College Accounting chapter 1 test

Business

an organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers

Objective of most businesses

to earn a profit

Types of businesses

service, retail, manufacturing

Service businesses

provide services rather than products to customers (ex. Delta Air Lines, The Walt Disney Company)

Retail businesses

sell products they purchase from other businesses to customers (ex. Walmart Inc., Target Corporation)

Manufacturing businesses

change basic inputs into products that are sold to customers (ex. Ford Motor Company, Merck & Co., Inc.)

Business activities

operating, investing, financing

Operating activities

activities by which the company generates revenues from customers

Investing activities

activities by which a company acquires long-term assets for use in the operating activities of the company

Financing activities

activities by which the company obtains funds to start and operate the company

Role of accounting in business

to provide information for managers to use in operating the business

Accounting

An information system that provides reports to users about the economic activities and condition of a business (the “language of business”)

How do accountants provide information to users?

1. Identify users.

2. Assess users’ information needs.

3. Design the accounting information system to meet users’ needs.

4. Record economic data about business activities and events.

5. Prepare accounting reports for users.

Users of accounting information

internal users (managers, employees) & external users (investors, creditors, customers, government)

Managerial accounting (management accounting)

the area of accounting that provides internal users with information

Objective of managerial accounting

to provide relevant and timely information for managers’ and employees’ decision-making needs

Private accounting

managerial accountants employed by a business

Financial accounting

the area of accounting that provides external users with information

Objective of financial accounting

to provide relevant and timely information for the decision-making needs of users outside of the business

General-purpose financial statements

a type of financial accounting report that is distributed to external users

Ethics

moral principles that guide the conduct of individuals

Public accounting

accountants and their staff who provide services on a fee basis

Certified Public Accountants (CPAs)

public accountants who have met a state’s education, experience, and examination requirements

American Institute of Certified Public Accountants (AICPA)

provides information and resources for students interested in accounting

Generally Accepted Accounting Principles (GAAP)

a collection of accounting standards, principles, and assumptions that define how financial information will be reported

Accounting standards

the rules that determine the accounting for individual business transactions

Accounting principles/assumptions

provide the framework upon which accounting standards are constructed

Financial Accounting Standards Board (FASB)

has the primary responsibility for developing accounting standards within the United States

Securities and Exchange Commission (SEC)

an agency of the U.S. government, has authority over the accounting and financial disclosures for companies whose shares of ownership (stock) are traded and sold to the public

International Accounting Standards Board (IASB)

creates accounting standards and principles for people outside the United States

Characteristics of financial reports

relevance & faithful representation

Relevant information

has the potential to impact decision making

Faithful representation

means that the information accurately reflects an entity’s economic activity or condition

Characteristics of relevant and faithful representation

comparability, verifiability, timeliness, understandability

Comparability

includes consistent reporting, allows users to identify similarities and differences among reported items

Verifiability

allows users to agree on the meaning of reported items

Timeliness

requires distribution of financial reports in time to influence a user’s decision

Understandability

requires clear and concise financial reports that facilitate user interpretation and analysis

Assumptions

monetary unit, time period, business entity, going concern

Monetary unit assumption

requires that financial reports be expressed in a single money unit, or currency

Time period assumption

allows a company to report its economic activities on a regular basis for a specific period of time

Fiscal year

the annual accounting period adopted by a company

Natural business year

a fiscal year that ends when business activities have reached the lowest point in its annual operating cycle, which allows more time to prepare financial reports

Business entity assumption

limits the economic data in financial reports to that directly related to the activities of the business

Going concern assumption

requires that financial reports be prepared assuming that the entity will continue operating into the future

Forms of business entities

proprietorship, partnership, corporation, limited liability company (LLC)

Proprietorship

owned by one individual

Partnership

owned by two or more individuals

Corporation

organized under state or federal statutes as a separate legal taxable entity

Limited liability company (LLC)

combines the attributes of a partnership and a corporation