Accounting: The Language of Business Review

Questions and Answers

Why is accounting called the language of business?

The results of the accounting process - financial statements - communicate essential information about a business to concerned individuals and organizations.

What are financial statements?

Periodic reports that summarize the financial affairs of a business.

What are the names of three accounting job positions?

Clerk, bookkeeper, and accountant.

One requirement for becoming a CPA is to pass the:

Uniform CPA Examination. Signup and view all the answers

Which organization has the final say on financial accounting issues faced by publicly owned corporations?

Securities and Exchange Commission. Signup and view all the answers

What type of information will the owner need to give to the bank to apply for a loan?

Current sales and expenses figures, anticipated sales and expenses, and the cost of the expansion. Signup and view all the answers

What are generally accepted accounting principles?

Accounting standards that are changed and refined in response to changes in the environment in which businesses operate. Signup and view all the answers

Why are generally accepted accounting principles needed?

GAAP help to ensure that financial information fairly represents a firm's operating results and financial position. Signup and view all the answers

How are generally accepted accounting principles developed?

The FASB develops proposed statements and solicits feedback from interested individuals, groups, and companies. Signup and view all the answers

An organization that has two or more owners who are legally responsible for the debts and taxes of the business is a:

Partnership. Signup and view all the answers

A nonprofit organization such as a public school is a:

Social entity. Signup and view all the answers

What are some of the advantages of the corporate form of business?

The shareholders are not responsible for the debts and taxes of the corporation; corporations can continue in existence indefinitely. Signup and view all the answers

What are three types of business entities?

Sole proprietorship, partnership, and corporation. Signup and view all the answers

How is the ownership of a corporation different from that of a sole proprietorship?

A sole proprietorship is a business entity owned by one person. A corporation is a separate legal entity that has a legal right to own property and do business in its own name. Signup and view all the answers

What is the purpose of accounting?

To gather and communicate financial information about a business. Signup and view all the answers

What does the accounting process involve?

Recording, classifying, summarizing, interpreting, and communicating financial information about a business. Signup and view all the answers

What is the purpose of the auditor's report?

To obtain the objective opinion of a professional accountant from outside the company that the statements fairly present the operating results and financial position of the business and that the information was prepared according to GAAP. Signup and view all the answers

What are the three major areas of accounting?

Public, managerial, and governmental. Signup and view all the answers

What types of services do public accountants provide?

Auditing, tax, and management advisory services. Signup and view all the answers

What is tax planning?

Advice on how to structure financial affairs in order to reduce taxes without violating tax laws. Signup and view all the answers

What are the major functions or activities performed by accountants in private industry?

Establish accounting policies, direct the accounting system, prepare and interpret financial statements, provide financial advice, prepare tax forms. Signup and view all the answers

What are the three types of business entities, and how do they differ?

Sole proprietorship (owned by one person), partnership (owned by two or more people), corporation (can be owned by one or many persons). Signup and view all the answers

Why is it important for business records to be separate from the records of the business's owner or owners?

Measure business performance; separate entity. Signup and view all the answers

Study Notes

Accounting Overview

Accounting is referred to as the "language of business" because it communicates essential financial information through financial statements.
Financial statements are periodic reports summarizing a business's financial affairs, essential for stakeholders.

Accounting Careers

Common job positions in accounting include clerk, bookkeeper, and accountant.
A Certified Public Accountant (CPA) must pass the Uniform CPA Examination.

Regulatory Framework

The Securities and Exchange Commission (SEC) has the final authority on financial accounting for publicly owned corporations.
Generally Accepted Accounting Principles (GAAP) are standards that evolve with changes in the business environment to ensure fair representation of a firm’s financial information.

Importance of GAAP

GAAP is crucial for consistency and reliability in financial reporting, helping convey a company’s operating results and financial position accurately.
The Financial Accounting Standards Board (FASB) establishes GAAP by proposing statements and gathering feedback from stakeholders.

Business Structures

A partnership is an organization with two or more owners who are personally liable for business debts and taxes.
A nonprofit organization, such as a public school, is classified as a social entity.
Corporations offer advantages over partnerships, such as limited liability for shareholders and perpetual existence.

Types of Business Entities

Business entities include sole proprietorships (owned by one), partnerships (owned by multiple), and corporations (which can be owned by one or many).
Corporations are separate legal entities with rights to own property and conduct business independently of their owners.

Purpose and Process of Accounting

The primary purpose of accounting is to gather and communicate financial information regarding a business.
The accounting process includes recording, classifying, summarizing, interpreting, and communicating financial data.

Audit and Oversight

The auditor’s report provides an independent opinion that financial statements fairly represent business performance, adhering to GAAP.
Key areas in accounting include public, managerial, and governmental accounting.

Public Accountant Services

Public accountants offer auditing, tax, and management advisory services, while providing tax planning advice to optimize financial affairs legally.

Roles of Private Accountants

Accountants in private industry establish accounting policies, direct accounting systems, prepare financial statements, provide financial advice, and handle tax documentation.

Importance of Record Separation

Keeping business and personal records separate is vital for measuring business performance, known as the separate entity principle.

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Description

Test your knowledge with this self-review quiz on accounting concepts and terminology. Discover why accounting is referred to as the language of business and learn about financial statements that summarize a business's financial affairs.