Accounting Test 1

Front 1

What do businesses Do?

Back 1

A business is an organization, which seeks to provide goods or services to customers.

Front 2

Three Basic kinds of Business

Back 2

A. Manufacturing
B. Merchandising
i. Retail
ii. Wholesale
C. Services

Front 3

The Three Keys to a sucessful business are?

Back 3

Idea-
Capital
Management Skill

Front 4

Idea

Back 4

A good idea for a product or service that can be sold at a profit.

Front 5

Capital -

Back 5

Money or Resources to bring that product or service to life.

Front 6

Only Two Sources of Capital available to start a business?

Back 6

Debt Financing (Borrow from Creditors)

Equity Financing
(contributions from investors/owners)

Front 7

Debt financing advantages and disadvantages

Back 7

Advantages- no sacrifice of ownership rights
Disadvantages - 1. must be paid back - within allotted time. 2. consequences of failure to pay back can be harsh.-bankruptcy/foreclosure. 3. can be difficult to qualify for.

Front 8

Equity Financing Advantages and Disadvantages

Back 8

Advantages- no requirement to repay contributed capital

Disadvantages- some sacrifice of ownership rights (voting, profit-sharing, post-termination resources)

Front 9

2 Basic ways owners/ investors provide equity capitl to a business

Back 9

Capital Contributions/stock

Retained Earnings (owners allow assets created through profitable operations to be retained in the business.)

Front 10

Partnership, General P, Corporation

1. number of owners allowed

Back 10

1.one
2.more than one
3. one or more

Front 11

Partnership, General P, Corporation

2. Red-Tape involved in formation and operation

Back 11

1. none unless employees are hired
2. none unless employees are hired

3. state regulations govern formation and operation

Front 12

Partnership, General P, Corporation

3. separate Legal liability (business/ owner)

Back 12

1. no

2. no

3. yes

Front 13

Partnership, General P, Corporation

4. Ability to raise equity Capital

Back 13

1. limited to resources of the one owner
2. limited to resources of partnership

3. unlimited number or owners (stockholders) possible

Front 14

Partnership, General P, Corporation

5. transfer of Ownership

Back 14

1. involves sale of entire business

2. typically requires partner approval

3. Easy transfer through sale of stock.

Front 15

Partnership, General P, Corporation

6. Income Taxation

Back 15

1. Business profits included in owners personal income
2. Business profits included in parner's personal income.
3. coporation pays tax on profits and owners pay dditional tax on any distribution of those profits.

Front 16

Stock Holders role- in Governance and operations

Back 16

stock holders 1.have the right to vote for a corporation's Board of Directors (1vote per share). 2. they benefit from
A.dividend distributions and increasing stock values
B Rights to share in any net assets available after the payment of liabilities in the event of business termination -liquidation.

Front 17

The Board of Director role in Governance and operations

Back 17

1. hires and monitors the performance of Senior management.
2. Involved in making of long-term strategic decisions.
3. members may or maynot be stock holders, are typically compensated for their time and effort.

Front 18

The Role of Senior Management in Governance and Operations

Back 18

1. responsible for daily operations of the company.
2. paid a salary by the company and may or may not own shares of stock themselves.

Front 19

Why is accounting often referred to as

"the language of business"

Back 19

Accounting is often referred to as the language of business because its sole purpose is to communicate business information.

Front 20

What are some of the distinguishing Characteristics of financial as opposed to managerial accounting .

FINANCIAL

Back 20

Financial- 1.seeks to provide- information to current or future providers (investors or Creditors) /other interested parties outside of management (Government agencies, etc.) This is done through periodic general-purpose financial statements prepared in accordance with (GAAP) or standardized rules of accounting. These financial statements provide summarized historical information on a company's financial position, results of operations and cash flows.

Front 21

What are some of the distinguishing Characteristics of financial as opposed to managerial accounting .

Managerial

Back 21

1. Seeks to provide information that's useful to a company's managers. in most cases this information is not released to the public and, as a result, is not governed by any rules or standards of accounting. Management accounting reports often provide detailed information an many times include forecasts of future results or budgets.

Front 22

What are the three general-purpose financial statements required under GAAP and what is the purpose of each?

Back 22

1.B S - Statement of Financial position

2. Income Statement - statement of operations, statement of earnings, or profit and loss statement/

3. Statement of Cash Flows

Front 23

What is the purpose of the Balance Sheet

Back 23

= Reflects a company's financial position (assets, liabilities and owners' equity ) as of a point in time

Front 24

Purpose of Income Statement

Back 24

- Reflects a company's results of operations or profits/losses over a period of time.

Front 25

Purpose of Cash Flows Statement

Back 25

Reflects a company's cash inflows, outflows, and changing cash balance over a period of time.

Front 26

What is often included in a companies general purpose financial statements but is not required by GAAP

Back 26

1. Statement of Retained Earnings or Statement of Owners Equity.

Front 27

What are the "notes to the financial statements"

Back 27

notes that provide important supplemental information in support of a companies general-purpose financial statements. Often includes information on accounting methods as well as more detailed info relative to certain financial statement amounts.

Front 28

What is the SEC and what is its role with regards to publicly held companies

Back 28

SEC( Securities and Exchange Comission)- is a federal agency responsible for the regulation of public capital markets in the united states. All businesses that seek capital from large numbers of investors in the United States(publicly held business) are subject to SEC rules and regulations requiring the disclosure of financial statement and other information to investors.

