Chapter 1: Accounting and Business
QUESTIONS
1. A business is an entity designed to exchange goods and/or services on an arm’s
length basis for the mutual benefit of parties involved.
2. Accounting is the information infrastructure of the economy. It provides the
information for people to make informed decisions regarding business.
3. The finance function is responsible for managing the financial resources of the
business. Human resources function is responsible for ensuring that employees are
given the opportunities to succeed in a safe environment. The marketing function is
responsible for determining the wants and needs of customers. The production and
operations function is responsible for planning, organizing, directing, and
controlling the operations of the business. The accounting and information systems
function is responsible for providing useful information to the other functional areas
and external parties.
4. JIT stands for just-in-time. It implies that goods arrive just when they are needed.
5. A sole proprietorship has only one owner and unlimited liability. A partnership has
two or more owners, unlimited liability, and mutual agency. A corporation has one
or more owners, limited liability, and unlimited life.
6. A service firm provides services such as legal or accounting advice to clients for a
fee. A merchandising firm buys merchandise from another business and then sells
this merchandise to consumers. A manufacturing firm makes products that it then
sells to other businesses.
7. In ancient times accounting was used primarily to record transactions in an
illiterate society.
8. In the 11th – 15th centuries accounting was used to maintain records for an on-going
business, often a partnership. The double-entry accounting system was developed
and the accounting equation was used to organize accounting records.
9. An asset is a right to use resources with expected future benefit. Examples of assets
include cash, buildings, amounts owed to the business by customers, land, and
inventory.
10. A liability is an obligation to transfer resources to suppliers of money, goods, and
services. Examples of liabilities include amounts owed by the business to the bank
, for interest, amounts owed by the business to employees for wages, and amounts
owed to suppliers for inventory purchases.
11. Net assets are total assets minus total liabilities, also known as, owners’ equity.
12. Owners’ equity is the claim on the business to transfer the residual interest to the
owners.
13. A partnership agreement is important because it outlines the rights and obligations
of each partner as well as how profits and losses will be divided.
14. The business entity concept requires that an accounting system reflect only
information about economic events that pertain to the entity. It implies that the
business records are maintained separately from personal records.
,15. The going concern concept assumes that absent any information to the contrary, the
business entity will continue into the foreseeable future. It implies that accounting
records can continue from one period to the next.
16. The fundamental accounting equation is: assets = liabilities + owners’ equity.
17. Pacioli is known as the “father of accounting” because he wrote a book on the
“Method of Venice” that was one of the first printed works. He helped establish the
double-entry accounting system.
18. The financial statements convey information concerning revenues and expenses,
cash flows, and financial position to interested, informed external users.
19. The monetary unit concept requires that accounting events be recorded in
monetary terms.
20. The periodicity concept requires that the success or failure of the business be
determined at regular intervals.
21. Using cash basis accounting income is revenues received less expenses paid.
22. Limited liability means that the assets of the business are at risk if the business fails,
but the owners’ personal possessions are not at risk from the business’s creditors.
23. Accrual basis income is revenue earned less expenses incurred in an effort to
generate that revenue.
24. The stock market crash of 1929 led to the regulation of the securities market. The
SEC was established to oversee publicly held companies and how they report to
stockholders.
25. Generally accepted accounting principles (GAAP) are the set of reporting standards
applicable to all companies that issue financial reports to external user. The
Financial Accounting Standards Board (FASB) is responsible for determining GAAP
in the United States.
26. The FASB Concepts Statements are designed to provide broad overview of
accounting and to serve as a foundation for future accounting standards.
27. The International Financial Reporting Standards are the global standards for
international external reporting by public companies.
28. The product life cycle is the time span from the conception of the product until it is
no longer in demand by customers. For example, consider the Schwin 10-speed
bicycle. Initially someone developed the idea of a 10-speed bicycle for road use.
This bicycle had very thin tires, handlebars that wrapped under, and a skinny seat.
Eventually these bicycles became less popular as mountain bikes were developed.
Eventually the Schwin 10-speed ceased to exist.
, 29. These types of “hybrid” organizational structures were developed to combine the
various characteristics of sole proprietorships, partnerships, and corporations to
minimize the risks for the owners.
30. The income statement is designed to show the revenues, expenses, and resulting net
income for a period of time. The statement of cash flows is designed to show the
cash inflows and outflows from operating, investing, and financing activities for a
period of time. The statement of owners’ equity is designed to show the changes in
owners’ equity for a period of time. The balance sheet is designed to show the
balances of the company’s assets, liabilities, and owners’ equity at the end of the
period.
