Chapter 1 Concepts

What are 4 types of external users of accounting information?

(a) lenders, to measure the risk and return of loans; (b) shareholders, to assess whether to buy, sell, or hold their shares; (c) directors, to oversee their interests in the organization; (d) employees and labor unions, to judge the fairness of wages and assess future employment opportunities; and (e) regulators, to determine whether the organization is complying with regulations. Other users are voters, legislators, government officials, contributors to nonprofits, suppliers and customers.

What are some accounting related professions?

Accounting-related professions include consultant, financial analyst, underwriter, financial planner, appraiser, FBI investigator, market researcher, and system designer.

What are three types of services offered by accounting professionals?

Auditing, management advice, tax planning, business valuation, and money management

Why is accounting described as a service activity?

Because it serves decision makers by providing information to help them make better business decisions.

Describe the three basic forms of business organization and their key characteristics?

Business organizations can be organized in one of three basic forms: sole proprietorship, partnership, or corporation. These forms have implications for legal liability, taxation, continuity, number of owners, and legal status as follows: Prop. Part Corp. Business entity yes yes yes Legal entity no no yes Limited liability no* no* yes Unlimited life no no yes Business taxed no no yes One owner allowed yes no yes

How do ethics rules affect auditor's choice of clients?

Ethics rules require that auditors avoid auditing clients in which they have a direct investment, or if the auditor's fee is dependent on the figures in the client's reports. This will prevent others from doubting the quality of the auditor's report.

What work do tax accounting professionals perform in addition to preparing tax returns?

In addition to preparing tax returns, tax accountants help companies and individuals plan future transactions to minimize the amount of tax to be paid. They are also actively involved in estate planning and in helping set up organizations. Some tax accountants work for regulatory agencies such as the IRS or the various state departments of revenue. These tax accountants help to enforce tax laws.

What type of accounting information would be useful to a Marketing Manager?

Information such as sales volume, advertising costs, promotion costs, salaries of sales personnel, and sales commissions.

What are three businesses that offer services and products?

Service businesses include: Standard and Poor's, Dun & Bradstreet, Merrill Lynch, Southwest Airlines, CitiCorp, Humana, Charles Schwab, and Prudential. Businesses offering products include Nike, Reebok, Gap, Apple Computer, Ford Motor Co., Philip Morris, Coca-Cola, Best Buy, and Circuit City.

Why study Accounting?

Technology reduces the time, effort, and cost of recordkeeping. There is still a demand for people who can design accounting systems, supervise their operation, analyze complex transactions, and interpret reports. Demand also exists for people who can effectively use computers to prepare and analyze accounting reports. Technology will never substitute for qualified people with abilities to prepare, use, analyze, and interpret accounting information

What does the concept of objectivity imply for information reported in financial statements? Why?

The objectivity concept means that financial statement information is supported by independent, unbiased evidence other than someone's opinion or imagination. This concept increases the reliability and verifiability of financial statement information.

Why is the revenue recognition principle needed? What does it demand?

The revenue recognition principle provides guidance for managers and auditors so they know when to recognize revenue. If revenue is recognized too early, the business looks more profitable than it is. On the other hand, if revenue is recognized too late the business looks less profitable than it is. This principle demands that revenue be recognized when it is both earned and can be measured reliably. The amount of revenue should equal the value of the assets received or expected to be received from the business's operating activities covering a specific time period.

A business reports its own office stationery on the balance sheet at its $400 cost, although it cannot be sold for more than $10 as scrap paper. Which accounting principle and/or assumption justifies this treatment?

This treatment is justified by both the cost principle and the going-concern assumption

Purpose of Accounting

To provide decision makers with relevant and reliable information to help them make better decisions. Examples include information for people making investments, loans, and business plans.

What is the internal role of accounting for business organizations?

To serve the organization's internal operating functions. It does this by providing useful information for internal users in completing their tasks more effectively and efficiently. By providing this information, accounting helps the organization reach its overall goals.

What are three questions business owners and managers can answer by looking at accounting information?

What resources does an organization own? What debts are owed? How much income is earned? Are expenses reasonable for the level of sales? Are customers' accounts being promptly collected?