Exercise 1-4 Learning the language of business

Match each of the numbered descriptions 1 through 5 with the term or phrase it best reflects. Indicate your answer by writing the letter A through H for the term or phrase in the blank provided.

A. Audit

B. GAAP

C. Ethics

D. FASB

E. SEC

F. Public accountants

H. IASB

G. Net income 

1. An assessment of whether financial statements follow GAAP.

2. Amount a business earns in excess of all expenses and costs associated with its sales and revenues.

3. A group that sets accounting principles in the United States.

4. Accounting professionals who provide services to many clients.

5. Principles that determine whether an action is right or wrong.

Exercise 1-5 Identifying ethical terminology

Match each of the numbered descriptions 1 through 7 with the term or phrase it best reflects. Indicate your answer by writing the letter A through G for the term or phrase in the blank provided.

A. Ethics

B. Fraud triangle

C. Prevention

D. Internal controls

E. Sarbanes-Oxley Act

F. Audit

G. Dodd-Frank Act

1. Requires the SEC to pay whistleblowers.

2. Examines whether financial statements are prepared using GAAP; it does not ensure absolute accuracy of the statements.

3. Requires documentation and verification of internal controls and increases emphasis on internal control effectiveness.

4. Procedures set up to protect company property and equipment, ensure reliable accounting, promote efficiency, and encourage adherence to policies.

5. A less expensive and more effective means to stop fraud.

6. Three factors push a person to commit fraud: opportunity, pressure, and rationalization.

7. Beliefs that distinguish right from wrong.

Exercise 1-6 Distinguishing business organizations

The following describe several different business organizations. Determine whether each description best refers to a sole proprietorship (SP), partnership (P), corporation (C), or limited liability company (LLC).

a. Micah and Nancy own Financial Services, which pays a business income tax. Micah and Nancy do not have personal responsibility for the debts of Financial Services.

b. Riley and Kay own Speedy Packages, a courier service. Both are personally liable for the debts of the business.

c. IBC Services does not have separate legal existence apart from the one person who owns it.

d. Trent Company is owned by Trent Malone, who is personally liable for the company's debts.

e. Ownership of Zander Company is divided into 1,000 shares of stock. The company pays a business income tax.

f. Physio Products does not pay income taxes and has one owner. The owner has unlimited liability for business debt.

g. AJ Company pays a business income tax and has two owners.

h. Jeffy Auto is a separate legal entity from its owner, but it does not pay a business income tax.

Exercise 1-9 Using the accounting equation

Answer the following questions. Hint: Use the accounting equation. 

a. At the beginning of the year, Addison Company's assets are $300,000 and its equity is $100,000. During the year, assets increase $80,000 and liabilities increase $50,000. What is the equity at year-end? 

b. Office Store Co. has assets equal to $123,000 and liabilities equal to $47,000 at year-end. What is the equity for Office Store Co. at year-end? 

c. At the beginning of the year, Quaker Company's liabilities equal $70,000. During the year, assets increase by $60,000, and at year-end assets equal $190,000. Liabilities decrease $5,000 during the year. What are the beginning and ending amounts of equity?