Financial and Managerial Accounting, 8e (Wild)
Chapter 1 Accounting in Business
1) Accounting is an information and measurement system that identifies, records, and
communicates an organization’s business activities.
2) Recordkeeping, or bookkeeping, is the recording of transactions and events, either manually
or electronically. This is just one part of accounting.
3) An accounting system captures relevant data about transactions and then classifies, records,
and reports data.
4) Financial accounting is the area of accounting aimed at serving external users by providing
them with general-purpose financial statements.
5) Internal users of accounting information do not directly run the organization and have limited
access to its accounting information.
6) Auditors verify the effectiveness of internal controls.
7) External auditors examine financial statements to verify that they are prepared according to
generally accepted accounting principles.
8) External users include lenders, shareholders, customers, and regulators.
9) Regulators often have legal authority over certain activities of organizations.
10) Internal users include lenders, shareholders, brokers and nonexecutive employees.
11) Opportunities in accounting include auditing, consulting, market research, and tax planning.
12) Ethics is defined as maximizing personal wealth, regardless the cost.
13) The Sarbanes-Oxley Act (SOX) requires documentation and verification of internal controls.
It also emphasizes effective internal controls.
14) The fraud triangle asserts that the three factors that must exist for a person to commit fraud
are opportunity, pressure, and rationalization.
15) Management is not responsible for implementing internal controls and does not need to issue
a report on internal controls.
16) A partnership is a business owned by two or more people.
17) Owners of a corporation are called shareholders or stockholders.
18) In the partnership form of business, the owners are called stockholders.
19) The balance sheet shows a company’s net income or loss over a period of time.
20) The Financial Accounting Standards Board (FASB) is a group tasked with setting generally
accepted accounting principles (GAAP).
21) The business entity principle means that accounting information reflects a presumption that
the business will continue operating instead of being closed or sold.
22) General principles are the basic assumptions, concepts, and guidelines for preparing financial
statements. GAAP aims to make information relevant and representationally faithful.
23) The business entity assumption means that a business is accounted for separately from other
business entities, including its owner or owners.
24) As a general rule, revenues should not be recognized in the accounting records when earned,
but rather when cash is received.
25) Specific accounting principles are basic assumptions, concepts, and guidelines for preparing
financial statements and arise out of long-used accounting practice.
26) Limited liability and indefinite business life are characteristics of a corporation.
27) A sole proprietorship is a business with multiple owners.
28) Unlimited liability and separate taxation of the business are advantages of a sole
proprietorship.
29) A partnership must pay an additional business income tax.
30) Objectives, qualitative characteristics, elements, and recognition and measurement are
components of the FASB conceptual framework.
31) Objectivity means that financial information is supported by independent, unbiased evidence;
it demands more than a person’s opinion.
32) The going-concern assumption presumes that a business will continue operating instead of
being closed or sold.
33) The measurement principle prescribes that accounting information is based on subjective
opinion rather than cost.
34) The monetary unit assumption means that companies should express transactions in terms
such as “a lot” or “very little.”
35) The International Accounting Standards Board (IASB) issues International Financial
Reporting Standards (IFRS) that identify preferred accounting practices.
36) A limited liability company offers the limited liability of a partnership or proprietorship and
the tax treatment of a corporation.
37) A limited liability company offers the limited liability of a corporation and the tax treatment
of a partnership or proprietorship.
38) The Securities and Exchange Commission (SEC) is a U.S. government agency that oversees
proper use of GAAP by companies that sell stock and debt to the public.
39) The four common forms of business ownership include sole proprietorship, partnership,
corporation, and non-profit.
40) The four common forms of business ownership include sole proprietorship, partnership,
limited liability company (LLC), and corporation.
41) The three major types of business activities are operating, financing, and investing.
42) Planning is a part of each business activity (operating, investing, and financing), and gives
each activity meaning and focus.
43) Financing activities provide the resources organizations use to pay for resources such as
land, buildings, and equipment.
44) Investing activities include long-term borrowing and repaying of cash from lenders.
45) Investing activities are the acquiring and disposing of resources that an organization uses to
acquire and sell its products or services.
46) Owner financing refers to resources contributed by creditors or lenders.
47) Revenues are increases in equity (via net income) from a company’s sales of products and
services to customers.
48) A net loss occurs when revenues exceed expenses.
49) Net income occurs when revenues exceed expenses.
50) Liabilities are owners’ claims on assets.
51) Assets are the resources a company owns or controls that are expected to yield future
benefits.
52) Dividends are subtracted as expenses in the calculation of net income.
53) The accounting equation can be restated as: Assets − Equity = Liabilities.
55) Stock issuances are increases in equity from the sale of products or services.
56) Every business transaction leaves the accounting equation in balance.
57) An external transaction is an exchange within an entity that may or may not affect the
accounting equation.
58) From an accounting perspective, an event is a happening that affects the accounting equation,
but cannot be measured.
59) Stockholders’ equity is increased when cash is received from customers in payment of
previously recorded accounts receivable.
60) Stockholder investments increase equity via net income.
61) Return on assets is often stated in ratio form as the amount of average total assets divided by
revenue.
62) Return on assets is often stated in ratio form as the amount of income divided by assets
invested.
63) Return on assets is useful in evaluating management, analyzing and forecasting profits, and
planning activities.
64) Arrow’s net income of $120 million and average total assets of $1,500 million results in a
return on assets of 8%.
65) Risk is the uncertainty about the return we will earn.
66) Generally, the lower the risk, the higher the return that can be expected.
67) U.S. Government Treasury bonds provide low return and low risk to investors.
68) The four basic financial statements include the balance sheet, income statement, statement of
retained earnings, and statement of cash flows.
69) An income statement reports on investing and financing activities.
70) A balance sheet covers activities over a period of time such as a month or year.
71) The income statement describes revenues earned and expenses incurred along with the
resulting net income or loss over a specified period of time.
72) The statement of cash flows shows the net effect of revenues and expenses for a reporting
period.
73) The income statement shows the financial position of a business on a specific date.
74) The first section of the income statement reports cash flows from operating activities.
75) The balance sheet is based on the accounting equation.
76) Investing activities involve the buying and selling of assets such as land and equipment that
are held for long-term use in the business.
77) Operating activities include long-term borrowing and repaying cash from lenders,
stockholder investments and dividends paid to stockholders.
78) The purchase of supplies appears on the statement of cash flows as an investing activity
because it involves the purchase of assets.
79) The income statement reports on operating activities at a point in time.