QUESTIONS
1. A business is an entity designed to exchange goods and/or services on an arm’s
length basis for the mutual benefit of parties involved.
2. Accounting is the information infrastructure of the economy. It provides the
information for people to make informed decisions regarding business.
3. The finance function is responsible for managing the financial resources of the
business. Human resources function is responsible for ensuring that employees are
given the opportunities to succeed in a safe environment. The marketing function is
responsible for determining the wants and needs of customers. The production and
operations function is responsible for planning, organizing, directing, and
controlling the operations of the business. The accounting and information systems
function is responsible for providing useful information to the other functional areas
and external parties.
4. JIT stands for just-in-time. It implies that goods arrive just when they are needed.
5. A sole proprietorship has only one owner and unlimited liability. A partnership has
two or more owners, unlimited liability, and mutual agency. A corporation has one
or more owners, limited liability, and unlimited life.
6. A service firm provides services such as legal or accounting advice to clients for a
fee. A merchandising firm buys merchandise from another business and then sells
this merchandise to consumers. A manufacturing firm makes products that it then
sells to other businesses.
7. In ancient times accounting was used primarily to record transactions in an
illiterate society.
8. In the 11th – 15th centuries accounting was used to maintain records for an on-going
business, often a partnership. The double-entry accounting system was developed
and the accounting equation was used to organize accounting records.
9. An asset is a right to use resources with expected future benefit. Examples of assets
include cash, buildings, amounts owed to the business by customers, land, and
inventory.
10. A liability is an obligation to transfer resources to suppliers of money, goods, and
services. Examples of liabilities include amounts owed by the business to the bank
, for interest, amounts owed by the business to employees for wages, and amounts
owed to suppliers for inventory purchases.
11. Net assets are total assets minus total liabilities, also known as, owners’ equity.
12. Owners’ equity is the claim on the business to transfer the residual interest to the
owners.
13. A partnership agreement is important because it outlines the rights and obligations
of each partner as well as how profits and losses will be divided.
14. The business entity concept requires that an accounting system reflect only
information about economic events that pertain to the entity. It implies that the
business records are maintained separately from personal records.
,15. The going concern concept assumes that absent any information to the contrary, the
business entity will continue into the foreseeable future. It implies that accounting
records can continue from one period to the next.
16. The fundamental accounting equation is: assets = liabilities + owners’ equity.
17. Pacioli is known as the “father of accounting” because he wrote a book on the
“Method of Venice” that was one of the first printed works. He helped establish the
double-entry accounting system.
18. The financial statements convey information concerning revenues and expenses,
cash flows, and financial position to interested, informed external users.
19. The monetary unit concept requires that accounting events be recorded in
monetary terms.
20. The periodicity concept requires that the success or failure of the business be
determined at regular intervals.
21. Using cash basis accounting income is revenues received less expenses paid.
22. Limited liability means that the assets of the business are at risk if the business fails,
but the owners’ personal possessions are not at risk from the business’s creditors.
23. Accrual basis income is revenue earned less expenses incurred in an effort to
generate that revenue.
24. The stock market crash of 1929 led to the regulation of the securities market. The
SEC was established to oversee publicly held companies and how they report to
stockholders.
25. Generally accepted accounting principles (GAAP) are the set of reporting standards
applicable to all companies that issue financial reports to external user. The
Financial Accounting Standards Board (FASB) is responsible for determining GAAP
in the United States.
26. The FASB Concepts Statements are designed to provide broad overview of
accounting and to serve as a foundation for future accounting standards.
27. The International Financial Reporting Standards are the global standards for
international external reporting by public companies.
28. The product life cycle is the time span from the conception of the product until it is
no longer in demand by customers. For example, consider the Schwin 10-speed
bicycle. Initially someone developed the idea of a 10-speed bicycle for road use.
This bicycle had very thin tires, handlebars that wrapped under, and a skinny seat.
Eventually these bicycles became less popular as mountain bikes were developed.
Eventually the Schwin 10-speed ceased to exist.
, 29. These types of “hybrid” organizational structures were developed to combine the
various characteristics of sole proprietorships, partnerships, and corporations to
minimize the risks for the owners.
30. The income statement is designed to show the revenues, expenses, and resulting net
income for a period of time. The statement of cash flows is designed to show the
cash inflows and outflows from operating, investing, and financing activities for a
period of time. The statement of owners’ equity is designed to show the changes in
owners’ equity for a period of time. The balance sheet is designed to show the
balances of the company’s assets, liabilities, and owners’ equity at the end of the
period.
