the process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties
Define:
accounting system
a process designed to accumulate, classify, and summarize financial data
the review of financial statements to assess their fairness and adherence to generally accepted accounting principles
an independent accountant's review of a firm's financial statements
Define:
certified public accountant [CPA]
an independent accountant who provides accounting services to the public for free
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
T or F:
In a corporation stockholders are responsible for the debts or taxes of the business
False; in a corporation stockholders are not responsible for the debts or taxes of the business
one to whom money is owed
Define:
discussion memorandum
an explanation of a topic under consideration by the Financial Accounting Standards Board
a business or organization whose major purpose is to produce a profit for its owners
anything having its own separate identity, such as an individual, a town, a university, or a business
a proposed solution to a problem being considered by the Financial Accounting Standards Board
Define:
financial statements
periodic reports of a firm's financial position or operating results
Define:
generally accepted accounting principles [GAAP]
accounting standards developed and applied by professional accountants
Define:
governmental accounting
accounting work performed for a federal, state, or local governmental unit
Define:
international accounting
the study of accounting principles used by different countries
Define:
management advisory services
services designed to help clients improve their information systems or their business performance
Define:
managerial accounting [also called private accounting]
accounting work carried on by an accountant employed by a single business in industry
a business entity owned by two or more people who are legally responsible for the debts and taxes of the business
Define:
public accountants
members of firms that perform accounting services for other companies
Define:
separate entity assumption
the concept of keeping a firm's financial records separate from the owner's personal financial records
a nonprofit organization, such as a city, public school, or public hospital
Define:
sole proprietorship
a business entity owned by one person who is legally responsible for the debts and taxes of the business
Define:
Statements of Financial Accounting Standards
accounting principles established by the Financial Accounting Standards Board
certificates that represent ownership of a corporation
Define:
stockholders [also called shareholders]
the owners of a corporation
a service that involves tax compliance and tax planning
What are the three areas that accountants usually practice in?
public accounting, managerial accounting, governmental accounting
What three services do public accountants usually offer?
auditing, tax accounting, management advisory services
What are the "Big Four" public accounting firms in the US?
- Deloitte & Touche
- Ernst & Young
- KPMG
- PricewaterhouseCoopers
Identify the users of financial information
- owners and managers
- suppliers
- banks
- tax authorities
- regulatory agencies and investors
- customers
- employees and unions
What are the responsibilities of the Securities and Exchange Commission [SEC]?
- * oversee the financial information provided by publicly owned corporations to their investors and potential investors
- * reviews the accounting methods used by publicly owned corporations
Why was the Sarbanes-Oxley Act passed?
in response to the wave of corporate accounting scandals
The Sarbanes-Oxley Act creates a five-member Public Company Accounting Oversight Board. What is the responsibility of the Board?
they have investigative and enforcement powers to oversee the accounting profession and to discipline corrupt accountants and auditors
Who oversees the Public Company Accounting Oversight Board?
the Securities and Exchange Commission
What does the Sarbanes-Oxley Act prohibit accountants from doing?
- accountants cannot offer a broad range of consulting services to publicly traded companies that they audit
- accounting firms are required to change the lead audit or coordinating partner and the reviewing partner for a company every five years
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
What are the names of three accounting job positions?
clerk, bookkeeper, accounant
Which organization has the final say on financial accounting issues faced by publicly owned corporations?
B. Securities and Exchange Commission
One requirement for becoming a CPA is to pass the:
B. Uniform CPA Examination
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 are the three major legal forms of a business entity?
sole proprietorship, partnership, and corporation
T or F:
The life of the business ends when the owner is no longer willing or able to keep the business going
True
T or F:
The owner of a sole proprietorship is legally responsible for the debts and taxes of the business.
True
T or F:
When paying taxes, the owner's income and the income of the business are separated to compute the total tax responsibility of the owner.
False; When paying taxes, the owner's income and the income of the business are combined to compute the total tax responsibility of the owner.
T or F:
In a partnership, when a partner leaves, the partnership is dissolved and a new partnership may be formed with the remaining partners.
True
T or F:
Partners are individually, and as a group, responsible for the debts and taxes of the partnership.
True
What is the only form of business that is a separate legal entity?
a corporation
The Limited Liability Partnership Act allows a Limited Liability Partnership [LLP] to be formed. What is an LLP?
a general partnership that provides some limited liability for all partners
T or F:
Under an LLP, partners are liable for the actions of another partner.
False; under an LLP partners are not liable for the actions of another partner. They are responsible and have liability for their own actions and the actions of those under their control of supervision.
