VYC1 Chapter 1

What led to the passage of the Public Company Accounting Reform and Investor Protection Act of 2002?

(aka Sarbanes-Oxley Act) 1. it was passed in response to the wave of corporate accounting scandals (Enron, WorldCom, Adelphia, Arthur Anderson) 2. it significantly tightens regulation of financial reporting by publicly held companies and their accountants and auditors

What are the major functions or activities performed by accountants in private industry?

(managerial accounting) 1. establish accounting policies 2. manage the accounting system 3. prepare financial statements 4. interpret financial information 5. provide financial advice to management 6. prepare tax forms 7. perform tax planning services 8. prepare internal reports for management

What is a Partnership?

1. A business entity owned by two or more people who are legally responsible for the debts & taxes of the business. 2. Has TWO or more owners. 3. Ends when partner: a. withdraws b. dies c. closes the firm 4. Partners are individually and jointly responsible for business debts if firm is unable to pay.

What is a Sole Proprietorship?

1. A business owned by ONE person who is legally responsible for the debts/taxes of the business. 2. Has ONE owner. 3. Ends when owner is: a. unable to carry on. b. dies c. closes the firm 4. Owner is responsible for business debts if the firm is unable to pay.

Suppliers use financial info to?

1. Assess the firms ability to pay its bills 2. Set a credit limit for the firm.

Banks use financial info to?

1. Decide whether to make a loan. 2. Determine the terms of the loan.

Tax Authorities (IRS) use financial info to?

1. Determine tax base for: a) income taxes b) sales taxes c) property taxes

Customers use financial info to?

1. Determine the economic health of the business. 2. Determine the likelihood that the firm will remain in business to provide parts, service and support.

What is a corporation?

1. It is a publicly or privately owned business entity, that is separate from its owners and has a legal right to own property and do business in its own name. It can have ONE or A THOUSAND OWNERS. 2. Stockholders are not responsible for the debts or taxes of the business. 3. Continues indefinitely; ends when: a. business goes bankrupt b. stockholders vote to liquidate. 4. Stockholders can only lose amount they invested. They are not responsible for debts or taxes.

Sarbanes-Oxley Act (2002)?

1. Led to a major change in the regulatory environment. 2. Was designed as a regulatory crackdown on corporate fraud and corruption.

Employees and unions use financial info to?

1. Negotiate wages & benefits. 2. Monitor profitability of profit sharing plans.

As an owner or manager of a business, what questions would you ask to judge the firm's performance, control operations, make decisions, and plan for the future?

1. Should I drop a product line or reduce the price? 2. How much should I charge for items I am adding to product line? 3. How much should i spend on advertising? 4. How does this months profit compare with last months profit? 5. Should I open a new store?

3 major legal forms of a business entity?

1. Sole Proprietorship 2. Partnership 3. Corporation

What are the three types of business entities, and how do they differ?

1. Sole Proprietorship- a business entity owned by one person 2. Partnership- a business entity owned by two or more people 3. Corporation- a business entity that is separate from its owners

Regulatory Agency of financial information?

1. The (SEC) is the federal agency that oversees the financial info of public corporations.

What is the purpose of the Financial Accounting Standards Board?

1. They develop GAAP 2. Issues statements of financial accounting standards 3. Before issuing the standards, they obtain feedback from interested people & organizations.

At the beginning of a partnership what happens?

1. Two or more individuals enter into a contract. 2. The contract details the rights, obligations, and limitations of each partner. 3. Partners must agree upon: a. the amount each partner will contribute to the business. b. each partner's percentage of ownership c. each partner's share of the profits d. the duties each partner will perform e. the responsibility each partner has for the amounts owed by the business to creditors and tax authorities.

What order does the FASB develop Statements of Financial Accounting Standards in?

1. issues a discussion memorandum 2. obtains responses to the discussion memorandum 3. issues an exposure draft 4. obtains responses to the exposure draft 5. issues a statement of principle

Why is financial information important?

