ACG 2021 Test #1 Study Guide (Chapter 1 & 2) Exam Questions and
Answers.
Assets = Liabilities + Owner's Equity
MUST BE BALANCED - ✔✔✔ Accounting Equation
Financial accounting is governed by concepts and rules known as generally accepted
accounting principles (GAAP). GAAP aims to make information relevant, reliable, and
comparable. - ✔✔✔ Generally Accepted Accounting Principles (GAAP)
The International Accounting Standards Board (IASB), a group (consisting of individuals
from many countries that issues International Financial Reporting Standards (IFRS) that
identify preferred accounting practices.
Issues International Financial Reporting Standards (IFRS) - ✔✔✔ International
Accounting Standards Board (IASB)
a group in the US that determines the rules for GAAP
the private board that establishes the generally accepted accounting principles used in the
practice of financial accounting
The ________ framework consists of the following:
Objectives—to provide information useful to investors, creditors, and others.
Qualitative Characteristics—to require information that is relevant, reliable, and
comparable.
Elements—to define items in financial statements.
Recognition and Measurement—to set criteria that an item must meet for it to be
recognized as an element; and how to measure that element. - ✔✔✔ FASB (Financial
Accounting Standards Board)
The agency of the U.S. government that oversees U.S. financial markets and accounting
standard-setting bodies. - ✔✔✔ Securities and Exchange Commission (SEC)
is a business owned by one person. The business is a separate entity for accounting
purposes. However, the business is not a separate legal entity from its owner.
- Easy to set up
- No additional business income tax
- Unlimited liability
- Not a separate entity
- Business ends with owner death and choice - ✔✔✔ Sole Proprietorship
, A ___________ a business owned by two or more people, called partners, which are
jointly liable for tax and other obligations. Like a proprietorship, no special legal
requirements must be met in starting a partnership. The only requirement is an agreement
between partners to run a business together. The agreement can be either oral or written
and usually indicates how income and losses are to be shared. A partnership, like a
proprietorship, is not legally separate from its owners.
- 2 or more called partners
- No additional business income tax
- Unlimited liability
- Not a separate entity
- Business ends with partner death and choice - ✔✔✔ Partnership
A __________, also called a C corporation, is a business legally separate from its owner or
owners, meaning it is responsible for its own acts and its own debts. Separate legal status
means that a corporation can conduct business with the rights, duties, and responsibilities
of a person. A corporation acts through its managers, who are its legal agents. Separate
legal status also means that its owners, who are called shareholders (or stockholders), are
not personally liable for corporate acts and debts.
- Has limited liability, no consequences
- Additional corporate income tax
- Limited liability. Owners called stockholders/shareholders are not liable for corporate acts
and debts
- a separate entity with the same rights and responsibilities as a person
- indefinite - ✔✔✔ Corporation
An increase in owner's equity resulting from the operation of a business - ✔✔✔ revenue
(equity)
Prepaid accounts, also called prepaid expenses, are assets that represent prepayments of
future expenses (expenses expected to be incurred in one or more future accounting
periods). When the expenses are later incurred, the amounts in prepaid accounts are
transferred to expense accounts.
Examples include prepaid insurance, prepaid rent, and prepaid services. - ✔✔✔ prepaid
expenses (assets)
Unearned revenue is a liability that is settled in the future when a company delivers its
product or services.
Ex) If you subscribe to a magazine, you generally pay a one-year subscription in advance.
For the publishing company, cash is received but nothing has been done to earn the
revenue. As the magazine is delivered to you, the publishing company recognizes a
Answers.
Assets = Liabilities + Owner's Equity
MUST BE BALANCED - ✔✔✔ Accounting Equation
Financial accounting is governed by concepts and rules known as generally accepted
accounting principles (GAAP). GAAP aims to make information relevant, reliable, and
comparable. - ✔✔✔ Generally Accepted Accounting Principles (GAAP)
The International Accounting Standards Board (IASB), a group (consisting of individuals
from many countries that issues International Financial Reporting Standards (IFRS) that
identify preferred accounting practices.
Issues International Financial Reporting Standards (IFRS) - ✔✔✔ International
Accounting Standards Board (IASB)
a group in the US that determines the rules for GAAP
the private board that establishes the generally accepted accounting principles used in the
practice of financial accounting
The ________ framework consists of the following:
Objectives—to provide information useful to investors, creditors, and others.
Qualitative Characteristics—to require information that is relevant, reliable, and
comparable.
Elements—to define items in financial statements.
Recognition and Measurement—to set criteria that an item must meet for it to be
recognized as an element; and how to measure that element. - ✔✔✔ FASB (Financial
Accounting Standards Board)
The agency of the U.S. government that oversees U.S. financial markets and accounting
standard-setting bodies. - ✔✔✔ Securities and Exchange Commission (SEC)
is a business owned by one person. The business is a separate entity for accounting
purposes. However, the business is not a separate legal entity from its owner.
- Easy to set up
- No additional business income tax
- Unlimited liability
- Not a separate entity
- Business ends with owner death and choice - ✔✔✔ Sole Proprietorship
, A ___________ a business owned by two or more people, called partners, which are
jointly liable for tax and other obligations. Like a proprietorship, no special legal
requirements must be met in starting a partnership. The only requirement is an agreement
between partners to run a business together. The agreement can be either oral or written
and usually indicates how income and losses are to be shared. A partnership, like a
proprietorship, is not legally separate from its owners.
- 2 or more called partners
- No additional business income tax
- Unlimited liability
- Not a separate entity
- Business ends with partner death and choice - ✔✔✔ Partnership
A __________, also called a C corporation, is a business legally separate from its owner or
owners, meaning it is responsible for its own acts and its own debts. Separate legal status
means that a corporation can conduct business with the rights, duties, and responsibilities
of a person. A corporation acts through its managers, who are its legal agents. Separate
legal status also means that its owners, who are called shareholders (or stockholders), are
not personally liable for corporate acts and debts.
- Has limited liability, no consequences
- Additional corporate income tax
- Limited liability. Owners called stockholders/shareholders are not liable for corporate acts
and debts
- a separate entity with the same rights and responsibilities as a person
- indefinite - ✔✔✔ Corporation
An increase in owner's equity resulting from the operation of a business - ✔✔✔ revenue
(equity)
Prepaid accounts, also called prepaid expenses, are assets that represent prepayments of
future expenses (expenses expected to be incurred in one or more future accounting
periods). When the expenses are later incurred, the amounts in prepaid accounts are
transferred to expense accounts.
Examples include prepaid insurance, prepaid rent, and prepaid services. - ✔✔✔ prepaid
expenses (assets)
Unearned revenue is a liability that is settled in the future when a company delivers its
product or services.
Ex) If you subscribe to a magazine, you generally pay a one-year subscription in advance.
For the publishing company, cash is received but nothing has been done to earn the
revenue. As the magazine is delivered to you, the publishing company recognizes a
