Accounting Chapter 1

Which is not one of the three forms of business organization?

Partnership
Creditorship
Sole proprietorship
Corporation

Creditorship

Easy transfer of ownership is a characteristic of which form of business organization?

Partnership
All of the answer choices are correct
Sole proprietorship
Corporation

Corporation

Which of the following is the most appropriate definition of accounting information?

A means of collecting information
Electronic collection and organization of vast amounts of financial information
The information system that identifies, records, and communicates the economic events of an organization to interested users
The interconnected network of subsystems necessary to operate a business

The information system that identifies, records, and communicates the economic events of an organization to interested users

Net income will result during a time period when

revenues exceed expenses.
expenses exceed revenues.
assets exceed liabilities.
assets exceed revenues.

revenues exceed expenses.

Which statement presents information as of a specific point in time?

Retained earnings statement
Statement of cash flows
Balance sheet
Income statement

Balance sheet

Stockholders’ equity

is usually equal to cash on hand.
includes retained earnings and common stock.
is shown on the income statement.
is equal to liabilities and retained earnings.

includes retained earnings and common stock.

Notes to the financial statements

are generally brief and few in number.
help clarify information presented in the financial statements.
need not be read in detail if an unqualified opinion accompanies the financial statements.
are optional.

help clarify information presented in the financial statements.

Which is an advantage of corporations relative to partnerships and sole proprietorships?

Reduced legal liability for investors
Most common form of organization
Increased difficulty of raising funds
Harder to transfer ownership

Reduced legal liability for investors

Which of the following is not an external user of accounting data?

Economic planners
Chief Financial Officer
Customers
Labor unions

Chief Financial Officer

Which of the following is not one of the three primary business activities?

Operating
Advertising
Investing
Financing

Advertising

Resources owned by a business are referred to as

stockholders’ equity.
liabilities.
assets.
revenues.

assets.

Which of the following would not appear on the income statement?

Net income
Service revenue
Interest expense
Dividends paid

Dividends paid

In which of the following sequences are the financial statements usually prepared?

Balance sheet, retained earnings statement, statement of cash flows, and income statement
Balance sheet, statement of cash flows, income statement and retained earnings statement
Income statement, balance sheet, retained earnings statement, and statement of cash flows
Income statement, retained earnings statement, balance sheet, and statement of cash flows

Income statement, retained earnings statement, balance sheet, and statement of cash flows The financial statements must be prepared in the following order: income statement, retained earnings statement, balance sheet and statement of cash flows. This is because net income (from the income statement) is a required input for the retained earnings statement, ending retained earnings (from the retained earnings statement) is a required input for the balance sheet and the ending cash balance (from the balance sheet) is a required input for the statement of cash flows.

Which financial statement reports assets, liabilities, and stockholders’ equity?

Income statement.
Statement of cash flows.
Retained earnings statement.
Balance sheet.

Balance sheet The balance sheet is a formal presentation of the accounting equation, such that Assets = Liabilities + Stockholders’ Equity.

Which of the following is the most appropriate and modern definition of accounting?

Electronic collection, organization, and communication of vast amounts of information
The interconnected network of subsystems necessary to operate a business
The information system that identifies, records, and communicates the economic events of an organization to interested users
A means of collecting information

The information system that identifies, records, and communicates the economic events of an organization to interested users

Which of the following would not be considered an external user of accounting data for the Julian Company?

Creditors
Management
Internal Revenue Service agent
Customers

Management

The liability created by a business when it purchases coffee beans and coffee cups on credit from suppliers is termed a(n)

account payable.
expense.
account receivable.
revenue.

account payable.

The common characteristic possessed by all assets is

tangible nature.
future economic benefit.
long life.
great monetary value.

future economic benefit.

Resources owned by a business are referred to as

assets.
liabilities.
revenues.
stockholders’ equity.

assets.

The best definition of assets is the

collections of resources belonging to the company and the claims on these resources.
owners’ investment in the business.
resources belonging to a company that have future benefit to the company.
cash owned by the company.

resources belonging to a company that have future benefit to the company.

Debts and obligations of a business are referred to as

assets.
expenses.
equities.
liabilities.

liabilities.

Which of the following financial statements is divided into major categories of operating, investing, and financing activities?

The balance sheet.
The retained earnings statement.
The statement of cash flows.
The income statement.

The statement of cash flows.

Retained earnings at the end of the period is equal to

-net income.
-assets plus liabilities.
-retained earnings at the beginning of the period plus net income minus liabilities.
-retained earnings at the beginning of the period plus net income minus dividends.

retained earnings at the beginning of the period plus net income minus dividends.

The primary purpose of the statement of cash flows is to report

a company’s investing transactions.
a company’s financing transactions.
information about cash receipts and cash payments of a company.
the net increase or decrease in cash.

information about cash receipts and cash payments of a company.

Why should the income statement be prepared first?

-The statement of cash flows should be prepared first because it determines the sources of cash. That information is then used in preparing the income statement.
-The income statement does not have to be prepared first. Financial statements can be prepared in any order.
-None of these answer choices are correct.
-Net income from the income statement flows into the retained earnings statement. The ending retained earnings balance then flows into the balance sheet.

Net income from the income statement flows into the retained earnings statement. The ending retained earnings balance then flows into the balance sheet.

normal revenue & expenses from operations
of the business to generate a profit

Operating Activities

borrowing of funds / issuance of stock to
support the business

Financing Activities

investing and/or proceeds in fixed assets or
resources to run the business.

