Chapter 1 - 3
Double-entry system
A system that records the two-sided effect of each transaction in appropriate accounts. -In a double entry system, equal debits and credits are made in the account for each transaction. -Thus, the total debits will always equal the total credits and the accounting equation will always stay in balance.
Which of the following is not an advantage of the corporate form of business organization?
Favorable tax treatment
The proprietorship form of business organization.
Generally receives favorable tax treatment relative to a corporation.
To appear in a balance sheet of a business entity, an asset need not:
Have a ready market value.
From an accounting viewpoint, when is a business considered an entity separate from its owner(s)?
In each of the above situations, the business is an accounting entity separate from the activities of the owner(s).
Basic form of account
In its simples form, an account consists of 1) the title of the account 2) left or a debit side 3) right or a credit side
Purpose of a Ledger
Information in the Ledger provides management with the balances in various accounts.
General Ledger (Individual Liabilities)
Interest payable, salaries payable, accounts payable, Notes payable
Which of the following groups uses accounting information to determine whether the company's net income will result in a stock price increase?
Investors in common stock
Which of the following is descriptive of the proper form of a balance sheet?
Liabilities are listed before owners' equity.
Owner's equity in a business may decrease by
Losses from unprofitable operation of the business.
Which of the following would not be considered an external user of accounting data for the XYZ Company?
Management
Which of the following would not be considered an internal user of accounting data for the XYZ Company?
President of the employees' labor union.
Financial statements are designed primarily to:
Provide people outside the business organization with information about the company's financial position and operating results.
Which of the following statements concerning users of accounting information is incorrect?
Regulatory authorities are considered internal users.
General Ledger (Individual Stockholders equity)
Salaries Expense, servies revenue, common stock, retained earnings
Which of the following is the most appropriate and modern definition of accounting?
The information system that identifies, records, and communicates through the economic events of an organization to interested users.
General journal
The most basic form of journal. - The journal shows the debit and credit effects on a specific accounts for each transaction. Every company has a general journal.
Journalizing
The procedure of entering transaction data in the journal. -Entering transaction data in the journal is known as journalizing. - Separate journal entries are made each transaction. -A complete entry consists of: 1) the date of the transaction 2) the accounts and amounts to be debited and credited, and a brief explanation of the transaction.
Accounting communicates financial information about a business to both internal and external users.
True
Corporate stockholder generally pay higher taxes but have no personal liability.
True
The right to receive money in the future is called a(n)
account receivable
A business organized as a separate legal entity is a
corporation
Which type of corporate information is not available to investors.
forecast of cash needs for the upcoming year
The group of users accounting information changed with achieving the goals of the business is its
managers
A local retail shop has been operating as sole proprietorship. The business is growing and now the owner wants to incorporate. Which of the following is not a reason for this owner to incorporate?
the prestige of operating as a corporation.
Which of the following is not one of the three forms of business organization?
investors
The partnership form of business organization
is a common form of organization for service-type businesses.
A business organized as a corporation
is owned by its stockholders
An advantage of the corporate form of a business is that
its ownership is easily transferable via the sale of shares of stock.
A small neighborhood barber shop is operated by its owner would likely be organized as a
proprietorship.
Most business enterprises in the United States are
proprietorships and partnerships
Limitation Of Trial Balance
-A trial balance is limited in that it will balance and therefore not uncover errors when: 1) A transaction is not journalized 2) a correct journal entry is not posted 3) a journal entry is posted twice 4) incorrect accounts are used in journalizing and posting 5) offsetting errors are made in recording the amount of a transaction.
Normal Balance
-Every account classification has a normal balance, whether it is a debit or credit. -For that particular account, the opposite side entries should never exceed the normal balance.
Basic Steps in the recording process
1)Analyze each transactions for its effect on the accounts 2) Enter transaction in information in a Journal 3) Transfer journal information to the appropriate accounts in the ledger
Joe Blow Wholesale Dress Co. sold dresses to Flow Glow Retail Shoppe. Floe., the owner, said she would pay for them at a later which Joe Blow Dress Co. agreed to. Joe Blow Dress Co. is considered:
A creditor
Which of the following is a user of accounting information with an indirect financial interest in a business?
A financial adviser
General ledger
A ledger that contains all asset, liability, stockholders' equity, revenue, and expense accounts. -A general ledger contains all the assets, liabilities, and stockholders' equity accounts.
Chart of accounts
A list of a company's accounts.
