Accounting: The Language of Business Self Review
Why are generally accepted accounting principles needed?
GAAP help to ensure that financial information fairly represents a firm's operating results and financial position.
Why is it important for business records to be separate from the records of the business's owner or owners? What is the term accountants use to describe this separation of personal and business records?
Measure business performance; separate entity.
What are the three major areas of accounting?
Public, managerial, and governmental.
Which organization has the final say on financial accounting issues faced by publicly owned corporations?
Securities and Exchange Commission
A nonprofit organization such as a public school is a
Social entity
What types of services do public accountants provide?
Auditing, tax, and management advisory services.
Why is accounting called the language of business?
The results of the accounting process-financial statements-communicate essential information about a business to concerned individuals and organizations.
You plan to open a business with two of your friends. You would like to form a corporation, but your friends prefer the partnership form of business. What are some of the advantages of the corporate form of business?
The shareholders are not responsible for the debts and taxes of the corporation. Corporations can continue in existence indefinitely.
How is the ownership of a corporation different from that of a sole proprietorship?
A sole proprietorship is a business entity owned by one person. A corporation is a separate legal entity that has a legal right to own property and do business in its own name.
What are generally accepted accounting principles?
Accounting standards that are changed and refined in response to changes in the environment in which businesses operate
What are the names of three accounting job positions?
Clerk, bookkeeper, and accountant.
The owner of the sporting goods store where you work has decided to expand the store. She has decided to apply for a loan. What type of information will she need to give to the bank?
Current sales and expenses figures, anticipated sales and expenses, and the cost of the expansion.
What types of people or organizations are interested in financial information about a firm, and why are they interested in this information?
Owners and managers: evaluate operations. Suppliers: assess ability of a firm to pay debts. Banks: ability to repay loans. Tax Authorities: determine a tax base. Governmental agencies: legal compliance. Employees: wage levels and profit-sharing plans.
An organization that has two or more owners who are legally responsible for the debts and taxes of the business is a
Partnership
What are financial statements?
Periodic reports that summarize the financial affairs of a business.
What does the accounting process involve?
Recording, classifying, summarizing, interpreting, and communicating financial information about a business.
What is the function of the Securities and Exchange Commission?
Regulation of financial reporting by publicly owned corporations.
How are generally accepted accounting principles developed?
The FASB develops proposed statements and solicits feedback from interested individuals, groups, and companies. The FASB evaluates the opinions received and votes on the statement.
What led to the passage of the Public Company Accounting Reform and Investor Protection Act of 2002?
The Public Company Accounting Reform and Investor Protection Act of 2002 was passed in response to the wave of corporate accounting scandals starting with the demise of Enron Corporation in 2001, the arrest of top executives at WorldCom and Adelphia Communications Corporations, and ultimately, the demise of Arthur Andersen, an international public accounting firm.
Prohibits accountants from offering a broad range of consulting services to publicly traded companies that they audit.
The Sarbanes-Oxley Act
What is the purpose of the Public Company Accounting Oversight Board?
The purpose of the Public Company Accounting Oversight Board is to oversee the accounting profession through its investigative and enforcement powers and to discipline corrupt accountants and auditors.
What is the purpose of accounting?
To gather and communicate financial information about a business.
What is the purpose of the auditor's report?
To obtain the objective opinion of a professional accountant from outside the company that the statements fairly present the operating results and financial position of the business and that the information was prepared according to GAAP.
One requirement for becoming a CPA is to pass the:
Uniform CPA Examination
What is tax planning?
Advice on how to structure financial affairs in order to reduce taxes without violating tax laws
What are the major functions or activities performed by accountants in private industry?
Establish accounting policies, direct the accounting system, prepare and interpret financial statements, provide financial advice, prepare tax forms.
What groups consistently offer opinions about proposed FASB statements?
SEC, AICPA, AAA
What are the three types of business entities, and how do they differ?
Sole proprietorship (owned by one person). Partnership (owned by two or more people). Corporation (can be owned by one or many persons).
What are three types of business entities?
Sole proprietorship, partnership, and corporation.
What is the purpose of the Financial Accounting Standards Board?
Statements of Financial Accounting Standards