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ACC 100 Study Guide - Midterm Guide: Cash Flow Statement, Retained Earnings, Balance Sheet

Course Code
ACC 100
Donna Zathy
Study Guide

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ACC100 Midterm Theory Notes
Chapter 1
1. What are the three different forms of business organizations? What are the
advantages and the disadvantages to each of these forms?
Sole proprietorship - only one owner, no share of profit. Despite the close relationship
with business the affairs of the two must be kept separate.
Partnership - when two or more people do business together.
Corporation - is an entity organized under the laws of a particular province or the
Federal government.
2. Define the three business activities of a company and provide examples of each of
these activities.
Financing - long term loan
Operating - earning revenue, income
Investing - when purchasing inventory
3. What is the purpose of financial accounting?
Informing management and outsiders about company through financial statements.
4. Who are the primary users of accounting information?
Primary users best described as internal users who are primarily the managers of the
company are involved in the daily affairs of the business.
5. What is the purpose of each of the financial statements? How are the financial
statements interrelated?
Statement of cash flow - shows how changes in balance sheet accounts and income
affect cash and cash equivalents, and breaks the analysis down to operating, investing
and financing activities.
Balance Sheet - The financial statements that summarize the assets, liabilities, and
owners equity at specific point in time.
Income statement - The statement that summarize the revenue and expenses.
Statement of retained earnings - The statement that summarizes the income
and dividend paid over the life of business.
6. What is the accounting equation and how is it connected to the financial statements.
7. You are deciding whether to invest in a company shares. Which financial statement
would you want to see, and which areas would you be most interested in?
Balance sheet, most importantly we will look at liabilities section to see if the
company is in debt.
Income statement to see if company is earning money.
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8. What are the assumptions that underlie the financial statements and why are they
important? Name all the assumptions and principles and define them.
Cost principle - assets are recorded at the cost to acquire them.
Going concern - the assumption that an entity is not in the process of liquidation
and that it will continue indefinitely.
Time period - the artificial segment on the calendar used as the basis for preparing
financial statements.
9. Define the cost principle. Give an example of when the cost principle has
Been violated. Define the going concern assumption. What other principle is
interrelated with the going concern assumption?
Refer to question 8.
10. Define the monetary unit assumption. Give an example of when it has been violated.
Monetary unit - the yardstick used to measure amounts in financial statements.
Ex. preparing the statement in dollar units.
11. Define the time period assumption. How is this assumption connected to accrual
Look at question 8.
12. What are Generally Accepted Accounting Principles?
GAAP- the various methods, rules, practices, and other procedures that have evolved
over time in response to the need to regulate the preparation of financial statements.
13. What are the five categories in the financial statements? What are the
characteristics or attributes of each of these five categories? Why is an
understanding of each of these categories and their characteristics important
when creating the financial statements?
oResources owned by a company; future economic value; can be measured;
can be expressed in dollars
oAccounts receivable
oObligations of a company or organization; amount owed to lenders and
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oSource of assets, owners' residual claim after liabilities have been paid;
corporation's total book value which is different from corporation's
worth/market value
oPaid-in capital
oRetained earnings
oAccumulated other comprehensive income
oTreasury stock
oFees earned from providing services and the amounts of merchandise sold
oServices revenues
oFees earned
oInterest revenue
oInterest income
oCosts that are matches with revenues on the income statement
oInsurance expense
oWages/salary expense
oAdvertising expense
oInterest expense
Chapter 2
1. What is the objective of financial reporting?
Primary: Provide Information for Decision Making
Supporting: Assist with the Prediction of Cash Receipts to Investors and
Supporting: Reflect the Management's Stewardship of Resources and
Claims to Resources
1. What makes accounting information useful? List the qualitative characteristics
that underlie all financial statements. Define each of the qualitative characteristics.
Understandability: the quality of accounting information that makes it
comprehensible to those willing to spend the necessary time
Relevance: the capacity of info. to make a difference in decision
Reliability: the quality that makes acc. Info. dependable in representing
the events that it purports to represent
Comparability: the quality that allows a user to analyze two or more
companies and look for similarities and differences
Consistency: the quality that allows a user to compare two or more
accounting periods for a single company
Materiality: magnitude of an acc. info. omission or misstatement that
will affect the judgement of someone relying on the info.
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