Test Answers on financial accounting Chapter 1

question

Accounting
answer

the language of business, a system of maintaining records of a companys operations and communicating that information to decision makers
question

the earliest use of system dates back to
answer

ancient mesopotamia, present day iraq for delivered agricultural products, record of multiple transactions allowed for better exchange among individuals and aided in the development of more complex societies
question

primary users of financial accounting information
answer

investors, and creditors (lenders)
question

people make decisions about
answer

companies
question

investors
answer

decide whether to invest in stock
question

creditors
answer

decide whether to lend money
question

customers
answer

decides whether to purchase products
question

suppliers
answer

decide the ability to pay for supplies
question

managers
answer

decide production and expansion
question

employees
answer

decide employment opportunities
question

competitiors
answer

decide market share and profitability
question

regulators
answer

decide on social welfare
question

tax authorities
answer

decide on taxation policies
question

local communities
answer

decide on environmental issues
question

people and organizations need
answer

information to make good decisions
question

functions of accounting
answer

to measure the activities of the company and communicate those measurements to people
question

two broad classes of accounting
answer

managerial and financial
question

managerial
answer

deals with the methods accountants use to provide information to an organizations internal users ( that is its own managers)
question

people make decisions about
answer

companies
question

companies activities measured by
answer

accountants
question

accountants communicate information to
answer

people
question

the two primary functions of financial accounting
answer

to measure business activities of a company and to communicate those measurements to external parties for decision making purposes
question

two primary external users of financial accounting information (users outside of the firms)
answer

investors and creditors
question

investors make decisions related to
answer

buying and selling the companies stock (shares of ownership) “is the company profitable?” , ” will the companies stock increase in value?”
question

creditors make decisions related to
answer

lending money to the company “will the company be able to repay its debt when it comes due?”, “will it be able to pay interest in the meantime?”
question

the first of financial accounting’s functions is
answer

to measure business activities
question

a business engages in three fundamental activities
answer

financing, investing, and operating
question

corporation
answer

and entity that is legally separate from its owners . the corporation raises external funding by selling shares of ownership (typically referred to as common stock) in the corporation. each share of stock represents a unit of ownership
question

we measured resources owned by a company as
answer

assets
question

assets can be refereed to as
answer

cash, inventories, supplies and buildings
question

cash
answer

a resource used to make purchases , inventories represent resources used to make product sales to customers, supplies include resources used to preform basic business functions, and buildings are resources used by employees as a location from which to operate a company
question

liabilities
answer

amounts owned to creditors, must be paid by a specific date
question

stockholders equity
answer

for a corporation , we refer to owners claims to resources as stockholders equity, since stockholders are the owners of the corporation
question

basic accounting equation, relationship among three measurement categories (companies resources equal creditors and owners clamis to those resources) (ASSETS AND LIABILITIES ARE HOW MUCH COMPANIES OWE AND EQUITY IS THE DIFFERENCE)
answer

assets (resources)= liabilities (creditors claim)+stockholder equity (owners claims) CLAIMS ARE CLAIMS TO RESOURCES
question

stockholders claim all
answer

resources in excess of amounts owed to creditors profits of the company, which add to total resources are claimed solely by stockholders, the owners of the company
question

revenues
answer

the amounts earned from selling products or services to customers
question

how to calculate companies profits
answer

compare revenues and expenses
question

expenses
answer

the costs of providing products and services
question

net income
answer

the difference between revenues and expenses . all businesses want revenues too be greater than expenses, producing a positive net income (revenues- expenses= net income)
question

net loss
answer

if expenses exceed revenues , the difference between them is a negative amount
question

if the cooporation has positive net income
answer

it typically will distribute to its owner, the stockholders, some of those proftis, it does so by making cash payments to its stockholders, usually every 3 months, in payments called DIVIDENS
question

the computer repair business
answer

organized as a corporation
question

sole proprietorship
answer

a business owned by one person
question

partnership
answer

owned by 2 or more persons
question

major advantage of the corporate form of business
answer

limited liability of the corporations stockholder
question

limited liability
answer

the stockholders are not held personally responsible fro the financial obligations of the corporation . if the business fails, stockholders can lose no more than the investment they already made by purchasing stock . stockholders are not obligated to pay the corporations remaining debts out of their own pockets. in contrast if a sole proprietorship or partenership is unable to pay its legal obligations to creditors, the owner may be forced to surrender personal assets to satisfy those debts
question

the disadvantage of the corporate form
answer

the higher tax burden on the owners. the corporate income tax rate is greater than the individual income tax . moreover a coorporation’s income is taxed twice first when the company earns it and pays corporate income taxes on it and then again when stockholders pay personal income taxes on amounts the firm distributes to them as dividends. this is called double taxation. any income of a sole proprietorship or a partnership is taxed only once and at the personal income rate
question

financial statements
answer

periodic reports published by the company for the purpose of providing information to external users, primary means of communication financial statments
question

four primary financial statements
answer

income statement, statement of stockholders equity, balance sheet , statement of cash flows
question

income statement
answer

financial statement that reports the companies revenues and expenses over an interval of time, it shows whether the company was able to generate enough revenue to cover the expenses of running the business.
question

