Accounting Phillips Chapter 1

Front 1

CPA

Back 1

Certified Public Accountant

Front 2

GAAP

Back 2

GAAP
Generally Accepted Accounting Principles

Front 3

FASB

Back 3

Financial Accounting Standards Board

Front 4

SEC

Back 4

Securities and Exchange Commission

Front 5

Define accounting.

Back 5

Accounting is the process of analyzing, summarizing, and reporting the results of a business’s activities.

Front 6

Briefly distinguish financial accounting from managerial accounting.

Back 6

Financial accounting focuses on preparing and using the financial statements that are made available to owners and external users such as customers and creditors who are interested in reading them. Managerial accounting focuses on other accounting reports that are not released to the general public, but instead are prepared and used by the managers who run the company.

Front 7

The accounting process generates financial reports for both internal and external users. Describe some of the specific groups of internal and external users.

Back 7

Financial reports are used by both internal and external groups and individuals. The internal groups are comprised of the various managers of the business. The external groups include investors, creditors, governmental agencies, other interested parties, and the public at large.

Front 8

Explain what the separate entity assumption means when it says a business is treated as separate from its owners for accounting purposes.

Back 8

The business itself, not the individual stockholders who own the business, is viewed as owning the assets and owing the liabilities on its balance sheet. A business’s balance sheet includes the assets, liabilities, and stockholders’ equity of only that business and not the personal assets, liabilities, and equity of the stockholders. The financial statements of a company show the results of the business activities of only that company.

Front 9

List the three main types of business activities and give an example of each.

Back 9

(a) Operating – These activities are directly related to earning profits. They include buying supplies, making products, serving customers, cleaning the premises, advertising, renting a building, repairing equipment, and obtaining insurance coverage.
(b) Investing – These activities involve buying and selling productive resources with long lives, such as buildings, land, equipment, and tools.
(c) Financing – Any borrowing from banks, repaying bank loans, receiving contributions from stockholders, or paying dividends to stockholders are considered financing activities.

Front 10

What information should be included in the heading of each of the four primary financial statements?

Back 10

The heading of each of the four primary financial statements should include the following:
(a) Name of the business
(b) Name of the statement
(c) Date of the statement, or the period of time

Front 11

What are the purposes of (a) the balance sheet, (b) the income statement, (c) the statement of retained earnings, and (d) the statement of cash flows?

Back 11

(a) The purpose of the balance sheet is to report the financial position (assets, liabilities and stockholders’ equity) of a business at a specific date.
(b) The purpose of the income statement is to present information about the revenues, expenses, and net income of a business for a specified period of time.
(c) The statement of retained earnings shows the amount of earnings that have been retained in the business and the amount of the business’s resources paid out to stockholders as dividends.
(d) The purpose of the statement of cash flows is to summarize how a business’s operating, investing, and financing activities caused its cash balance to change over a particular period of time.

Front 12

Explain why the income statement of retained earnings, and the statement of cash flows would be dated "For the year Ended December 31, 2007," whereas the balance sheet would be dated "At December 31 2007."

Back 12

The income statement, statement of retained earnings, and statement of cash flows would be dated “For the Year Ended December 31, 2006,” because they report the inflows and outflows of resources during a period of time. In contrast, the balance sheet would be dated “At December 31, 2006,” because it represents the assets, liabilities and stockholders’ equity at a specific date.

Front 13

Briefly explain the difference between net income and net loss.

Back 13

Net income is the excess of total revenues over total expenses. A net loss occurs if total expenses exceed total revenues.

Front 14

Describe the basic accounting equation that provides the structure for the balance sheet. Define the three major components reported on the balance sheet.

Back 14

The accounting equation for the balance sheet is: Assets = Liabilities + Stockholders’ Equity. Assets are the resources owned by a business. Liabilities are amounts owed by the business. Stockholders’ equity is the owners’ claims to the business. It includes amounts invested and the amounts earned and accumulated through profitable business operations.

Front 15

Describe the equation that provides the structure for the income statement. Explain the three major items reported on the income statement.

Back 15

The equation for the income statement is Revenues - Expenses = Net Income. Revenues are increases in a company’s resources, arising primarily from its operating activities. Expenses are decreases in a company’s resources, arising primarily from its operating activities. Net income is equal to revenues minus expenses.

Front 16

Describe the equation that provides the structure for the statement of retained earnings. Explain the four major items reported on the statement of retained earnings.

Back 16

The equation for the statement of retained earnings is: Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings. It begins with beginning-of-the-year retained earnings which is the prior year’s ending retained earnings reported on the prior year’s balance sheet. The current year's net income reported on the income statement is added and the current year's dividends are subtracted from this amount. The ending retained earnings amount is reported on the end-of-year balance sheet.

Front 17

Describe the equation that provides the structure for the statement of cash flows. Explain the three major types of activities reported on the statement.

Back 17

The equation for the statement of cash flows is: Cash flows from operating activities + Cash flows from investing activities + Cash flows from financing activities = Change in cash for the period. Change in cash for the period + Beginning cash balance = Ending cash balance. The net cash flows for the period represent the increase or decrease in cash that occurred during the period. Cash flows from operating activities are cash flows directly related to earning income (normal business activity). Cash flows from investing activities include cash flows that are related to the acquisition or sale of the company’s long-term assets. Cash flows from financing activities are directly related to the financing of the company.

