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Accounting - Exam 1 Study Guide Questions and Answers
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Accounting - Exam 1 Study Guide Questions and Answers
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Accounting - Exam 1 Study GuideQuestions and Answers
Chapter 1 -
accounting - Answer-the means by which we measure and describe the economic
activities of a business AND communicate these results to interested users.
main types of accounting information - Answer-1. financial accounting
2. managerial accounting
financial accounting - Answer-used by 'outsiders' to make decisions
managerial accounting - Answer-used by managers within the company to make
decisions
examples of external users (outsiders): - Answer-- investors (owners, stockholders)
- creditors (lenders, bankers)
- others (taxing authorities, regulatory agencies, customers, competitors, analysts)
questions asked by external users: - Answer-- is the company earning satisfactory
income?
- how does the company compare in size and profitability with competitors?
- will the company be able to pay its debts when they become due?
how do we get information to the outside users? - Answer-financial statements
financial statements - Answer-a set of accounting reports that convey information to the
outside users such as creditors & investors
*4 major financial statements - Answer-1. balance sheet (statement of financial position)
2. income statement (statement of earnings)
3. statement of owners' equity
4. statement of cash flows
you have some money to invest, and you are trying to decide if you should buy the
stock of company A or company B. how would you make this decision? - Answer-
among other things, you would compare the financial statements of the two companies
to help determine which would be the best investment.
,in order for the above comparison to be meaningful what must be true about the two
sets of financial statements? - Answer-the two sets of financial statements must be
prepared using the same methods, concepts, terminology, classifications, etc.
in other words, the outside user must be able to compare apples to apples in order to
obtain value from the comparison of financial statements
Generally Accepted Accounting Principles (GAAP) - Answer-the concepts, standards,
guidelines, and conventions companies are supposed to follow when preparing financial
statements.
where does GAAP come from? - Answer-2 organizations responsible for the
development of GAAP:
1) Financial Accounting Standards Board (FASB)
2) Securities Exchange Commission (SEC)
Financial Accounting Standards Board (FASB) - Answer-a private sector organization
that develops most of the accounting rules (GAAP);
-> FASB does NOT have express authority to develop GAAP
Securities Exchange Commission (SEC) - Answer-a public sector organization that HAS
express authority to develop GAAP;
-> SEC has allowed accounting professionals (FASB) to form GAAP
how do we know that companies are following GAAP in preparing their financial
statements? - Answer-companies need to have their financial statements audited every
year by an independent auditor
audit of financial statements - Answer-- independent audits are required to safeguard
investors and creditors from misleading financial statements
- the auditor must issue an audit report that will state if the statements are fair and
comply with GAAP
- the independent audit report must accompany the financial statements
why are audits necessary? - Answer-managers have incentives to use 'flexible'
accounting methods to manipulate the statements
some of the reasons for manipulating financial data include: - Answer-- to deceive
investors and creditors into providing cash to the company
- management bonuses and compensation are tied to firm performance
- to avoid violating debt (loan) covenants
, - to avoid higher tax liability
Chapter 2 - Answer-...
financial statements - Answer-a set of accounting reports that convey economic and
financial information to outside users such as creditors and investors
balance sheet (statement of financial position) - Answer-the financial statement that
portrays:
1) the economic resources owned by a business
2) the debts owed by a business
3) the amount of the owners investment in the business
at a specific point in time (a 'snapshot');
the financial statement that describes the company's resources (assets) and the claims
against those resources by creditors (liabilities) and owners (equity).
assets - Answer-the economic resources owned by a business
liabilities - Answer-the debts owed by a business
equity - Answer-the amount of the owners investment in the business.
FUNDAMENTAL ACCOUNTING EQUATION: - Answer-* ASSETS = LIABILITIES +
EQUITY
two major categories of assets: - Answer-1) current assets
2) long-term (non-current) assets
current assets - Answer-assets that are expected to either be converted into cash or
expire (be used up) within one year
examples of current assets - Answer-1. cash
2. accounts receivable
3. inventory
4. supplies
accounts receivable - Answer-represent amounts owed to the company by its
customers
inventory - Answer-this is the product the company sells to its customers
supplies - Answer-items used in the normal course of business (supplies are not the
same as inventory)
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