Financial Accounting Test 1 Answers – Flashcards

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Accounting
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Art of analyzing, recording and reporting economic information
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Accounting System
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Personnel, procedures, devices, technology, & records used to develop and communicate accounting information to decision makers
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Audit
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Investigation of financial statements designed to determine their fairness in relation to GAAP
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Balance Sheet
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B/S - aka, Statement of Financial Position - A financial statement showing a company's financial position at a point in time - usually the last day of the I/S
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Bookkeeping
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Clerical dimension of accounting which includes daily recording or transactions
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Cash flow prospects
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Likelihood an enterprise will be able to provide an investor with both a return on the investor's investment and the return of that investment
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Certified Public Accountant (CPA)
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Public accountants who have met a state's education, experience, and examination requirements
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Control activities
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Policies & procedures to address the risks identified during the risk assessment process
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Control environment
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Foundation for all other elements of internal control - sets the tone
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External users
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Primarily investors and creditors interested in a company's financial condition
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Financial accounting
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Recording accounting data and providing financial information about the enterprise primarily to external users
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FASB
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Financial Accounting Standards Board - Private-sector organization that is responsible for determining generally accepted accounting principles in the U.S.
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Financial statement
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F/S - Monetary declaration of what is believed to be true about an organization
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GAAP
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Generally Accepted Accounting Principles - The ground rules for accounting and financial statement preparation
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General-purpose information
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Information intended to meet the needs of multiple users that have an interest in the financial information of an organization
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Income Statement
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I/S - A financial statement showing the results of operations (profit or loss) for a specific period of time
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Information and communication
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Organization's process for capturing operational, financial, and compliance-related information necessary to run the business, and communicating the information downstream (management to employees), upstream (employees to man- agement), and across the organization
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Integrity
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Qualities of being complete, unbroken, unimpaired, sound, honest & sincere
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Internal Control
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IC - Process designed to provide reasonable assurance that a company produces reliable financial reports, complies with laws and regulations, and operates efficiently and effectively
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Internal users
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Individuals who use accounting information within an organization
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International Accounting Standards Board
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IASB - Organization which issues International Financial Accounting Standards for many countries outside the U.S.
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Management (or Managerial) Accounting
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Providing information that is used primarily by management and is tailored to meet their needs
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Monitoring
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Process of evaluating the effectiveness of an organization's system of internal control over time
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Public Company Accounting Oversight Board
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PCAOB - Quasi-government body charged with oversight of the public accounting profession - sets auditing standards for public companies
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Return of investment
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ROI - Repayment of an amount originally invested in another company
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Return on investment
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Payment of an amount (dividend, interest, capital gain) in addition to amount invested
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Risk assessment
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Process of identifying, analyzing, and managing those risks that pose a threat to the achievement of a company's objectives
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Sarbanes-Oxley Act
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Landmark legislation designed to improve effectiveness of corporate financial reporting
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Securities and Exchange Commission
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SEC - A governmental organization that has the legal power to establish accounting principles for publicly held corporations in the U. S.
