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Unformatted text preview: CHAPTER 1 1-1 Accounting is a process of identifying, recording, summarizing and reporting economic information to decision makers. 1-2 No. Accounting is about real information about real companies. In learning accounting it is helpful to see accounting reports from various companies. This helps put the rules and techniques of accounting into an understandable framework and provides familiarity with the diversity of practice. 1-3 Examples of decisions that are likely to be influenced by financial statements include choosing where to expand or reduce operations, lending money, investing ownership capital, and rewarding mangers. 1-4 Users of financial statements include managers, lenders, suppliers, owners, income tax authorities, and government regulators. 1-5 The major distinction between financial accounting and management accounting is their use by two classes of decision makers. Management accounting is concerned mainly with how accounting can serve internal decision makers such as the chief executive officer and other executives. Financial accounting is concerned with supplying information to external users. 1-6 The balance sheet equation is Assets = Liabilities + Owners equity. It is the fundamental framework of accounting. The left side lists the resources of the organization, and the right side lists the claims against those resources. 1-7 No. Every transaction should leave the balance sheet equation in balance. Accounting is often called double-entry because accountants must enter at least two numbers for each transaction to keep the equation in balance. Chapter 1 Accounting: The Language of Business 1 1-8 This is true. When a company buys inventory for cash, one asset is traded for another, and neither total assets nor total liabilities change. Thus, the balance sheet equation stays in balance. When a company buys inventory on credit, both inventory and accounts payable increase. Thus, both total assets and total liabilities increase by the same amount, again keeping the balance sheet equation in balance. 1-9 The evidence for a note payable includes a promissory note, but the evidence for an account payable does not. 1-10 Ownership shares in most large corporations are easily traded in the stock markets, corporate owners have limited liability, and the owners of sole proprietorships or partnerships are usually also managers in the company while most corporations hire professional managers. 1-11 Limited liability means that corporate owners are not personally liable for the debts of the corporation. Creditors' claims can be satisfied only by the assets of the particular corporation. 1-12 The corporation is the most prominent type of entity and corporations do by far the largest volume of business....
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