Accounting 101 Exam 1 with Accurate
Solutions
3 Types of business - ANSWER-Sole Proprietorship, Partnership, Corporation
Sole Proprietorship - ANSWER-One of the three types of business. It is a business
owned by one person.
Pros: You are in control, simple to establish, tax advantages
Cons: Proprietor is liable, financing may be difficult, Transfer of ownership may be
difficult.
Partnership - ANSWER-One of the three types of business. It is a business owned by
two people.
Pros: The two people are completely in control, tax advantages, simple to establish,
broader skills and resources.
Cons: Liable for all business debts/claims, transfer of ownership may be difficult.
Generally Accepted Accounting Principles (GAAP) - ANSWER-How does a company
decide on the amount and type of financial information to disclose? What reporting
format should a company use?
How should a company measure assets, liabilities, revenues, and expenses?
The rules of accounting.
FASB - ANSWER-Primary Accounting Setting Body in the US: Financial Accounting
Standards Board.
Makes the rules of accounting (GAAP).
SEC - ANSWER-US government agency that oversees financial markets. Securities
Exchange Commission.
Enforces the rules of accounting.
IASB - ANSWER-International Accounting Standards Board
PCAOB - ANSWER-Public Company Accounting Oversight Board
, Characteristics of useful and quality enhancing financial information - ANSWER-
Relevance, Faithful Representation, Verifiable, Comparability, Consistency,
Understandability.
Financial Reporting Assumptions - ANSWER-Monetary Unit, Economic Entity,
Periodicity, Going Concern, Accrual Basis
Monetary Unit - ANSWER-One of the financial reporting assumptions. Requires that
only those things that can be expressed in money are included in the accounting
records
Economic Entity - ANSWER-One of the financial reporting assumptions. States that
every economic entity can be separately identified and accounted for.
Periodicity - ANSWER-A type of financial reporting assumption. States that the life of a
business can be divided into artificial time periods.
Going Concern - ANSWER-A type of financial reporting assumption. The business will
remain in operation for the foreseeable future.
Accrual-Basis - ANSWER-A type of financial reporting assumption. Transactions are
recorded in the periods in which the events occur.
Financial Reporting Principles - ANSWER-Cost, Fair Value, Full Disclosure
Cost - ANSWER-A financial reporting principle. Dictates that companies record assets
at their cost
Fair Value - ANSWER-A financial reporting principle. Indicates that assets and liabilities
should be reported at fair value (the price received to sell an asset or settle a liability)
Full Disclosure - ANSWER-A financial reporting principle. Requires that companies
disclose all circumstances and events that would make a difference to financial
statement users.
Constraints in Financial Reporting - ANSWER-Materiality Constraint, Cost Constraint
Materiality Constraint - ANSWER-One of the constraints in financial reporting. An item is
material when its size makes it likely to influence the decision of an investor or creditor.
Cost Constraint - ANSWER-A constraint of financial reporting. Accounting standard-
setters weigh the cost that companies will incur to provide the information against the
benefit that financial statement users will gain.
Solutions
3 Types of business - ANSWER-Sole Proprietorship, Partnership, Corporation
Sole Proprietorship - ANSWER-One of the three types of business. It is a business
owned by one person.
Pros: You are in control, simple to establish, tax advantages
Cons: Proprietor is liable, financing may be difficult, Transfer of ownership may be
difficult.
Partnership - ANSWER-One of the three types of business. It is a business owned by
two people.
Pros: The two people are completely in control, tax advantages, simple to establish,
broader skills and resources.
Cons: Liable for all business debts/claims, transfer of ownership may be difficult.
Generally Accepted Accounting Principles (GAAP) - ANSWER-How does a company
decide on the amount and type of financial information to disclose? What reporting
format should a company use?
How should a company measure assets, liabilities, revenues, and expenses?
The rules of accounting.
FASB - ANSWER-Primary Accounting Setting Body in the US: Financial Accounting
Standards Board.
Makes the rules of accounting (GAAP).
SEC - ANSWER-US government agency that oversees financial markets. Securities
Exchange Commission.
Enforces the rules of accounting.
IASB - ANSWER-International Accounting Standards Board
PCAOB - ANSWER-Public Company Accounting Oversight Board
, Characteristics of useful and quality enhancing financial information - ANSWER-
Relevance, Faithful Representation, Verifiable, Comparability, Consistency,
Understandability.
Financial Reporting Assumptions - ANSWER-Monetary Unit, Economic Entity,
Periodicity, Going Concern, Accrual Basis
Monetary Unit - ANSWER-One of the financial reporting assumptions. Requires that
only those things that can be expressed in money are included in the accounting
records
Economic Entity - ANSWER-One of the financial reporting assumptions. States that
every economic entity can be separately identified and accounted for.
Periodicity - ANSWER-A type of financial reporting assumption. States that the life of a
business can be divided into artificial time periods.
Going Concern - ANSWER-A type of financial reporting assumption. The business will
remain in operation for the foreseeable future.
Accrual-Basis - ANSWER-A type of financial reporting assumption. Transactions are
recorded in the periods in which the events occur.
Financial Reporting Principles - ANSWER-Cost, Fair Value, Full Disclosure
Cost - ANSWER-A financial reporting principle. Dictates that companies record assets
at their cost
Fair Value - ANSWER-A financial reporting principle. Indicates that assets and liabilities
should be reported at fair value (the price received to sell an asset or settle a liability)
Full Disclosure - ANSWER-A financial reporting principle. Requires that companies
disclose all circumstances and events that would make a difference to financial
statement users.
Constraints in Financial Reporting - ANSWER-Materiality Constraint, Cost Constraint
Materiality Constraint - ANSWER-One of the constraints in financial reporting. An item is
material when its size makes it likely to influence the decision of an investor or creditor.
Cost Constraint - ANSWER-A constraint of financial reporting. Accounting standard-
setters weigh the cost that companies will incur to provide the information against the
benefit that financial statement users will gain.
