ACCOUNTING IN ACTION

CHAPTER 1

ACCOUNTING IN ACTION

CHAPTER LEARNING OBJECTIVES

1.Identify the activities and users associated with accounting. Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users. The major users and uses of accounting are as follows: (a) Management uses accounting information to plan, organize, and run the business. (b) Investors (owners) decide whether to buy, hold, or sell their financial interests on the basis of accounting data. (c) Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on the basis of accounting information. Other groups that use accounting information are taxing authorities, regulatory agencies, customers, and labor unions.

2.Explain the building blocks of accounting: ethics, principles, and assumptions. Ethics are the standards of conduct by which actions are judged as right or wrong. Effective financial reporting depends on sound ethical behavior.Generally accepted accounting principles are a common set of standards used by accountants. The primary accounting standard-setting body in the United States is the Financial Accounting Standards Board.

3.State the accounting equation, and define its components. The basic accounting

equation is:

Assets = Liabilities + Owner's Equity Assets are resources a business owns. Liabilities are creditorship claims on total assets.Owner's equity is the ownership claim on total assets.

The expanded accounting equation is:

Assets = Liabilities + Owner's Capital − Owner's Drawings + Revenues − Expenses Investments by owners (assets the owner puts into the business) are recorded in a category called owner’s capital. Owner’s drawings are the withdrawal of assets by the owner for personal use. Revenues are the gross increase in owner’s equity from business activities for the purpose of earning income. Expenses are the costs of assets consumed or services used in the process of earning revenue. Owner’s equity is increased by an owner’s investments and by revenues from business operations. Owner’s equity is decreased by an owner’s withdrawals of assets and by expenses.

4.Analyze the effects of business transactions on the accounting equation. Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset increases, there must be a corresponding (1) decrease in another asset, or (2) increase in a specific liability, or (3) increase in owner's equity.

5.Describe the four financial statements and how they are prepared. An income statement presents the revenues and expenses, and resulting net income or net loss for a specific period of time. An owner's equity statement summarizes the changes in owner's equity for a specific period of time. A balance sheet reports the assets, liabilities, and owner's equity at a specific date. A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time.Accounting Principles, 14e Jerry Weygandt, Paul Kimmel, Jill Mitchell (Test Bank All Chapters) 1 / 4

Test Bank for Accounting Principles, Fourteenth Edition

FOR INSTRUCTOR USE ONLY

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• Explain the career opportunities in accounting. Accounting offers many different jobs in

fields such as public and private accounting, governmental, and forensic accounting.Accounting is a popular major because there are many different types of jobs, with unlimited potential for career advancement. 2 / 4

Accounting in Action

FOR INSTRUCTOR USE ONLY

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TRUE-FALSE STATEMENTS

• Owners of business firms are the only people who need accounting information.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

• Transactions that can be measured in dollars and cents are recorded in the financial

information system.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

• The hiring of a new company president is an economic event recorded by the financial

information system.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

• Management of a business enterprise is the major external user of information.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

• Accounting communicates financial information about a business enterprise to both

internal and external users.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

• Accounting information is used only by external users with a financial interest in a

business enterprise.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

• Financial statements are the major means of communicating accounting information to

interested parties.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

• Bookkeeping and accounting are one and the same because the bookkeeping function

includes the accounting process.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

• The origins of accounting are attributed to Luca Pacioli, a famous mathematician.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting 3 / 4

Test Bank for Accounting Principles, Fourteenth Edition

FOR INSTRUCTOR USE ONLY

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• The study of accounting is not useful for a business career unless your career objective is

to become an accountant.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

• A working knowledge of accounting is not relevant to a lawyer or an architect.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

• Identifying is the process of keeping a chronological diary of events measured in dollars

and cents.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

• Management consulting includes examining the financial statements of companies and

expressing an opinion as to the fairness of their presentation.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

• A partnership must have more than one owner.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

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