Exercise 1-1: Review Questions 1. What is accounting? Give at least two definitions.

Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events, which are in part at least of a financial character and interpreting the results thereof. Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature about economic entities that is intended to be useful in making economic decisions. 2. Whys is accounting often referred to as the language of business? Accounting is a special kind of language. It is often described as the language of business because it is the medium of communication between a business firm and the various parties interested in its financial activities. It is the tool, which enables firms to communicate to various interested third parties certain quantitative information about the financial activities of a business. 3. Who are the users of financial accounting information? Internal External Potential investors, creditors (which include money lenders, suppliers, and other trade creditors), customers, taxing authorities, government regulation agencies, non-profit organizations, and other users 4. Explain how this information influences the users in making business decisions. Internal: helps in planning, organizing, and running a business; composition External Investors: whether to buy, hold, or sell shares Creditors: risk of granting credit Customers: whether the company will support after sales (i.e. warranty) Tax authorities: whether the entity if operating within prescribed rules Economists: forecast economic activity Owners, management, employees

5. What are the three forms of business organizations according to ownership? Briefly discuss each form. Sole or single proprietorship: When only one person makes the investment. Partnership: When two or more persons agree to operate the business as coowners under certain conditions.

 Corporation: A body formed and authorized by law to act as a single person although constituted by one or more persons and legally endowed with various rights and duties. 6. What are the three types of activity that can be performed by business organizations? Service concern Merchandising or trading concern Manufacturing concern 7. What do you understand of the term generally accepted accounting principles or basic accounting concepts? A national standard generally accepted and practiced within a country used by accountants. 8. Enumerate at least two fundamental purposes of basic accounting principles. They help increase the confidence of financial statement users that the financial statements are representationally faithful. They provide companies and accountants who prepare financial statements with guidance on how to account for and report economic activities. And they provide independent auditors of financial statements with basis for evaluating the fairness and completeness of those statements 9. What are the different basic accounting concepts? Entity, Going Concern, Cost, Objectivity/Reliability, Revenue Recognition, Accrual, Matching, Time Period/Accounting Period, Monetary Unit, Adequate Disclosure, Materiality, Consistency, Conservatism 10. Enumerate and briefly discuss each concept. Entity It is assumed that the business is separate from the owners, managers and employees who constitute the firm. The transactions of the enterprise should not be merged with the transactions of the owners. Going Concern It is assumed that in the absence of evidence to the contrary, the business will continue to operate indefinitely to carry out its existing contracts and commitments. Cost Principle This principle requires that the assets should be recorded initially at original acquisition cost. Objectivity/Reliability

This principle requires that the quality of information assumes users that the information is free from bias and error and represents what it claims to represent. Revenue Recognition This principle states that revenue is recognized when earned regardless of when cash is received. Point of sale is the point of revenue recognition. Accrual Concept This principle means that income is recognized when earned regardless of when received and expense is recognized when incurred regardless of when paid. Matching This principle states that all costs and expenses incurred in earning a revenue should be reported in the same period. (*It is possible that an expense is not yet incurred even if you have already paid) Time Period/Accounting Period Assumption This assumption requires that the indefinite life of an enterprise is subdivided into time periods or accounting periods which are usually of equal length to ensure reports at regular intervals There are 3 kinds of accounting period namely: Calendar year (Jan1Dec31), Fiscal year (any 12 months), and Natural Business year (any 12 months but the end of the period is during a slack season) