Financial Accounting Chapters 1-4 Exam
Questions and Answers
ACCOUNTING BASICS - Answer-
Accounting is...
It does 3 things - Answer-An information system
1) Measures business activity
2) Processes data into reports
3) Communicates results to decision makers
Financial Statements - Answer--End (and key) product of accounting process
-Report on business in monetary terms
Financial Accounting vs Managerial Accounting - Answer-Financial Accounting
-Provides information for external decision makers
-Investors
-Creditors
-Taxing authorities
Managerial Accounting
-Provides information for internal decision makers
-Managers
-Individual business owners
Audits - Answer-To provide reliable information, the SEC requires companies to have
their financial statements audited by independent accountants.
An audit is a financial examination. The independent accountants then tell whether or
not the financial statements give a fair picture of the company's situation.
Enron Corp., for example, was one of the largest companies in the United States before
it began reporting misleading data.
Sarbanes-Oxley Act (SOX) - Answer-made it a criminal offense to falsify financial
statements.
It also created a new watchdog agency, the Public Companies Accounting Oversight
Board, to monitor the work of accountants.
Types of Business Organizations - Answer-1) Proprietorships
- 1 owner
- life of organization limited by owner's choice/death
- owner is personally liable
2) Partnerships
- 2 or more owners
, - life limited by owner's choice/death
- partners are personally liable
3) Corporations
- owned by stockholders
- life is indefinite
- stockholders not personally liable
4) Limited Liability
- owned by members
- life is indefinite
- member are not personally liable
Stock - Answer-- refers to ownership of a company
- split into "shares"
- owners of stock = "stockholders"/"shareholders"
Generally Accepted Accounting Principles (GAAP) - Answer-Goal: to provide useful
information to those making investment and lending decisions
List of Accounting Principles - Answer-1) Entity Concept: a business is separate from its
owner
2) Reliability: accounting information is accurate and free from bias
3) Cost: assets are recorded at purchase price
4) Going Concern: assumption that business will continue indefinitely
5) Monetary Unit: in the US amounts are recorded in dollars, the dollar is considered a
stable unit of measure
The Accounting Equation - Answer-Assets = Liabilities + Stockholders' Equity
Assets - Answer-Economic resources that have a future benefit
ex//
- Cash
- Accounts receivable
- Merchandise inventory
- Furniture
- Land
- Patents
Liabilities - Answer-Debts payable to outsiders
ex//
- Accounts payable
- Bank loans
Questions and Answers
ACCOUNTING BASICS - Answer-
Accounting is...
It does 3 things - Answer-An information system
1) Measures business activity
2) Processes data into reports
3) Communicates results to decision makers
Financial Statements - Answer--End (and key) product of accounting process
-Report on business in monetary terms
Financial Accounting vs Managerial Accounting - Answer-Financial Accounting
-Provides information for external decision makers
-Investors
-Creditors
-Taxing authorities
Managerial Accounting
-Provides information for internal decision makers
-Managers
-Individual business owners
Audits - Answer-To provide reliable information, the SEC requires companies to have
their financial statements audited by independent accountants.
An audit is a financial examination. The independent accountants then tell whether or
not the financial statements give a fair picture of the company's situation.
Enron Corp., for example, was one of the largest companies in the United States before
it began reporting misleading data.
Sarbanes-Oxley Act (SOX) - Answer-made it a criminal offense to falsify financial
statements.
It also created a new watchdog agency, the Public Companies Accounting Oversight
Board, to monitor the work of accountants.
Types of Business Organizations - Answer-1) Proprietorships
- 1 owner
- life of organization limited by owner's choice/death
- owner is personally liable
2) Partnerships
- 2 or more owners
, - life limited by owner's choice/death
- partners are personally liable
3) Corporations
- owned by stockholders
- life is indefinite
- stockholders not personally liable
4) Limited Liability
- owned by members
- life is indefinite
- member are not personally liable
Stock - Answer-- refers to ownership of a company
- split into "shares"
- owners of stock = "stockholders"/"shareholders"
Generally Accepted Accounting Principles (GAAP) - Answer-Goal: to provide useful
information to those making investment and lending decisions
List of Accounting Principles - Answer-1) Entity Concept: a business is separate from its
owner
2) Reliability: accounting information is accurate and free from bias
3) Cost: assets are recorded at purchase price
4) Going Concern: assumption that business will continue indefinitely
5) Monetary Unit: in the US amounts are recorded in dollars, the dollar is considered a
stable unit of measure
The Accounting Equation - Answer-Assets = Liabilities + Stockholders' Equity
Assets - Answer-Economic resources that have a future benefit
ex//
- Cash
- Accounts receivable
- Merchandise inventory
- Furniture
- Land
- Patents
Liabilities - Answer-Debts payable to outsiders
ex//
- Accounts payable
- Bank loans
