Chapter 1

Question 1

Account payable

Answer 1

The liability created by a purchase on account.

Question 2

Account(s) receivable

Answer 2

An asset, which is a claim against the customer created by selling merchandise or services on credit.

Question 3

Accounting

Answer 3

An information system that provides reports to stakeholders about the economic activities and condition of a business.

Question 4

Accounting assumptions

Answer 4

Assumptions that provide the frame-work upon which accounting standards are constructed.

Question 5

Accounting equation

Answer 5

The equation that shows the relationship among assets, liabilities, and equity; expressed as Assets 5 Liabilities 1 Equity.

Question 6

Accounting principles

Answer 6

Principles that provide the framework upon which accounting standards are constructed.

Question 7

Accounting standards

Answer 7

The rules that determine the accounting for individual business transactions.

Question 8

Accounting Standards Codification

Answer 8

An electronic database maintained by the Financial Accounting Standards Board (FASB) that contains all of the accounting standards that make up the generally accepted accounting principles (GAAP)

Question 9

Accounting Standards Updates

Answer 9

Published changes to accounting standards that are the source of updates to the Accounting Standards Codification.

Question 10

Arm’s-length transactions

Answer 10

Transactions between two independent parties.

Question 11

Assets

Answer 11

The resources owned by a business.

Question 12

Balance sheet

Answer 12

A list of the assets, liabilities, and owner’s equity as of a specific date, usually at the close of the last day of a month or a year.

Question 13

Business

Answer 13

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

Question 14

Business entity assumption

Answer 14

A concept of accounting that limits the economic data in the accounting system to data related directly to the activities of the business.

Question 15

Business transaction

Answer 15

An economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.

Question 16

Certified Public Accountants (CPAs)

Answer 16

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

Question 17

Comparability

Answer 17

A secondary characteristic of financial information; comparability includes consistent reporting, that allows users to identify similarities and differences among reported items.

Question 18

Corporation

Answer 18

A business organized under state or federal statutes as a separate legal entity.

Question 19

Data analytics

Answer 19

The science of analyzing large amounts of raw data, sometimes called “big data,” to discover patterns, identify anomalies, or gain other useful insights for decision making.

Question 20

Earnings

Answer 20

The amount by which revenues exceed expenses.

Question 21

Equity

Answer 21

The rights of the owners of a business.

Question 22

Ethics

Answer 22

Moral principles that guide the conduct of individuals.

Question 23

Expenses

Answer 23

Amounts used to generate revenue; assets used up or services consumed in the process of generating revenues.

Question 24

Expenses recognition principle

Answer 24

A principle, sometimes called the matching principle, that requires expenses to be recorded in the same period as the related revenue; a concept of accounting in which expenses are matched with the revenue generated during a period by those expenses.

Question 25

Faithful representation

Answer 25

A characteristic of financial reports that pertains to information accurately reflecting an entity’s economic activity or condition.

Question 26

Fees earned

Answer 26

Revenue from providing services

Question 27

Financial accounting

Answer 27

The branch of accounting that is concerned with recording transactions using generally accepted accounting principles (GAAP) for a business or other economic unit and with a periodic preparation of various statements from such records.

Question 28

Financial Accounting Standards Board (FASB)

Answer 28

The authoritative body that has the primary responsibility for developing accounting principles

Question 29

Financial statements

Answer 29

Financial reports that summarize the effects of events on a business.

Question 30

Financing activities

Answer 30

Activities by which a business obtains funds to start and operate the business.

Question 31

Fiscal year

Answer 31

The annual accounting period adopted by a business.

Question 32

Generally accepted accounting principles (GAAP)

Answer 32

A collection of accounting standards, principles, and assumptions that define how financial information should be reported.

Question 33

General-purpose financial statements

Answer 33

A type of financial accounting report that is distributed to external users. The term “general purpose” refers to the wide range of decision-making needs that the reports are designed to serve.

Question 34

Going concern assumption

Answer 34

An assumption that requires that financial reports be prepared assuming that the entity will continue operating in the future

Question 35

cost principle

Answer 35

A concept of accounting that states that an asset should be recorded and maintained in the accounting records at its initial transaction price.

Question 36

historical cost principle (or cost principle)

Answer 36

A concept of accounting that states that an asset should be recorded and maintained in the accounting records at its initial transaction price.

Question 37

Income statement

Answer 37

A summary of the revenue and expenses for a specific period of time, such as a month or a year.

Question 38

Interest revenue

Answer 38

Earnings received from interest

Question 39

International Accounting Standards Board (IASB)

Answer 39

An organization that issues International Financial Reporting Standards for many countries outside the United States.

Question 40

Investing activities

Answer 40

Activities by which a business acquires long-term assets for use in the operating activities of the business.