Investing Activities

Reports the assets, liabilities and stockholder’s
equity (SHE) as of a specific date. Assets = Liabilities + SHE

Balance Sheet

Reports revenues and expenses of a company
for a specific period of time. Simple Step Income Statement:
Revenues – Expenses = Net Income; Multiple Step = Net
Sales – COGS = Gross Profit – Operating Exp. = Net Income

Income Statement:

Summarizes the changes in
retained earnings that have occurred as of a specific date.
Beg. Retained Earnings +/- Net Income/Deficit – Dividends =
Ending Retained Earnings.

Retained Earnings Statement

Summarizes information concerning the
cash in flows (receipts) and outflows (payments) for a
specific period of time and is categorized by operating,
investing and financing activities

Statement of Cash Flows

Clarifies and
expands upon in words information shown on the face of the
financial statements when additional detail is need for the
user.

Footnotes or Notes to the Financial Statements:

LIABILITES + STOCKHOLDERS EQUITY=

Assets

the debts and obligations of a business; liabilities
represent the amounts owed to a creditor or third party
who lent you money or resources

Liabilities

Common Stock + Retained Earnings; common
stock represents the total amount paid in by
stockholders to own shares of the company; retained
earnings equals the cumulative net income/loss of the
company since its inception.

Stockholders Equity

Which of the following is the most appropriate definition of accounting information?

A means of collecting information
Electronic collection and organization of vast amounts of financial information
The information system that identifies, records, and communicates the economic events of an organization to interested users
The interconnected network of subsystems necessary to operate a business

The information system that identifies, records, and communicates the economic events of an organization to interested users

All businesses are involved in three types of activity

financing, investing, operating.

accounting information system

keeps track of the 3 business activites

Payments to stockholders are called

dividends

Notes payable and bonds payable are different type of

liabilities

Party to whom amounts are owed are

creditors

Amounts owed are called

liabilities

Two primary sources of outside funds are

-Borrowing money -Issuing shares of stock for cash

Amounts earned from the sale of products

Revenues

Goods available for sale to customers

Inventory

Right to receive money from a
customer,in the future, as the result of a sale.

Accounts receivable

cost of assets consumed or services used.
(cost of goods sold, selling, marketing, administrative,
interest, and income taxes expense).

Expenses

arising from expenses include accounts payable,
interest payable, wages payable, sales taxes payable, and
income taxes payable.

Liabilities

when revenues exceed expenses.

Net income

when expenses exceed revenues.

Net loss

A set of rules and
practices, having substantial authoritative support, that the accounting
profession recognizes as a general guide for financial reporting

Generally Accepted Accounting Principles (GAAP)

(GAAP)

Generally Accepted Accounting Principles

Transactions are recorded in the periods in which the events occur

Accrual-Basis of Accounting

Required Financial Statements

Balance Sheet, Income Statement, Retained Earnings Statement, Statement of Cash Flows and Required Footnotes for those Financial Statements.

Reports assets and claims
to assets at a specific
point in time.

Balance Sheet

Liabilities +
Stockholders’ Equity=

Assets (balance Sheet)

Lists assets first, followed
by liabilities and
stockholders’ equity.

Balance Sheet

Liabilities are all ________

________ Payable

Reports revenues and
expenses for a specific
period of time.

Income Statement

Statement shows amounts and
causes of changes in retained
earnings during the period.

Retained Earnings Statement

Time period is the same as that
covered by the income
statement.

Retained Earnings Statement

Users can evaluate dividend
payment practices.

Retained Earnings Statement

Where did cash come
from during the period?

Statement of Cash Flows

How was cash used
during the period?

Statement of Cash Flows

What was the change in
the cash balance during the
period?

Statement of Cash Flows

Where cash came from and where it was spent

Statement of Cash Flows

Retained Earnings=

Equity

Retained earnings at beginning+Net Income-Dividends=

Retained earnings at the end

Revenues-expenses=

Net Income (income statement)

Assets, Liabilites, and common stock are found on the

Balance Sheet

Common Stock basically means

Who owns us

An asset that is convertible within 12 months of balance sheet to cash

Current Asset

On a balance sheet assets are listed in order of

Liquidity

investments convertible after 12 months of balance sheet

Long Term Investments

examples of long term assets

Land, Buildings

Goodwill, film library, patents are examples of what asset

Intangible

Payable debt/short term

Current Liabilities

Debt that will take longer that 12 months to pay off

Long term liabilites

Operating Activities, Investing Activities and financing activities all show up on what statement

Statement of cash flows.

U.S. companies that are publicly traded must provide
shareholders with an

annual report

The annual report always
includes:

-Financial statements. -Notes to the financial statements. -Independent auditor’s report. -Management discussion and analysis.

Accounting equation 1

ASSETS = LIABILITIES + STOCKHOLDERS EQUITY

MIRRORS THE FORMAT OF THE BALANCE SHEET

Accounting Equation

Requires that only
those things that can be
expressed in money are
included in the
accounting records.

Monetary Unit

States that every
economic entity can be
separately identified
and accounted for.

Economic Entity

States that the life of a
business can be divided
into artificial time
periods.

Periodicity

The business will
remain in operation
for the foreseeable
future.

Going Concern

Transactions are
recorded in the
periods in which the
events occur.

Accrual-Basis