the heading of the income statement
answer

includes the companies name, the title of the financial statement, and the time period covered by the financial statement, the three major captions in thr income statement include revenues and expenses, and the difference between them (net income)
question

typical costs of any company
answer

revenues of $6,360, expenses of 5,860, the income statement shows that revenues exceed expenses and thus the academy is able to report net income of $500
question

statement of shareholders equity
answer

financial statement that summarizes the changes in stockholders equity over and interval of time, the reporting period coincides with the time period covered by the income statement
question

stockholders equity has two primary components
answer

common stock and retained earning
question

common stock
answer

represents amounts invested by stockholders (the owners of the coorporation) when they purchase shares of stock. common stock is an external source of stockholders equity
question

retained earnings
answer

internal source of stockholders equity , represents the cumulative amount of net income , earned over the life of the company, that has not been distributed to stockholders as dividend. since all profits of the company are owned by stockholders, any net income in excess of dividends paid to stockholders represents stockholders equity retained in the business
question

stockholders equity consists of
answer

common stock, retained earnings
question

the name retained earnings is descriptive. the balance of retained earnings represents the amount of earnings retained (not paid out in the form of dividends) over the life of a company
answer

retained earnings
question

balance sheet
answer

financial statement that presents the financial position of the company on a particular date
question

statement of cash flows
answer

financial statement that measures activities involving cash payments over an interval of time. we can classify all cash transactions into three categories that correspond to the three fundamental business activities operating, investing and financing
question

operating cash flows
answer

include cash receipts and cash payments for transaction involving revenues and expenses
question

investing cash flows
answer

generally include cash transactions for the purchase and sale of investments and productive long term assets . long term assets are resources owned by a company that are thought to provide benefits for more than one year
question

financing cash flows
answer

include cash transactions with lenders such as borrowing money and repaying debt and with stockholders such as issuing stock and paying dividends
question

any transaction that affects the income statement
answer

affects the balance sheet through the balance of retained earnings
question

management discussion and analysis
answer

includes managements views on significant events, trends, and uncertainties pertaining, to the companies operations and resources
question

note disclosures
answer

offer additional information either to explain the information presented in the financial statements or to provide information not included in the financial statements
question

GAAP (generally accepted accounting principles)
answer

all companies that sell their stock to the public must follow these rules and must publish financial statements in accordance with these rules
question

FASB (financial accounting standards board)
answer

independent private sector with full time voting members and a very large support staff. financial accounting and reporting standards in the US are established by them. members include representatives from the accounting profession, large corporations, financial analysts, accounting educators, and government agencies
question

it is the responsibility of management to apply
answer

GAAP when communicating with investors and creditors through financial statements
question

auditors
answer

helps ensure that management has in fact appropriately applied GAAP the SEC required independent outside verification of the financial statements of publicly traded companies, these people are hired by a company as an independent party to express a professionalism opinion of the accuracy of that companys financial statements
question

ethics
answer

a code or moral system that provides criteria for evaluating right and wrong behavior
question

public accounting firms
answer

professional service firms that traditionally have focused on three areas” auditing, tax preparation/planning, and business consulting
question

private accounting firms
answer

providing accounting services to the company that employs you
question

conceptual framework
answer

theory of accounting
question

decision usefulness
answer

the ability to be usefull in decision making
question

relevance
answer

information should possess confirmatory value and predictive value
question

faithful representation
answer

information should be complete, neutral, and free from material error
question

comparability
answer

the ability of users to see similarities and differences between two different business activities
question

consistency
answer

the use of similar accounting procedures either over time for the same company or across companies at the same point in time
question

verfiability
answer

a consensus among different measures
question

timeliness
answer

information being available to users early enough to allow them to use it in the decision process
question

understandability
answer

users must be able to understand the information within the context of the decision they are making
question

cost effictiveness
answer

suggests that financial accounting information is provided only when the benefits of doing so exceed the costs
question

materiality
answer

the impact of financial accounting information on investors and creditor decisions
question

four basic assumptions that underlie GAAP
answer

economic entity, monetary unit, periodicity, going concern
question

economic entity assumption
answer

states we can identify all economic events with a particular economic entity, only business transactions involving dell should be reported as part of dells financial accounting information. another key aspect of this assumption is the distinction between the economic activities of owners and those of the company
question

monetary unit assumption
answer

in order to measure financial statement elements, we need a unit or scale measurement . the dollar in the US is the most appropriate common denominator to express those elements
question

periodicity assumption
answer

relates to the qualitative characteristic of timeliness. external users need periodic information to make decisions, divides the economic life of an enterprise (presumed to be indefinite into an artificial time period for the periodic financial reporting . corporations like dell whose securities are publicly traded are required to provide financial information to the SEC on a quarterly and annual basis
question

going concern assumption
answer

states in the absence of information to the contrary, a business entity will continue to operate indefinitely. this assumption is critical to many broad and specific accounting principles. it provides justification for measuring many assets based on their original costs ( a practice known as the historical cost principle)
question

four principles that guide the application of GAAP
answer

historical cost, full disclosure, realization, and matching

Get instant access to
all materials

Become a Member