What represents the ownership of a corporation?
stock
Corporations may be privately or publicly owned. How are stock exchanged in each type?
- Stock of privately owned [or closely held] corporations is not traded on an exchange
- Stock of publicly owned is bought and sold on stock exchanges
What are Subchapter S Corporations [also known as S corporations]?
entities formed as corporations and are to be treated as a partnership so the corporation pays no income tax
How do business entities end?
- sole proprietorship ends when the owner dies or discontinues the business
- partnership ends on the death or withdrawal of a partner
- corporation does not end when ownership changes
T or F:
Corporate owners [stockholders] are responsible for the debts or taxes of the corporation.
False; Corporate owners [stockholders] are not responsible for the debts or taxes of the corporation.
Who has the final say on matters of financial reporting by publicly owned corporations?
the Securities and Exchange Commission
Who developed the GAAP?
the Financial Accounting Standards Board [FASB]
What are the steps the FASB follows before issuing Statements of Financial Accounting Standards?
- the FASB writes a discussion memorandum to explain the topic being considered
- public hearings are held where interested parties can express their opinions, either orally or in writing
- the FASB releases and exposure draft, which describes the proposed statement
- the FASB receives and evaluates public comments about the exposure draft
- FASB members vote n the statement
- Note: at least four members must approve for the statement to be issued
What is the International Accounting Standards Board [IASB, formally IASC] responsible for?
- deals with issues caused by the lack of uniform accounting principles
- makes recommendations to enhance comparability of reporting practices
Why are generally accepted accounting principles needed?
GAAP help to ensure that financial information fairly presents a firm's operating results and financial position
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.
A nonprofit organization such as a public school is a[n]:
D. social entity
An organization that has two or more owners who are legally responsible for the debts and taxes of the business is a:
D. partnership
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
What are the three types of business entities?
sole proprietorship, partnership, and corporation
-
What does the accounting process involve?
recording, classifying, summarizing, interpreting, and communicating financial information about a business
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
T or F:
The purpose of accounting is to provide financial information about an economic or social entity.
True
T or F:
An accounting system is designed to accumulate and classify data about a firm's financial affairs and summarize it in the general journal.
False
T or F:
In a sole proprietorship, the owner is responsible for the debts of the business if the firm is unable to pay.
True
T or F:
Currently, generally accepted accounting principles are developed by the American Institute of Certified Public Accountants [AICPA].
False
T or F:
The Securities and Exchange Commission [SEC] requires that publicly owned corporations submit financial statements to it each year.
True
T or F:
Anyone can invest in a closely held corporation.
False
T or F:
The separate entity assumption applies only to the corporate form of business.
False
T or F:
As the first step in the development of generally accepted accounting principles, the FASB writes an exposure draft, which explains the topic under consideration.
False
T or F:
Public accountants work on the staff of federal, state, or local governmental units.
False
T or F:
Accounting is defined as the process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties.
True
Which of the following is NOT an area in which accountants usually practice?
B. Industrial Accounting
An example of an economic entity is:
B. a business
Which of the following is NOT a type of information communicated by the financial statements?
A. the types of products and services the business provides
The Financial Accounting Standards Board is responsible for:
C. developing generally accepted accounting principles
The financial affairs of a business and the financial affairs of the owners should be:
A. kept totally separate
The corporations whose stock can be bought and sold on stock exchanges and in over-the-counter markets are referred to as:
B. publicly owned corporations
A firm issues periodic reports called:
A. financial statements
The FASB develops Statements of Financial Accounting Standards in the following order:
A. issues a discussion memorandum, obtains responses to the discussion memorandum, issues an exposure draft, obtains responses to the exposure draft, issues a statement of principle
The review of financial statements to assess their fairness and adherence to GAAP is:
D. auditing
An independent accountant who provides accounting services to the public for a fee is a:
D. CPA
The review of financial statements to assess their fairness and adherence to GAAP is
Accounting Chap 1 Terms.
Fairness has an important place in the practice of accounting. It is stated in the auditor's report that the financial statements present fairly the results of operations and cash flows for the year ended in conformity with generally accepted accounting principles.
GAAP is a term that refers to a set of accounting rules, standards, and practices used to prepare and standardize financial statements that are issued by a company. The goal of these standards is to help investors and creditors better compare companies by establishing consistency and transparency.
GAAP compliance makes the financial reporting process transparent and standardizes assumptions, terminology, definitions, and methods. External parties can easily compare financial statements issued by GAAP-compliant entities and safely assume consistency, which allows for quick and accurate cross-company comparisons.