Trial balance
A list of accounts and their balances at a given time. -A trial balance is a list of accounts and their balances at a given time. -The primary purpose of the trial balance is to prove the mathematical equality of debits and credits after posting. -A trial balance may uncover errors in journalizing and posting. -A trial balance is useful in the preparation of financial statements.
Chart of accounts
Accounts in the general ledger are listed in the chart of accounts. *Assets- cash, account receivable, advertising supplies, prepaid insurance, office equipment, accounted depreciation- office equipments *Liabilities- Notes payable, Accounts payable, Interest Payable, Unlearned servies revenue, Salaries payable * Stockholders Equity- Common stock, retained earning, dividends, income summary *Revenues- Service Revenue *Expense- Salaries Expense, supplies expense, rent expense, insurance expense, interest expense, depreciation expense
Normal balance for each of the following Items
Common Stock- Credit Revenues- Credit Assets- Debit Dividends- Debit Expenses- Debit Liabilities- Credit
The valuation of assets in the balance sheet is based primarily upon:
Cost, because cost is usually factual and verifiable.
Which of the following is a primary user of accounting information with a direct financial interest in the business?
Creditor
Which of the following would not be considered an internal user of accounting data for a company?
Creditor of a company
Which of the following groups uses accounting information to determine whether the company can pay its obligations?
Creditors
Which of the following is not a principal type of business activity?
Delivering
Owner's equity in a business may increase by:
Earnings from profitable operation of the business.
A corporation has which of the following set of characteristics?
Easier to transfer ownership and raise funds, no personal liability
General Ledger (Individual Assets)
Equipment, land, supplies, cash
Transactions
Events that must be recorded in the financial statements
Accounting transactions
Events that require recording in the financial statements because they affect assets, liabilities, or stockholders' equity.
A balance sheet reports financial activities for a specific time period such as one month or one year.
False
A business is usually involved in two types of activity -financing and investing.
False
A business organized as a separate legal entity owned by stockholders is a partnership,
False
A different set of financial statements usually is prepared for each user.
False
Assets must always have physical characteristics such as buildings, machinery or inventory.
False
Cash is another term for Stockholders' Equity.
False
External users of accounting information are managers who plan, organize, and run a business.
False
If a company purchases equipment for cash, its total assets will decrease.
False
Net income is another term for revenue.
False
Owners of business firms are the only people who need accounting information.
False
Payments to the owners are operating activities.
False
Proprietorships in the United States generate more revenue than the other two forms of business enterprise.
False
The entity principle states that the affairs of the owner's are an important part of the financial operations of a business entity and cannot be separated.
False
The heading for the income statement might include the line "As of December 31, 20xx."
False
The majority of U.S. business is transacted by proprietorships.
False
The payment of a liability causes an increase in owners' equity.
False
The sale of additional shares of capital stock will cause net income to increase.
False
Which of the following groups uses accounting information to determine whether a marketing proposal will be cost effective?
Marketing managers
Which of the following is an advantage of corporations relative to partnerships and sole proprietorships?
Reduced legal liability for investors.
Which one of the following is not considered one of three primary financial statements?
Statement of business activities.
Which of the following groups uses accounting information primarily to ensure the entity is operating within prescribed rules?
Taxing authorities
Profitability may be defined as:
The ability to increase the value of retained earnings.
Liquidity may be defined as:
The ability to pay debts of the company as they fall due.
A balance sheet is designed to show:
The assets, liabilities, and owners' equity in the business at the particular date.
T account
The basic form of an account. The alignment of these parts in an form of account resembles the letter T and therefore the account form is called a T Account.
Debit
The left side of an account. The act of entering an amount on the left side of the account is called debiting the account. When the debit amounts exceed the credits, an account has a debit balance. -Increased assets -decreased liabilities
Posting
The procedure of transferring journal entry amounts to the ledger accounts. -Transferring journal entries to the ledger accounts is called posting -Posting accumulates the effects of journalized transactions into individual accounts.
Transaction Analysis
The process of considering the transaction or event that has taken place and identify how transaction is going to impact the accounting equation.
Credit
The right side of an account. The act of entering an amount on the right side of the account is called crediting the account. When the credit amounts exceed the debit, an account has a credit balance. -Decreased assets -Increased Liabilities
Accounting information system
The system of collecting and processing transaction data and communicating financial information to decision makers. -Collects and processes transaction data -Communicates financial information to decision makers
If a company purchases equipment for $40,000 by issuing a note payable:
Total assets will increase by $40,000.
If a company purchases equipment for $60,000 cash:
Total assets will remain the same.
A business entity is regarded as separate from the personal activities of its owners whether it is a sole proprietorship, a partnership, or a corporation.