1. it shows the financial health of the business to all interested parties (internal & external) 2. it is a fair presentation of the operating results and financial position of the business (it includes an auditor's report)

What is the function of the Securities and Exchange Commission?

1. oversees the financial information provided by publicly owned corporations to their investors and potential investors 2. responsible for reviewing the accounting methods used by publicly owned corporations 3. has final say

What are the three major areas of accounting?

1. public 2. managerial 3. governmental

What is the purpose of the Public Company Accounting Oversight Board?

1. will have investigative and enforcement powers to oversee the accounting profession and to discipline corrupt accountants and auditors 2. SEC oversees this board of 5 members 3. Sarbanes-Oxley Act created it.

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.

Why is accounting called the "language of business"?

Because of the results of the accounting process—financial statements—communicate essential information about a business to concerned individuals and organizations.

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 would you tell a small business owner who says he does not see a need for an accounting system in his business because he closely supervises the day-to-day operations and knows exactly what is happening with the business?

I would ask him/her a series of questions that would be difficult to answer without an accounting system in place. For example: 1. Should you drop a product line that isn't selling, or should you just reduce the price? 2. How much should you charge for the items you are adding to the product line? 3. How much should you spend on advertising? 4. How does this month's profit compare with last month's profit? 5. Should you open a new store? 6. How would others know the financial status of your business if something were to happen to you?

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?

If the owner's personal transactions are mixed with those of the business, it will be difficult to measure the performance of the business; the term used is called the separate entity assumption

What types of people or organizations are interested in financial information about a firm, and why are they interested in this information?

Internal: owners, managers, employees External: Tax authorities, suppliers, unions, regulatory agencies, banks, customers, investors & potential investors.

You are employed as an accountant for ABC Computers. Your company is in the process of signing a large contract with an electronics components supplier. You have a personal friend that works for the electronics components supplier, and you have personal knowledge that they have trouble paying their bills. Should you report this to your employer before the purchase?

No, I don't think so. If they are supplying us with electronic components, I don't think that would be information that is relevant to us. They wouldn't be paying us, they would just be supplying us with parts.

Currently, generally accepted accounting principles are developed by the American Institute of Certified Public Accountants (AICPA)?

No, generally accepted accounting principles are established by the FASB.

Can anyone can invest in a closely held corporation?

No, only people like family members and friends.

When a business is organized as a sole proprietorship, the owner may combine his/her personal financial information with the business financial information?

No, personal financial information should always be kept separate.

An accounting system is designed to accumulate and classify data about a firm's financial affairs and summarize it in the general journal?

No. It is not just to summarize it in the general journal.

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 groups consistently offer opinions about proposed FASB statements?

SEC, the American Institute of Certified Public Accountants (AICPA), public accounting firms, the American Accounting Association (AAA), and businesses with a direct interest in a particular statement

An act passed in response to the wave of corporate accounting scandals is the?

Sarbanes-Oxley Act of 2002

Which organization has the final say on financial accounting issues faced by publicly owned corporations?

Securities and Exchange Commission

Besides earning a profit, what other objectives might a business have? Can financial information play an important role in these objectives?

Social entities are nonprofit organizations, such as cities, public schools, and public hospitals whose main objective is helping the community by receiving donations or grants; financial information can play an important role in how the money is spent, and to let donators see where money is going.

What are the three types of business entities?

Sole proprietorship, partnership, and corporation.

The group of accounting educators who offer their opinions about proposed FASB statements, after research has been done to determine the possible effects on financial reporting and the economy, is?

The AAA

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 laws passed by Congress in 1933 and 1934 gave the Securities and Exchange Commission (SEC) final say on matters of financial reporting by publicly owned corporations?

The Securities Act & Securities and Exchange Act.

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.

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

An example of an economic entity is?

a business.

Managerial accounting is?

a form of private accounting

What kind of problems can you foresee if a business owner and/or manager does not have a basic knowledge of accounting?

a poorly ran business, poor business decisions, leading blindly.

