The Building Blocks of Accounting

What are the standard-setting bodies that determine the guidelines of the GAAP?

1. SEC 2. FASB 3. IASB

In what year was the Sarbanes-Oxley Act passed?

2002.

What type of business is owned by two or more persons associated as partners?

A partnership.

How much money (capital) is necessary to start in business as a proprietorship?

A relatively small amount.

What is a partnership agreement?

A written or oral agreement between the members of the a partnership that sets forth such terms as initial investment, duties of each partner, division of net income (or net loss), and settlement to be made upon death or withdrawal of a partner.

What does a well-functioning economy depend on?

Accurate and dependable financial reporting.

The SOX Act has also increased the oversight role of the ___.

Board of Directors.

As a result of the Sarbanes-Oxley Act, top management must now do what?

Certify the accuracy of financial information.

A business organized as a separate legal entity under state corporation laws is a ___.

Corporation

The economic entity assumption requires that the activities of the entity be kept ___ and ___ from the activities of its owner and all other economic activities.

Distinct and Separate.

Any organization or unit in society is an ___.

Economic entity.

List some of the companies involved in recent financial scandals.

Enron, WorldCom, HealthSOuth, and AIG to name a few.

Standards of conduct by which one's actions are judged as right or wrong, honest or dishonest, fair or not fair.

Ethics

What is fair value?

Fair value is the price received to sell an asset or settle a liability

A private organization that establishes generally accepted accounting principles (GAAP) in the U.S.

Financial Accounting Standards Board (FASB)

Penalties for ___ are much more severe now since the SOX Act has been passed.

Fraudulent financial activity.

The common set of standards that indicate how to report economic events.

Generally Accepted Accounting Principles (GAAP)

The accounting profession has attempted to develop a set of standards that are ___ and ___.

Generally accepted and universally practiced.

The cost principle is also known as the ___.

Historical principle.

An accounting standard-setting body that issues standards adopted by many countries outside of the U.S.

International Accounting Standards Board (IASB)

What are the international accounting standards issued by the IASB called?

International Financial Reporting Standards (IFRS).

Partnerships also include professional practices. List a few examples.

Lawyers, doctors, architects, and certified public accountants.

The monetary unit consumption requires that companies include in the accounting records only transaction data that can be expressed in terms of ___.

Money.

A proprietorship is generally owned by ___.

One person, often the manager/operator of the business.

The SOX Act increased independence for whom?

Outside auditors who review the accuracy of corporate financial statements.

List some examples of small service-type businesses.

Plumbing companies, beauty salons, and auto repair shops.

Who must follow the accounting standards set by the FASB?

Public companies.

Which type of businesses are partnerships often used to organize?

Retail and service-type businesses

A government external agency that oversees U.S. financial markets and accounting standard-setting bodies.

Securities and Exchange Commission (SEC)

Which type of businesses are often considered proprietorships?

Small service-type businesses.

What does effective financial reporting depend on?

Sound ethical behavior.

How much liability do stockholders have? What does this mean?

Stockholders have limited liability. This means that they are not personally liable for the debts of the corporate entity.

Who are the holders of the shares?

Stockholders.

What doe the SEC rely on the FASB to do?

The SEC relies on the FASB to develop accounting standards.

What does the cost principle dictate?

The cost principle dictates that companies record assets at their cost.

What are the two measurement principles generally used by the GAAP?

The cost principle or the fair value principle.

Which measurement principle is the monetary unit vital to and why?

The cost principle. It enables accounting to quantify or measure economic events (in terms of money).

What does the fair value principle state?

The fair value principle states that assets and liabilities should be reported at fair value.

What are the two main assumptions that provide a foundation for the accounting process?

The monetary unit assumption and the economic entity assumption.

Who receives any profits, suffers any losses, and is personally liable for all debts of the business in a proprietorship.

The proprietor (owner).

What are the three forms of business ownership?

The three forms of business ownership are proprietorship, partnership, and corporation.

What is the intent of the Sarbanes-Oxley Act?

To reduce unethical corporate behavior and decrease the likelihood of future corporate scandals.

A corporation is an ownership dived into divided into ___.

Transferable shares of stock

Why did congress pass the Sarbanes-Oxley Act?

U.S. regulators and lawmakers were concerned that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting.

How much personal liability does each partner generally have for the debts of the partnership?

Unlimited.