MBA Accounting Exam 1 Terms Questions and Answers

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What does accounting consist of? - ANSWER 1. identifies 2. records, and 3. communicates the economic events (transactions) of an organization to interested users Who are the internal users of ac... counting data? - ANSWER -marketing -management -finance -human resources Who are the external users of accounting data? - ANSWER -investors -creditors What act did congress pass to ensure ethical practices? - ANSWER Sarbanes-Oxley Act (SOX) What are the set of standards that are generally accepted and universally practiced. - ANSWER Generally Accepted Accounting Principles (GAAP) (indicates how to report economic events) What are the 3 standard-setting bodies? - ANSWER 1. Financial Accounting Standards Board (FASB) 2. Securities and Exchange Commission (SEC) 3. International Accounting Standards Board (IASB) What are the 2 measurement principles? - ANSWER 1. Historical Cost Principle (or cost principle) dictates that companies record assets at their cost. 2. Fair Value Principle states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). -selecting which one to use relates to relevance and faithful representation What are the 2 assumptions? - ANSWER 1. Monetary Unit Assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. 2. Economic Entity Assumption requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. What are the forms of business ownership? - ANSWER -proprietorship -partnership -corporation What is a proprietorship? - ANSWER -Generally owned by one person. -Often small service-type businesses -Owner receives any profits, suffers any losses, and is personally liable for all debts. What is a partnership? - ANSWER -Owned by two or more persons. -Often retail and service-type businesses -Generally unlimited personal liability -Partnership agreement What is a corporation? - ANSWER -Ownership divided into shares of stock -Separate legal entity organized under state corporation law -Limited liability What is an asset? - ANSWER -resources a business owns -provide future service or benefits -cash, supplies, equipment, etc. What is a liability? - ANSWER -Claims against assets (debts and obligations). -Creditors - party to whom money is owed. -Accounts payable, Notes payable, etc. What is stockholder's equity? - ANSWER -Ownership claim on total assets. -Referred to as residual equity. -Common stock and retained earnings. What is investment by stockholders? - ANSWER represent the total amount paid in by stockholders for the shares they purchase What are revenues? - ANSWER -result from business activities entered into for the purpose of earning income. -Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent. What are dividends? - ANSWER -the distribution of cash or other assets to stockholders. -reduce retained earnings. However, dividends are not an expense. What are expenses? - ANSWER -the cost of assets consumed or services used in the process of earning revenue. -Common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc. What are transactions? - ANSWER -a business's economic events recorded by accountants. -May be external or internal. -Not all activities represent transactions. -Each transaction has a dual effect on the accounting equation. What are the 4 financial statements? - ANSWER 1. income statement 2. retained earnings 3. balance sheet 4. cash flow What is an income statement? - ANSWER -Reports the profitability of the company's operations over a specific period of time. -Lists revenues first, followed by expenses. -Shows net income (or net loss). What is a retained earning statement? - ANSWER -Reports the changes in retained earnings for a specific period of time. -The time period is the same as that covered by the income statement. What is a balance sheet? - ANSWER -Reports the assets, liabilities, and stockholders' equity at a specific date. -Lists assets at the top, followed by liabilities and stockholder's equity. -Total assets must equal total liabilities and stockholder's equity. -Is a snapshot of the company's financial condition at a specific moment in time (usually the month-end or year-end). What is a statement of cash flows? - ANSWER -Information on the cash receipts and payments for a specific period of time. -Answers the following: Where did cash come from? What was cash used for? What was the change in the cash balance? What is an account - ANSWER -A record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. -Debit = "Left" -Credit = "Right" What is the double entry system? - ANSWER -Each transaction must affect two or more accounts to keep the basic accounting equation in balance. -Recording done by debiting at least one account and crediting another. -DEBITS must equal CREDITS. What is a business document? - ANSWER a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. What is the journal? - ANSWER -Book of original entry. -Transactions recorded in chronological order. -Contributions to the recording process: Discloses the complete effects of a transaction. Provides a chronological record of transactions. Helps to prevent or locate errors because the debit and credit amounts can be easily compared. What is journalizing? - ANSWER entering transaction data in the journal What is the general ledger? - ANSWER contains the entire group of accounts maintained by a company What is posting? - ANSWER process of transferring amounts from the journal to the ledger accounts What is the chart of accounts? - ANSWER Accounts and account numbers arranged in sequence in which they are presented in the financial statements. What are the limitations of a trial balance? - ANSWER The trial balance may balance even when: -A transaction is not journalized. -A correct journal entry is not posted. -A journal entry is posted twice. -Incorrect accounts are used in journalizing or posting. -Offsetting errors are made in recording the amount of a transaction. What is an error? - ANSWER the result of an unintentional mistake; it is neither ethical or unethical What is an irregularity? - ANSWER an intentional misstatement which is viewed as unethical What is the TIme Period Assumption? - ANSWER Accountants divide the economic life of a business into artificial time periods -also called the periodicity assumption What is an interim period? - ANSWER monthly and quarterly time periods What is a fiscal year? - ANSWER accounting time period that is one year in length What is a calendar year? - ANSWER january 1 to december 31 What is accrual-basis accounting? - ANSWER -Transactions recorded in the periods in which the events occur. -Companies recognize revenues when they perform services (rather than when they receive cash). -Expenses are recognized when incurred (rather than when paid). What is cash-basis accounting? - ANSWER -Revenues are recorded when cash is received. -Expenses are recorded when cash is paid. -Cash-basis accounting is not in accordance with generally accepted accountin [Show More]

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