Front 29

How does the SEC seek to insure that financial statements information provided to the public is credible and comparable?

Back 29

The SEC requires an annual audit of the financial statements of all publicly-held companies by independent certified public accounting (CPA) firms to insure that hte information provided in those statements is accurate and prepared in accordance with GAAP.

Front 30

What is GAAP and why is it important to financial statement Users?

Back 30

Generally accepted accounting princpa are the methods of accounting and the financial statement disclosures required of the SEC regulated companies.

Front 31

What is the Purpose of GAAP?

Back 31

is to improve the comparability and usefulness of financial statement information to investors, creditors and other external users. although not required, companies not subject to SEC regulation will also typically prepare financial statements in accordance with GAAP to add credibility for current or potential investors and creditors.

Front 32

Who is Legally Authorized to determine GAAP?

Back 32

The SEC has the legal authority to etermine GAAP for companies required to file financial statements with the SEC; However, the SEC currently allows the FASB to function in this capacity.

Front 33

What is the FASB?

Back 33

Financial Accounting Standards Board is a private non-profit organization currently responsible for the establishment of GAAP in the United States. The SEC recognizes the pronouncements of the FASB as authoritative.

Front 34

How do the SEC and the FASB relate to one another?

Back 34

Because the SEC has the ultimate power to determine GAAP, the FASB exists and functions at the SEC's pleasure. AS a result, when the SEC talks the FASB listens. The SEC has considerable influence over the pronouncements issued by the FASB.

Front 35

What is the IASB and what is its role?

Back 35

International Accounting Standards Board is a private organization headquartered in London and committed to developing a single set of high quality global accounting standards. In addition, the Board cooperates with national accounting standards setter in an attempt to achieve convergence in accounting standards around the world.

Front 36

Why are IAS not allowed for companies whose securities trade in the United States and what would be the benefit if they were allowed?

Back 36

At this time, the SEC requires the use of FASB accounting Standards(GAAP) because it currently deems FASB standards superior in providing fuller and fairer disclosure of financial information. As the IASB continues to develop and improve their standards it is possible that the SEC could modify its position. A clear benefit in the application of the international standards amount countries is the breakdown of significant investment and trade barrier Capital markets will never be truly global until common accounting standards are applied to companies world wide.

Front 37

Who is primarily responsible for a company's financial statement accuracy and compliance with GAAP?

Back 37

A company's management is primarily responsible forfinancial statement accuracy and compliance with GAAP. In Fact, management failure to provide accurate financial information may constitute a crime under current law.

Front 38

How does a person become a CPA and what do CPA's do besides audits of financial statements

Back 38

CPA certification is administered by each state. All states require CPA candidates to be college graduates with credit earned in designated accounting courses. Candidates must also pss a uniform CPA exam administered by the American Institute of Certified Public Accountatnts (AICPA). In addition, certain supervised work experience with a licensed CPA firm is also required. Subsequent to initial certification, a CPA must complete continuing professional education (CPE) requirements to maintain the right to Practice.

Besides audits, many CPA's provide a number of other services including tax planning and management advisory services.

Front 39

What is the AICPA

Back 39

American Institute of Certified Public Accountatnts - is a private professional organization made up of CPA's across the nation. In addition to the administration of the CPA exam, the AICPA also determines GAAS which govern the practices and procedures to be used by CPA firms in the conduct of a certified audit of financial statements.

Front 40

Why aren't CPA Firms completely independent in the performance of an audit?

Back 40

CPA firms conducting financial statement audits are paid by the companies they audit creating an inherent conflict of interest. In most cases, a company's management team is motivated to prepare financial statements that present the most favorable financial impression possible. If management/auditor disagreements arise on financial statement presentation, management may threaten to change auditors. As a result CPA firms may be tempted to comprise the integrity of their audit work in order to preserve the engagement and resulting fee income.

Front 41

entity concept

Back 41

the personal assets of a company's owners are not included in the company's balance sheet... the business is a separate accounting entity

Front 42

monetary measurement principle:

Back 42

In the U.S., Financial statement amounts are stated in U.S. dollars, not Japanese yen or any other denomination or unit of measure. ;jn

Front 43

What is an SPECIAL JOURNAL

Back 43

???

Front 44

What is a SUBSIDIARY LEDGER

Back 44

???

Front 45

Why is this stuff worth knowing when computers are programmed to do all this accounting stuff pretty much automatically

Back 45

There is value in understanding where the information provided on a company's financial statements comes from. the better you understand the source of information, the more useful that information becomes.

Front 46

What is accrual Base Accounting and why is it required under GAAP

Back 46

Accrual base accounting is made up of the revenue recognition and the matching principles and deals with the timing of revenues and expenses.

Front 47

Revenue Recognition principle

Back 47

states that revenues are to be recorded in the period in which those revenues are earned, not necessarily when cash is collected from customers.

Front 48

The Matching Principle

Back 48

requires that the costs of operating a company be recorded as expenses in the period in which those costs provide benefits to the company, not necessarily when those costs are actually paid in cash. Expenses are to be matched or recorded in the same period as the revenues they helped Generate.