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Accounting 1; Exam 1 ~ Chapters 1, 2, 3, 4 questions with answers.
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Accounting 1; Exam 1 ~ Chapters 1, 2, 3, 4 questions with answers.
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Accounting 1; Exam 1 ~ Chapters 1, 2, 3,4 questions with answers.
Forms of business organization ANS - Sole proprietorship, partnership, and corporation
Sole proprietorship ANS - - A business owned by 1 person
- Simple to set up
- Owner controlled
- Tax advantages (no double taxation)
- Entity does not pay tax; owner does
- No limit on liability
Partnership ANS - - A business owned by 2 or more persons
- Simple to establish
- Shared control
- Tax advantages
- Broader skills and resources
- Entity does not pay tax; owners do
- Should be formalized in a written partnership agreement
Corporation ANS - - Business organized as a separate legal entity owned by stockholders
- Easier to transfer ownership
+ Shares of stock are easy to sell (transfer
ownership), so buying stock is more attractive
than investing
- Easier to raise funds
+ Individuals can become stockholders by
investing relatively small amounts of money
,- Many businesses start as sole proprietorships and partnerships, and then incorporate
- Corporate stockholders generally pay higher taxes, but they have no personal legal liability
Accounting ANS - The information system that identifies, records, and communicates the economic
events of an organization to interested users
Internal users ANS - - Managers who plan, organize, and run a business
- Include marketing managers, production supervisors, finance directors, and company officers
- Must answer many important questions in order to run the business --> Need detailed information on
a timely basis
External users ANS - - Include
+ Investors (use accounting information to make
decisions regarding stock)
+ Creditors (suppliers and bankers use
accounting info to evaluate the risks of selling
on credit or lending money)
Sarbanes-Oxley Act (SOX) ANS - Passed to reduce unethical corporate behavior and decrease the
likelihood of future corporate scandals
Effects:
- Top management must now certify the accuracy of financial information
- Penalties for fraudulent financial activity are more severe
- Increased both the independence of the outside auditors who review the accuracy of corporate
financial statements and increased the oversight role of boards of directors
Accounting information system ANS - Keeps track of the results of 3 business activities
--> Financing activities, investing activities, and operating activities
, The system of collecting and processing transaction data and communicating financial information to
decision makers
Factors that shape this:
The nature of the company's business, the types of transactions, the size of the company, the volume of
data, and the information demands of management and others
Financing activities ANS - - 2 primary sources of outside funds for corporations are borrowing money
(debt financing) and issuing/selling shares of stock in exchange for cash (equity financing)
- To borrow money, the corporation can take out a loan at a bank, or it can borrow directly from
investors by issuing debt securities called bonds
Creditors ANS - Persons or entities to whom a corporation owes money
Liabilities ANS - Amounts owed to creditors (in the form of debt and other obligations)
Note payable ANS - A written promissory note.
A borrower obtains a specific amount of money from a lender and promises to pay it back with interest
over a predetermined time period.
Bonds payable ANS - Debt securities sold to investors that must be repaid at a particular date some
years in the future.
Common stock ANS - The total amount paid in by stockholders for the shares they purchase.
Difference between creditors and stockholders ANS - - If you lend money to a company, you are one of
its creditors
+ Creditors specify a payment schedule
+ Creditors have a legal right to be paid at the
agreed time
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