What is an auditors report?

a report that accompanies an independent accountants (CPA) audit or review of a firm's financial statements. It contains the auditor's opinion about the fair presentation of the operating results and financial position of the business.

What are generally accepted accounting principles? (GAAP)

accounting standards, developed and applied by professional accountants.

A form of the partnerships business entity is?

an LLP

The review of financial statements to assess their fairness and adherence to GAAP is?

auditing

Public accounting firms provide services such as:

auditing tax collecting management advisory services

The Sarbanes-Oxley Act includes rules on what?

auditor rotation

Why are international accounting standards important to management?

because accounting principles vary from country to country. It would be important for management to know this especially if they are in business with other countries.

The Financial Accounting Standards Board (FASB) is responsible for?

developing generally accepted accounting principles.

The Financial Accounting Standards Board is responsible for?

developing generally accepted accounting principles.

Which of the following is NOT a type of information communicated by the financial statements?

how long the business has been in operation

What is NOT a part of the process of accounting for financial information?

identifying

Governmental Accounting?

involves keeping financial records & preparing financial reports for a federal, state, or local governmental unit. Such as: SEC, IRS, FBI, DHS

Why are generally accepted accounting principles needed?

it helps to ensure that financial information fairly presents a firm's operating results and financial position.

What is tax planning?

it involves giving advice to clients on how to structure their financial affairs in order to reduce their tax liability

What is stock?

it is a stock certificate and it represents the ownership of the corporation.

The financial affairs of a business and the financial affairs of the owners should be?

kept totally separate

What is the role of the manager versus the accountant?

manager- make sure that the firm's accounting system produces financial information that is timely, accurate, and fair; use financial info given by accountant to control present operations, make decisions, and plan for the future accountant- manages financial info, prepares financial info for managers, interprets financial info, provides financial advice to managers, prepares tax forms, etc.

What is the area of accounting that involves the preparation of internal reports for a firm's executives and the analysis of the data in these reports to aid in decision making is known as?

managerial accounting

Does the separate entity assumption apply only to the corporate form of business?

no, it applies to all forms of business.

Do public accountants work on the staff of federal, state, or local governmental units?

no, public accountants provide services like auditing, tax collecting and management advisory services.

An organization that has two or more owners who are legally responsible for the debts and taxes of the business is a:

partnership

What types of services do public accountants provide?

perform auditing, tax accounting, or management advisory functions

What are financial statements?

periodic reports of a firms financial position and operating results.

Accountants work in what 3 areas?

public, managerial and governmental

The corporations whose stock can be bought and sold on stock exchanges and in over-the-counter markets are referred to as?

publicly owned corporations

For accounting purposes all forms of business entities are considered what?

separate entities, however, the corporation is the only form of business that is a separate LEGAL entity.

A nonprofit organization such as a public school is a(n):

social entity

Tax planning includes what?

suggesting actions to reduce tax liability.

Tax accounting involves tax compliance and?

tax planning

What is the AAA?

the American Accounting Association are a group of educators who offer their opinions about proposed FASB statements.

Who develops GAAP?

the FASB (Financial Accounting Standards Board). It is composed of 7 full-time members.

Who has the final say on matters of financial reporting by publicly owned corporations?

the SEC (Securities & Exchange Commission). They determine the proper accounting standards to the accounting profession and they sometimes override the decisions the accounting profession makes.

What is the separate entity assumption?

the concept of keeping a firm's financial records separate from the owner's personal financial records.

What is accounting?

the process by which financial information about a business is classified, recorded, summarized, interpreted, and communicated to owners, managers, and other interested parties.

What is NOT a type of information communicated by the financial statements?

the types of products and services the business provides

Managerial Accounting?

where an accountant is employed by a SINGLE business and it includes a wide range of work.

Does a business owner/manager need to worry about the separate entity assumption? Why or why not?

yes, so they can be sure their personal financial info is kept separate from the business.