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Chapter 1
ACCOUNTING IN BUSINESS
1. Accounting is an information and measurement system that identifies, records, and
communicates relevant, reliable, and comparable information about an organization's business
activities.
2. Bookkeeping is the recording of transactions and events and is only part of accounting.
3. An accounting information system communicates data to help businesses make better
decisions.
4. Managerial accounting is the area of accounting that provides internal reports to assist the
decision making needs of internal users.
5. Internal operating activities include research and development, distribution, and human
resources.
6. The primary objective of financial accounting is to provide general purpose financial
statements to help external users analyze and interpret an organization's activities.
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 managers.
11. Opportunities in accounting include auditing, consulting, market research, and tax
planning.
12. Identifying the proper ethical path is easy.
13. The Sarbanes-Oxley Act (SOX) requires each issuer of securities to disclose whether is
has adopted a code of ethics for its senior financial officers and the contents of that code.
14. The fraud triangle asserts that there are three factors that must exist for a person to commit
fraud; these factors are opportunity, pressure, and rationalization.
15. The Sarbanes-Oxley Act (SOX) does not require public companies to apply both
accounting oversight and stringent 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 due to earnings activities over a
period of time.
20. The Financial Accounting Standards Board is the private group that sets both broad and
specific accounting principles.
21. The business entity principle means that a business will continue operating for an
indefinite period of time.
22. Generally accepted accounting principles are the basic assumptions, concepts, and
guidelines for preparing financial statements.
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 until it is
received in cash.
25. Specific accounting principles are basic assumptions, concepts, and guidelines for
preparing financial statements and arise out of long-used accounting practice.
26. General accounting principles arise from long-used accounting practices.
27. A sole proprietorship is a business owned by one or more persons.
28. Unlimited liability is an advantage of a sole proprietorship.
29. Understanding generally accepted accounting principles is not necessary to use and
interpret financial statements.
30. The International Accounting Standards board (IASB) has the authority to impose its
standards on companies around the world.
31. Objectivity means that financial information is supported by independent unbiased
evidence.
32. The idea that a business will continue to operate instead of being closed or sold underlies
the going-concern assumption.
33. According to the cost principle, it is preferable for managers to report an estimate of an
asset's value.
34. The monetary unit assumption means that all international transactions must be expressed
in dollars.
35. The International Accounting Standards Board (IASB) is the government group that
establishes reporting requirements for companies that issue stock to the public.
36. A limited liability company offers the limited liability of a partnership or proprietorship
and the tax treatment of a corporation.
37. The Securities and Exchange Commission (SEC) is a government agency that has legal
authority to establish GAAP.
38. The three common forms of business ownership include sole proprietorship, partnership,
and non-profit.
39. The three major types of business activities are operating, financing, and investing.
40. Planning is defining an organization's ideas, goals, and actions.
41. Strategic management is the process of determining the right mix of operating activities
for the type of organization, its plans, and its markets.
42. Planning activities are the means an organization uses to pay for resources like land,
buildings, and equipment to carry out its plans.
43. Investing activities are the acquiring and disposing of resources that an organization uses
to acquire and sell its products or services.
44. Owner financing refers to resources contributed by creditors or lenders.
45. Revenues are increases in equity from a company's earning activities.
46. A net loss occurs when revenues exceed expenses.
47. Net income occurs when revenues exceed expenses.
48. Liabilities are the owner's claim on assets.
49. Assets are the resources of a company and are expected to yield future benefits.
50. Owner’s withdrawals are expenses.
51. The accounting equation can be restated as: Assets - Equity = Liabilities.
53. Owner's investments are increases in equity from a company's earnings activities.
54. Every business transaction leaves the accounting equation in balance.
55. An external transaction is an exchange of value within an organization.
56. From an accounting perspective, an event is a happening that affects the accounting
equation, but cannot be measured.
57. Owner's equity is increased when cash is received from customers in payment of
previously recorded accounts receivable.
58. An owner's investment in a business always creates an asset (cash), a liability (note
payable), and owner's equity (investment.)
59. Return on assets is often stated in ratio form as the amount of average total assets divided
by income.
60. Return on assets is also known as return on investment.
61. Return on assets is useful to decision makers for evaluating management, analyzing and
forecasting profits, and in planning activities.
62. Arrow’s net income of $117 million and average assets of $1,400 million results in a
return on assets of 8.36%.
63. Return on assets reflects the effectiveness of a company’s ability to generate profit
through productive use of its assets.
64. Risk is the uncertainty about the return we expect to earn.
65. Generally the lower the risk, the lower the return that can be expected.
66. U. S. Government Treasury bonds provide high return and low risk to investors.
67. The four basic financial statements include the balance sheet, income statement, statement
of owner's equity, and statement of cash flows.
68. An income statement reports on investing and financing activities.
69. A balance sheet covers a period of time such as a month or year.
70. The income statement displays revenues earned and expenses incurred over a specified
period of time due to earnings activities.
71. The statement of cash flows shows the net effect of revenues and expenses for a reporting
period.
72. The income statement shows the financial position of a business on a specific date.
73. The first section of the income statement reports cash flows from operating activities.
74. The balance sheet is based on the accounting equation.
75. Investing activities involve the buying and selling of assets such as land and equipment
that are held for long-term use in the business.
76. Operating activities include long-term borrowing and repaying cash from lenders, and
cash investments or withdrawals by the owner.
77. The purchase of supplies appears on the statement of cash flows as an investing activity
because it involves the purchase of assets.
78. The income statement reports on operating activities at a point in time.