True
A business is an accounting entity separate from its owners, regardless of whether it is a sole proprietorship, a partnership, or a corporation.
True
A transaction that causes a decrease in an asset may also cause an increase in another asset, a decrease in a liability, or a decrease in owners' equity.
True
Articulation between the financial statements mean that they relate closely to each other.
True
Assets are resources owned by a business and provide future services or benefits to the business.
True
Financing activities for corporations include borrowing money and selling shares of their own stock.
True
If a company purchases equipment by issuing a note payable, its total assets will increase.
True
It is not unusual for an entity to report a significant increase in cash from operating activities, but a decrease in the total amount of cash.
True
Notes payable and accounts payable are written promises to pay an amount owed by a certain date. Note payable generally have interest by accounts payable do not.
True
Operating activities involve putting the resources of the business into action to generate a profit.
True
The balance sheet reports assets and claims to those assets at a specific point in time.
True
The income statement provides a link between two balance sheets by showing how net income (or loss) has changed owners' equity from one balance sheet date to the next.
True
The information needs and questions of external users vary considerably.
True
The liability of corporate stockholders is limited to the amount of their investment.
True
The owner of a sole proprietorship is personally liable for the debts of the business, whereas the stockholders of a corporation are not personally liable for the debts of the business.
True
The practice of showing assets on the balance sheet at their cost rather than at their current market value is explained in part by the fact that cost is supported by objective evidence that can be verified by independent experts.
True
The primary purpose of statement of cash flows is to provide information about the cash receipts and cash payments of a company for a specific period of time.
True
The purchase of an asset such as office equipment, either for cash or on credit, causes no change in the owners' equity.
True
Total assets always equal total liabilities plus total owner's equity.
True
Total assets less total liabilities always equal total owners' equity.
True
The liability created by a business when it purchases coffee beans and coffee cups on credit from suppliers is termed a(n)
account payable
Journal
An accounting record in which transactions are initially recorded in chronological order. -Transactions are initially recorded in chronological order in a journal before being transferred to the accounts. -The journal shows the debit and credit effects on a specific accounts for each transaction. -The journal makes several significant contributions to the recoding process: 1) It disclose in one place the complete effect of a transaction. 2) It provides a chronological record of transactions. 3) It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared.
Account
An individual accounting record of increases and decreases in specific asset, liability, stockholders' equity, revenue or expense items. -An account is an individual accounting record of increase and decrease in a specific asset, liability or stockholders equity item. -A company will have separate accounts for such items as cash, salaries expense, account payable and so on.
The principle of adequate disclosure means that a company should dislclose;
Any financial facts that a reasonable informed person would consider necessary for the proper interpretation of the financial statements.
The way in which financial statements relate is known as:
Articulation
Expanded accounting equation
Assets= Liabilities + Stockholders Equity ->(Common Stock)+(Retained earnings)-> (Revenues)-(Expenses)-(Dividends)
A net loss results from having more liabilities than revenues.
False
Any business event that might affect the future probability of a business should be reported in its balance sheet.
False
In a business organized as a corporation, it is necessary to list the equity of each stockholder on the Statement of Cash Flows.
False
Investing activities involve collecting the necessary funds to support the business.
False
Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford.
False
Management of a business firms are the only people who need accounting information.
False
Net income for the period if determined by subtracting total expenses and dividends from revenues.
False
The accounting equation can be stated as "assets plus liabilities equal owners' equity."
False
The collection of an account receivable will cause total assets to increase.
False
The cost principle states that the activities of an entity should be kept separate from those of its owner.
False
The economic resources that are owned by a business are called stockholders' equity.
False
The going concern principle assumes that the business will not continue indefinitely.
False
When a business borrows money from a bank, the immediate effect is an increase in total assets and owners' equity.
False
A balance sheet:
Shows the assets, liabilities, and owners' equity of a business entity, values in conformity with generally accepted accounting principles.
Ledger
The group of accounts maintained by a company. -The entire group of accounts maintained by a company is called ledger.
Two primary external users of accounting information are investors and creditors.
True
External users want answers to all of the following questions except.
Will the company be able to afford employee pay raises this year?
The purchase of equipment is an example of a financing activity.
False
If total assets equal $120,000 and total liabilities equal $90,000, the total owners' equity must equal:
$ 30,000
If total assets equal $210,000 and total owners' equity equal $60,000, then total liabilities must equal:
$150,000
Which type of corporate information is readily available to investors?
Amount of net income retained in the business
The nature of an asset is best described as:
An economic resource owned by a business and expected to benefit future operations.