Front 18

Briefly describe the organizations that are responsible for developing accounting measurement rules (generally accepted accounting principles) in the United States.

Back 18

The Securities and Exchange Commission (SEC) is the U.S. government agency that determines the financial statements that public companies must provide to stockholders and the measurement rules used in producing those statements. The Financial Accounting Standards Board (FASB) is the private sector body given the primary responsibility to work out the detailed rules which become generally accepted accounting principles.

Front 19

Briefly explain the impact of financial statement fraud and the steps that have been taken to address it.

Back 19

Financial statement fraud is a result of top managers who have led financial statement users astray by misreporting their financial results. Although some people appear to initially benefit from fraudulent reporting in cases such as managers obtaining bank loans for the company, executives receiving higher bonuses, or managers saving their jobs, the consequences of these actions can be severe with executives being sentenced to long-term imprisonment. In response to these frauds, the U.S. Congress stepped in to create the Sarbanes-Oxley Act of 2002. The act requires that managers sign a report certifying their responsibilities for the financial statements, maintaining an audited system of internal controls to ensure accuracy in accounting reports, and maintaining an independent committee to meet with the auditors. Corporate executives face 20 years in prison and $5 million in fines if the company is found guilty of committing accounting fraud.

Front 20

Briefly define what an ethical dilemma is and describe the steps to consider when evaluating ethical dilemmas.

Back 20

An ethical dilemma is a situation where following one moral principle would result in violating another. Three steps that should be considered when evaluating ethical dilemmas are:
(a) Identify who will benefit from the situation (often, the manager or employee) and how others will be harmed (other employees, the company’s reputation, owners, creditors, and the public in general).
(b) Identify the alternative courses of action.
(c) Choose the alternative that is the most ethical – that which you would be proud to have reported in the news media. Often, there is no one right answer and hard choices will need to be made. Following strong ethical practices is a key part of ensuring good financial reporting by businesses of all sizes.

Front 21

In what ways might accounting frauds be similar to cases of academic dishonesty?

Back 21

Accounting frauds and cases involving academic dishonesty are similar in many respects. Both involve deceiving others in an attempt to influence their actions or decisions, often resulting in temporary personal gain for the deceiver. For example, when an accounting fraud is committed, financial statement users may be misled into making decisions they wouldn’t have made had the fraud not occurred (e.g., creditors might loan money to the company, investors might invest in the company, or stockholders might reward top managers with big bonuses). When academic dishonesty is committed, instructors might assign a higher grade than is warranted by the student’s individual contribution. Another similarity is that, as a consequence of the deceipt, innocent bystanders may be adversely affected by fraud and academic dishonesty. Fraud may require the company to charge higher prices to customers to cover costs incurred as a result of the fraud. Academic dishonesty may lead to stricter grading standards, with significant deductions taken for inadequate documentation of sources referenced. A final similarity is that if fraud and academic dishonesty are ultimately uncovered, both are likely to lead to adverse long-term consequences for the perpetrator. Fraudsters may be fined, imprisoned, and encounter an abrupt end to their careers. Students who cheat may be penalized through lower course grades, expulsion, and find it impossible to obtain academic references for employment applications.

Front 22

Investing activities

Back 22

Buying and selling productive resources with long lives

Front 23

Private company

Back 23

A.A company that sells shares of its stock privately and is not required to release its financial statements to the public.

Front 24

Corporation

Back 24

.An incorporated business that issues shares of stock as evidence of ownership.

Front 25

Accounting

Back 25

A.A system that collects and processes financial information about an organization and reports that information to decision makers.

Front 26

Partnership

Back 26

An unincorporated business owned by two or more persons.

Front 27

Financing activities

Back 27

A.Transactions with lenders (borrowing and repaying cash) and stockholders (selling company stock and paying dividends).

Front 28

Unit of measure

Back 28

A.Measurement of information about a business in the monetary unit (dollars or other national currency).

Front 29

Public company

Back 29

A company that has its stock bought and sold by investors on established stock exchanges .

Front 30

Operating activities

Back 30

Activities directly related to running the business to earn profit.

Front 31

Relevance

Back 31

A feature of financial information that allows it to influence a decision.

Front 32

Reliability

Back 32

Financial information that is unbiased and verifiable.

Front 33

Comparability

Back 33

Financial information that can be compared across businesses because similar accounting methods have been applied.

Front 34

Consistency

Back 34

Financial information that can be compared over time because similar accounting methods have been applied.

Front 35

Assets

Back 35

The resources owned by a business.

Front 36

Liabilities

Back 36

The amounts owed by the business.

Front 37

Stockholders’ equity

Back 37

The total amounts invested and reinvested in the business by its owners.

Front 38

Revenues

Back 38

Earned by selling goods or services to customers.

Front 39

Expenses

Back 39

The costs of business necessary to earn revenues.

Front 40

Unit of measure

Back 40

The assumption that states that results of business activities should be reported in an appropriate monetary unit.

Front 41

Separate Entity

Back 41

The financial reports of a business are assumed to include the results of only that business’s activities.

Front 42

Accounts payable is a(n)

Back 42

liability

Front 43

Dividends go on the...

Back 43

Statement of retained earnings

Front 44

Net income is on the..

Back 44

I/S, SRE

Front 45

Cash paid to purchase equipment

Back 45

(Investing) on Statement of cash flows