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Chapter 1
Accounting in Business
QUESTIONS
1. The purpose of accounting is to provide decision makers with relevant and reliable
2. Technology reduces the time, effort, and cost of recordkeeping. There is still a demand for
people who can design accounting systems, supervise their operation, analyze complex
3. External users and their uses of accounting information include: (a) lenders, to measure the
risk and return of loans; (b) shareholders, to assess whether to buy, sell, or hold their shares;
4. Business owners and managers use accounting information to help answer questions such as:
What resources does an organization own? What debts are owed? How much income is
5. Service businesses include: Standard and Poor’s, Dun & Bradstreet, Merrill Lynch,
6. The internal role of accounting is to serve the organization’s internal operating functions. It
does this by providing useful information for internal users in completing their tasks more
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
8. Marketing managers are likely interested in information such as sales volume, advertising
10. Some accounting-related professions include consultant, financial analyst, underwriter,
11. Ethics rules require that auditors avoid auditing clients in which they have a direct
12. In addition to preparing tax returns, tax accountants help companies and individuals plan
13. The objectivity concept means that financial statement information is supported by
14. This treatment is justified by both the cost principle and the going-concern assumption.
15. The revenue recognition principle provides guidance for managers and auditors so they know
when to recognize revenue. If revenue is recognized too early, the business looks more
16. Business organizations can be organized in one of three basic forms: sole proprietorship,
partnership, or corporation. These forms have implications for legal liability, taxation,
continuity, number of owners, and legal status as follows:
Proprietorship Partnership Corporation
Business entity yes yes yes
Legal entity no no yes
*Proprietorships and partnerships that are set up as LLCs provide limited liability.
17. (a) Assets are resources owned or controlled by a company that are expected to yield future
18. Equity is increased by investments from the owner and by net income (which is the excess of
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
19. Accounting principles consist of (a) general and (b) specific principles. General principles are
the basic assumptions, concepts, and guidelines for preparing financial statements. They stem from
20. Revenue (or sales) is the amount received from selling products and services.
21. Net income (also called income, profit or earnings) equals revenues minus expenses (if
22. The four basic financial statements are: income statement, statement of owner’s equity,
24. Rent expense, utilities expense, administrative expenses, advertising and promotion expenses,
28. Return on assets, also called return on investment, is a profitability measure that is useful in
evaluating management, analyzing and forecasting profits, and planning activities. It is
29A. Return refers to income, and risk is the uncertainty about the return we expect to make. The
30B. Organizations carry out three major activities: financing, investing, and operating. Financing
provides the means used to pay for resources. Investing refers to the acquisition and disposing
31B. An organization’s financing activities (liabilities and equity) pay for investing activities
(assets). An organization cannot have more or less assets than its liabilities and equity
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
32. The dollar amounts in Apple’s financial statements are rounded to the nearest million
34. Confirmation of Samsung’s accounting equation follows (numbers in KRW millions):
Assets = Liabilities + Equity
35. The independent auditor for Apple, is Ernst & Young, LLP. The auditor expressly states that
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
