Module 1

Question 1

Accounting

Answer 1

-The process of recording, summarizing, and analyzing financial transactions.

Question 2

Financial accounting

Answer 2

• designed primarily for decision makers outside of the company
• includes information about company profitability and financial health
• useful information to economic actors like investors, employees, customers, and governments

Question 3

Managerial accounting

Answer 3

• designed primarily for decision makers within the company
• includes proprietary information about the profitability of specific products, divisions, or customers
• Company managers use managerial accounting reports to make decisions such as whether to add or drop products or divisions, or whether to continue serving different types of customers.

Question 4

Disclosure

Answer 4

• A disclosure is additional information attached to an entity’s financial statements, usually as explanation for activities which have significantly influenced entity’s financial results.
• The act of providing financial information to external users.

Question 5

Corporation

Answer 5

• A form of business organization that is characterized by a large number of owners who are not involved in managing the day-to-day operations of the company.
• Corporation exists as a legal entity that issues shares of stock to its owners in exchange for cash and therefore the owners of a corporation are are shareholders, stockholders (shareholders rely on information in financial statements to evaluate management performance and assess the company’s financial condition).
• Corporations with stock traded on public exchanges are known as PUBLICLY TRADED CORPORATIONS, or simply PUBLIC CORPORATIONS.

Question 6

Sole proprietorship

Answer 6

-A single owner who typically manages the daily operations (i.e. small family-run businesses, such as corner grocery stores).

Question 7

Partnership

Answer 7

-Two or more owners who are usually involved in managing the business.

Question 8

Creditors

Answer 8

• Few businesses rely solely on shareholders for the cash/capital they need to operate the company; instead most borrow from banks or other lenders known as CREDITORS.
• Creditors are interested in the potential borrower’s ability to repay.
• They use financial accounting to help determine loan terms, amounts, interest rates, and collateral.

Question 9

Suppliers

Answer 9

-Use financial information to establish credit sales terms and to determine their long-term commitment to supply-chain relationships

Question 10

Board of Directors

Answer 10

• Publicly traded corporations are required by law to have a board of directors.
• Directors are elected by the shareholders to represent shareholder interests and to oversee management.
• The board hires executive management and regularly reviews company operations, evaluate future strategy, and assess management performance.
• Both managers and directors use the published financial statements of other companies to perform comparative analyses and establish performance benchmarks.

Question 11

Planning activities

Answer 11

-A company’s goals and the strategies adopted to reach those goals are the product of its planning activities.

Question 12

Strategy

Answer 12

-How the company plans to create value for its owners, the shareholders.

Question 13

Investing activities/Assets

Answer 13

• Consist of acquiring and disposing of the resources* needed to produce and sell a company’s products and services
• *These resources are called assets and they provide future benefits to the company.

Question 14

Financing activities

Answer 14

-Investments in resources require funding and financing activities refer to the methods companies use to fund those investments.

Question 15

Financial management

Answer 15

• The planning of resource needs, including the proper mix of financing sources.
• Companies obtain financing from two sources equity (owner) financing and creditor (non-owner) financing.

Question 16

Liabilities

Answer 16

-Liabilities are obligations the company must repay in the future (i.e. a bank loan).

Question 17

Accounting equation

Answer 17

Investing [assets]= creditor financing [liabilities/debt]+owner financing [equity]

Question 18

Operating activities

Answer 18

-Refer to the production, promotion, and selling of a company’s products and services (involving input markets–suppliers–to output markets–customers).

Question 19

Revenue

Answer 19

• The increase in equity resulting from the sale of goods and services to customers.
• The amount of revenue is determined BEFORE deducting expenses.

Question 20

Expense

Answer 20

-An expense is the cost incurred to generate revenue, including the cost of the goods and services sold to customers, as well as the cost of carrying out other business cavities.

Question 21

Income

Answer 21

-Also called net income
=Equals revenues minus - expenses
-It is the net increase in equity from the company’s operating activities.

Question 22

SUMMARY

Answer 22

IDENTIFY THE USERS OF ACCOUNTING INFORMATION AND DISCUSS THE COSTS AND BENEFITS OF DISCLOSURE:
-There are many diverse decision makers who use financial information.
-The benefits of disclosure of credible financial information must exceed the costs of providing the information.
DESCRIBE A COMPANY’S BUSINESS ACTIVITIES AND EXPLAIN HOW THESE ACTIVITIES ARE REPRESENTED BY THE ACCOUNTING EQUATION:
-To effectively manage a company or infer whether it is well-managed, we must understand its activities as well as the competitive and regulatory environment in which it operates.
-All corporations plan business activities, finance, and invest in them, and engage in operations.
-Financing is obtained partly from stockholders and partly from creditors, including suppliers and lenders.
-Investing activities involve the acquisition and disposition of the company’s productive resources called assets.
-Operating activities include the production of goods or services that create operating revenues (sales) and expenses (costs). Operating profit (income) arises when operating revenues exceed operating expenses.