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Principles of Accounting Exam 1 Study Guide_ Answers
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Principles of Accounting Exam 1 StudyGuide: Answers
What is accounting ? - ANS-the information system that identifies, records, and
communicates the economic events of an organization to interested users
What are the three basic activities of Accounting ? - ANS-Identifying, recording, and
communicating
Internal Users - ANS-Managers who plan, organize, and run the business. Ex:
Marketing Managers, Finance Directors
External Users - ANS-Individuals, and organizations outside a company who want
financial information about the company.
Investors (Owners) - ANS-Decide whether to buy, hold, or sell ownership shares of a
company.
Creditors (Bankers and Suppliers) - ANS-Evaluate the risks of granting credit or lending
money.
Why is Ethics a fundamental building block of business ? - ANS-Helps to keep
dependable, and accurate financial reporting.
What is SOX ? - ANS-Sarbanes-Oxley Act: Law passed by Congress intended to
reduce unethical corporate behavior.
What are Generally Accepted Accounting Principles ? (GAAP) - ANS-Common
standards that indicate how to report economic events.
Financial Accounting Standards Board (FASB): - ANS-A private organization that
establishes GAAP in the U.S.
Security and Exchange Commission (SEC): - ANS-A governmental agency that
oversees U.S. financial markets and accounting standard-setting bodies.
, International Accounting Standards Board (IASB): - ANS-An accounting
standard-setting body that issues standards adopted by many countries outside the
U.S.
Historical Cost Principle: - ANS-Dictates that companies record assets at their cost. This
is true at the time the asset is purchased, as well as over the time the asset is held.
Fair Value Principle: - ANS-States that assets, and liabilities should be reported at fair
value. ( The price received to sell an asset or settle a liability )
Monetary Unit Assumption: - ANS-requires that companies include in the accounting
records ONLY transaction data that can be expressed in Money Terms.
-Enables accounting to quantify (Measure) economic events.
-The monetary unit assumption is vital to applying the historical cost principle.
Economic Entity Assumption: - ANS-Requires that the activities of the entity be kept
separate, and distinct from the activities of its owner and all other economic entities.
-An economic entity can be any organization or unit in society.
Proprietorship's: - ANS-A business owned by one person.
~Strengths
-Only a relatively small amount of money is needed to start this kind of business.
-The owner receives all of the profits.
~Weaknesses
-The owner suffers any loses.
-The owner is personally reliable for all debts.
Partnership: - ANS-A business owned by 2 or more people.
-Each partner generally has unlimited personal liability for the debts.
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