owner Withdrawals?

Answer 36

Owner withdrawals are outflows of cash and other assets to owners for personal use.

REDUCES Equity

Question 37

What is categorized under the Revenues?

Answer 37

They increase equity (via net income) from sales of products and services to customers.

Ex: Sales of Products, Consulting services provided, Facilities rented to others, and commissions from services.

Question 38

What is categorized under Expenses?

Answer 38

Expenses DECREASE Equity (via Net Income) from THE COSTS of PROVIDING products and services to customers.

Ex: cost of employee times, use of supplies, advertising, utilities, and insurance fees.

Question 39

What is the basic layout of the Income statement?

Answer 39

Revenues
- Expenses
__________
Net Income

Question 40

What does the Income statement do? What number order does it come in?

Answer 40

Describes a company’s revenues and expenses and computes net income or loss over a period of time.

The First statement to generate. Finds the Net Income.

Question 41

What is the Statement of Owner’s Equity basic layout?

Answer 41

Beginning Capitol (if a given year, then subtract year beginning from year end)
+ Owners investments
+ Net Income (Retrieved from Income statement)
- Withdrawals
___________________
End capitol

Question 42

What is the Statement of Owner’s Equity for? And what statement does this come AFTER?

Answer 42

Explains changes in owner’s equity from owner investments, net income (or net loss), and any withdrawals over a period of time.

This comes AFTER the income statement (you need the Net Income)

Question 43

What is the basic layout for the Balance Sheet?

Answer 43

Assets = liabilities
————-+Equity

Note how liabilities and equity are under one another!

Question 44

What is the Balance sheet for? And what statement does this come after?

Answer 44

The Balance sheet describes a company’s financial position (types and amounts of assets, liabilities, and equity) AT A POINT IN TIME.

This comes AFTER the Statement of owner’s equity. YA NEED the CAPITOL for the equity section.