Question 41

Liabilities

Answer 41

The rights of creditors that represent debts of the business.

Question 42

Limited liability company (LLC)

Answer 42

A business form consisting of one or more persons or entities filing an operating agree-ment with a state to conduct business with limited liability to the owners, yet treated as a partnership for tax purposes.

Question 43

Managerial accounting, or management accounting

Answer 43

The branch of accounting that uses both historical and estimated data in providing internal users (management) with information relevant to decision making.

Question 44

Manufacturing business

Answer 44

A type of business that changes basic inputs into products that are sold to individual cus-tomers.

Question 45

Measurement principle

Answer 45

A principle that requires that amounts be objective and verifiable.

Question 46

Monetary unit assumption

Answer 46

An accounting assumption that requires that financial reports be expressed in a single mone-tary unit, or currency.

Question 47

Natural business year

Answer 47

A fiscal year that ends when business activities have reached the lowest point in an annual operating cycle.

Question 48

Net income (or net profit)

Answer 48

The amount by which revenues exceed expenses.

Question 49

Net loss

Answer 49

The amount by which revenues exceed expenses.

Question 50

Operating activities

Answer 50

Activities by which a business generates revenues from customers.

Question 51

Owner’s equity

Answer 51

The rights of the owners of a proprietorship, partnership, or a limited liability company; the owner’s right to the assets of the business after all liabilities have been paid.

Question 52

Partnership

Answer 52

An unincorporated business form consisting of two or more persons conducting business as co-owners for profit.

Question 53

Prepaid expense(s)

Answer 53

Assets created by making advanced payments for expense items, such as insurance premiums or supplies, that will be used in the business in the future.

Question 54

Private accounting

Answer 54

The field of accounting whereby accountants are employed by a business firm or a not-for-profit organization.

Question 55

Profit

Answer 55

The difference between the amounts received from customers for goods or services provided and the amounts paid for the inputs used to provide the goods or services.

Question 56

Proprietorship

Answer 56

A business owned by one individual.

Question 57

Public accounting

Answer 57

The field of accounting where accountants and their staff provide services to other businesses on a fee basis.

Question 58

Public Company Accounting Oversight Board (PCAOB)

Answer 58

A new oversight body for the accounting profession that was established by the Sarbanes-Oxley Act.

Question 59

Ratio of liabilities to owner’s equity

Answer 59

A ratio used for analyzing the ability of a company to pay its creditors, computed as total liabilities divided by total owner’s (stock-holders’) equity; a solvency ratio that measures how much of the company is financed by debt and equity, computed as total liabilities divided by total owner’s (stockholders’) equity.

Question 60

Relevant

Answer 60

A characteristic of financial reports that pertains to information having the potential to impact decision making.

Question 61

Rent revenue

Answer 61

Earnings from property that is leased to others for use.

Question 62

Report form (of balance sheet)

Answer 62

A form of balance sheet with the “Liabilities” and “Owner’s Equity” sections presented below the “Assets” section.

Question 63

Retail business(es)

Answer 63

A type of business that purchases products from other businesses and sells them to customers.

Question 64

Revenue recognition principle

Answer 64

A concept of accounting that states that revenues are recorded when earned, which is when the services have been performed or products have been delivered to customers.

Question 65

Revenue(s)

Answer 65

Increases in owner’s equity as a result of providing services or selling goods to customers.

Question 66

Sales

Answer 66

How revenue from the sale of merchandise is recorded; the total amount charged customers for merchandise sold, including cash sales and sales on account.

Question 67

Sarbanes-Oxley Act (SOX)

Answer 67

An act passed by Congress to restore public confidence and trust in the financial statements of companies.

Question 68

Securities and Exchange Commission (SEC)

Answer 68

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

Question 69

Service business

Answer 69

A business providing services rather than products to customers.

Question 70

Statement of cash flows

Answer 70

A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year.

Question 71

Statement of owner’s equity

Answer 71

A summary of the changes in the owner’s equity of a business that have occurred during a specific period of time, such as a month or a year.

Question 72

Stockholders’ equity

Answer 72

The ownership rights of stockholders in a corporation; the stockholders’ rights to the assets in a corporation.

Question 73

Time period assumption

Answer 73

An accounting assumption that allows a business to report its economic activities on a regular basis for a specific period of time.

Question 74

Timeliness

Answer 74

A secondary characteristic of financial information that requires distribution of financial reports in time to influence a user’s decision.

Question 75

Understandability

Answer 75

A secondary characteristic of financial information that requires clear and concise financial reports that facilitate user interpretation and analysis.

Question 76

Verifiability

Answer 76

A secondary characteristic of financial information that allows users to agree on the meaning of reported items.