MGT 8803 Week 1 EXAM WITH COMPREHENSIVE SOLUTIONS

A business owned by a single owner - ANSWER proprietorship A business owned by more than one owner - ANSWER partnership In ___ & ___, the business and the owner(s) are legally one entity - there is unlimited liability and no taxation. - ANSWER proprietorship and partnership What does unlimited liability mean? - ANSWER The obligations of the business are the same as the obligations of the owners; i.e., a bank can go after the owners if the business defaults on its loan What does "no taxation" mean with regard to proprietorships and partnerships? - ANSWER The business itself is not taxed, but its owners pay income tax T/F: A corporation is a legally separate entity from its owners. - ANSWER True Corporations have ___ liability, which means ___. - ANSWER limited; the business is legally a separate entity from its shareholders, and they cannot be held accountable for defaulted loans opened under the business How does taxation work with regard to corporations and shareholders? - ANSWER The corporation pays taxes AND the shareholders pay taxes as individuals What are the 5 key assumptions of financial accounting? - ANSWER 1. Separate entity 2. Unit of measurement 3. Going concern 4. Periodicity 5. Materiality Explain the separate entity assumption of financial accounting. - ANSWER We treat the business and the owners as separate entities, focusing on the accounting for the businesses, not the owners. Explain the unit of measurement assumption of financial accounting. - ANSWER We'd like to pick a unit of measure to aggregate all the different things we have (in the business) so there is one common unit of measure. This is typically the currency in which the company operates. Explain the going concern assumption of financial accounting. - ANSWER We presume that the company will continue to operate. Explain the periodicity assumption of financial accounting. - ANSWER We presume that we can arbitrarily pick any time period that we want to and report the financial results for that time period. Explain the materiality assumption of financial accounting. - ANSWER The only information that needs to be disclosed in financial statements is information that will be useful for those who rely on the financial statements to make decisions. What 5 groups use financial reports? - ANSWER 1. Investors (stockholders) 2. Creditors (banks) 3. Government agencies (SEC) 4. Company management 5. Financial analysts T/F: Most of the users of financial reports are outside the company. - ANSWER True What does GAAP stand for? - ANSWER Generally Accepted Accounting Principles What does SEC stand for? - ANSWER Securities and Exchange Commission What does FASB stand for? - ANSWER Financial Accounting Standards Board Rule-making for GAAP resides under the authority of ___. - ANSWER The SEC ___ consists of representatives from public accounting firms, industry, government agencies, and academia. The SEC has delegated rule-making to this private body in recent years. - ANSWER FASB T/F: GAAP apply to both publicly and privately held companies. - ANSWER True What does IFRS stand for? - ANSWER International Financial Reporting Standards T/F: GAPP and tax accounting are the same thing. - ANSWER False What are the 6 desirable qualities of financial statements? - ANSWER 1. Understandability 2. Timeliness 3. Full disclosure 4. Comparability 5. Objectivity 6. Decision relevance What are the 3 basic financial statements that should be provided to users? - ANSWER 1. Balance sheet 2. Income statement 3. Statement of cash flows The ___ measures financial position at a point in time, and summarizes what the company has and what it owes. - ANSWER balance sheet What are the 3 components of the balance sheet? - ANSWER 1. Assets 2. Liabilities 3. Owner's equity What is the accounting equation? - ANSWER Assets = Liabilities + Owner's Equity What does the left side of the accounting equation represent? - ANSWER Resources of the company, i.e., the assets are the resources What does the right side of the accounting equation represent? - ANSWER Sources of the funding provided by the creditors, i.e., who has claims to the assets. Liabilities represent the creditor's claims. Owner's equity represents the sources provided by the owners and the owner's claims. ___ are the resources owned or the rights to receive resources. - ANSWER Assets Assets can be ___ (cash, buildings, inventory, equipment), ___ (copyrights, patents, or trademarks), or ___ (e.g., legal right to receive payment). - ANSWER physical, intangible, legal rights Cash, accounts receivable & notes receivable, inventory, investments, buildings & equipment, and copyrights & patents are all examples of ___. - ANSWER Assets The order of presentation on the balance sheet is generally in terms of ___. - ANSWER liquidity (the closer they are to being cash, the more liquid they are) Historical cost, sales value, replacement value, and general price-level adjusted costs are all ___. - ANSWER valuation metrics ___ is the price that was paid to either manufacture or purchase an asset. - ANSWER Historical cost ___ is what an asset can be sold for. - ANSWER Sales value (AKA market value) ___ is what it would cost you to replace an asset with an identical asset. - ANSWER Replacement cost