Chapter 1 solutions - Chapter One: The Link Between...

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Chapter One: The Link Between Business and Accounting Solutions to Questions and Multiple Choice Problems Questions: 1. Accounting is the process of identifying, measuring and communicating financial business information to various users. 2. The purpose of a business is provide goods or services to consumers for the purpose of making a profit for its owner(s). 9. Generally accepted accounting principles (GAAP) are the guidelines that companies use to prepare their financial statements. 3. No. Some businesses, known as not-for-profits, provide goods and services for the sole purpose of helping people. However, they are usually called organizations rather than businesses. 4. A not-for profit does not need to earn a profit. It only needs to cover its costs while providing services to others. However, many like to earn a profit to enable them to grow, replace assets, and expand the services they offer. 5. Managers use financial information for internal decision making; investors use financial information to make decisions about investing; creditors use financial information to decide whether to loan money or extend credit. So all of them use the information to make decisions. 6. The four basic financial statements are the balance sheet, income statement, statement of changes in owners' equity and the statement of cash flows. 7. The balance sheet reports the financial position of the company at a specific point in time. The income statement reports the financial performance of the company during a specified period of time. The statement of changes in owners' equity reports the changes that have taken place in owners' equity during a specified period of time. The statement of cash flows summarizes all the cash inflows and all the cash outflows during the period. 8. Contributed capital is the amount invested in the business by its the owners. In corporations, it usually takes the form of Common Stock. It’s important because it is usually the primary source of financing for a firm. 10. The Securities and Exchange Commission (SEC) has been given the authority to set these rules by the United States Congress. The SEC has, in turn, allowed the Financial Accounting Standards Board, a private standards-setting body, to set most of the rules. In 2002, Congress passed the Sarbanes-Oxley Act which created the Public Company Accounting Oversight Board (PCAOB) to oversee auditors of public companies. 11. The income statement reports all revenues earned (whether or not the cash has been collected), whereas the statement of cash flows includes only the cash collected (for current or past revenues). The same is true for expenses. All expenses incurred to generate the period’s revenue are included on the period’s income statement, whereas only the actual cash outflows for expenses are shown on the statement of cash flows. 12. The major risk of being in business is losing your money! Other examples of risks that firms face include the risk of product
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This note was uploaded on 11/24/2009 for the course BA 2301 taught by Professor Mattpolze during the Fall '08 term at University of Texas at Dallas, Richardson.

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Chapter 1 solutions - Chapter One: The Link Between...

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