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Statement of Cash Flows
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SCF - A financial statement that shows the sources and uses of cash over a period of time
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Accounting (or balance sheet) equation
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Assets equal liabilities plus stockholders' equity (A = L + SE)
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Articulation
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The close relationship that exists between financial statements that are prepared on the basis of the same transaction information
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Assets
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A - What you own that will bring future benefit
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Balance Sheet
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Financial Position - B/S - The financial statement showing the financial position of an organization as of a certain date
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Business Entity
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An economic unit that engages in business activities
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Capital Stock
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Transferable units of ownership in a corporation
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Corporation
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Corp - A business organized as a separate legal entity and chartered by a state with ownership divided into transferable shares of capital stock
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Cost Principle
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GAAP that says to record assets at their historic cost
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Creditor
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Person or organization to whom debt is owed
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Deflation
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Decline in the general price level, resulting in an increase of purchasing power
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Disclosure
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GAAP which says to provide users of financial statements with financial and other facts necessary to interpret the financial statements
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Expenses
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Exp - Cost of goods or services incurred (or used up) to generate revenue
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Financial Statement
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F/S - Declaration of information believed to be true communicated in monetary terms
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Financing Activities
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Category of the Statement of Cash Flows that reflects the results of debt and equity financing
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Going-concern Assumption
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GAAP that says a business will operate into the foreseeable future
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Income Statement
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I/S - A financial statement which shows the results of operations for a period of time (Revenue less Expenses = Net Income)
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Inflation
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Increase in the general price level, resulting in a decline of purchasing power
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Investing Activities
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Category in the Statement of Cash Flows that shows purchases and sales of long-term assets
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Liabilities
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L - Debt; what you owe; creditors' claims against assets
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Liquidity
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Ability to pay debts when due
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Negative Cash Flow
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Payment of cash that reduces the cash balance
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Operating Activities
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Category in the Statement of cash Flows that shows the cash effects of revenue and expense transactions
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Partnership
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Unincorporated business consisting of two or more owners
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Positive Cash Flows
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Increases in cash that add to the cash balances
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Retained Earnings
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RE - Portion of stockholders' equity that has accumulated due to profitable operations
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Revenues
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Rev - Price for goods and services charged to customers
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Sole Proprietorship
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SP - Unincorporated business owned by one person
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Stable-dollar Assumption
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GAAP that says the monetary unit is assumed to be stable over time, so changes are not reflected in the financial statements
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Statement of Cash Flows
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SCF - Financial statement that explains the sources and uses of cash for a period of time
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Stockholders
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S/H - Owners of capital stock in a corporation
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Stockholders' Equity
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SE - The excess of assets over liabilities; the owners' claims against the assets of the business
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Window Dressing
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Measures taken by management to make a business look as financially strong as possible at the balance sheet date
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Account
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Record used to summarize all increases and decreases in a particular asset, liability, revenue, or expense
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Accountability
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The condition of being held accountable for one's actions by the existence of an independent record of those actions - a major goal of accounting records and internal control procedures
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Accounting cycle
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Sequence of accounting procedures used to record, classify and summarize accounting information. Begins with initial transaction; concludes with financial statements
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Accounting period
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Span of time covered by an income statement
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Accrual basis of accounting
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Calls for recording revenues when earned and expenses when incurred; adheres to GAAP
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Conservatism
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The traditional accounting practice of resolving uncertainty by choosing the solution that leads to lower (more conservative) net income
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Credit
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C - Right side of an account
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Debit
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D - Left side of an account
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Dividends
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Distribution of resources by a corporation to its stockholders (usually cash)
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Double entry accounting
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A system of recording every business transaction with equal dollar amounts of both debit and credit entries; keeps the accounting equation in balance
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Expenses
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E - The cost of goods and services used up (incurred) to generate revenue
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Fiscal year
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Any 12-month period adopted by a business
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Income statement
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I/S - Financial statement summarizing the results of operations of a business for a period of time (R - E = NI)
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Journal
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Chronological record of transactions; book of original entry
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Ledger
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Book of accounts; organized in financial statement order by account
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Matching Principle
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GAAP stating that expenses should be recorded in the period incurred to generate revenue, regardless of when cash exchanges hands
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Net Income
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NI - Increase in stockholders' equity resulting from profitable operations
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Net Loss
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NL - A decrease in operations resulting from unprofitable operations
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Posting
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Process of transferring information from the journal to individual ledger accounts in the ledger
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Realization Principle
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GAAP stating that revenue should be recorded in the accounting period earned, regardless of when cash exchanges hands
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Revenue
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R - Price charged to customer for goods and services offered in a business
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Time Period Principle
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To provide users of financial statements with timely information, net income is measured for relatively short time periods of equal length
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Trial Balance
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TB - List of names and balances of all accounts in the ledger; purpose is to assure that debits and credits are equal
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Realization Principle GAAP
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Records revenue when earned (happened)
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Matching Principle GAAP
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Expenses when happens
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Cost Principle GAAP
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Record as how much you paid when transaction happened
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Arguetivity Principle GAAP
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Must have proof of transaction
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Steel Dollar Principle GAAP
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Price behind dollar changes over time
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Business Entity Principle GAAP
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Keep personal separate from business
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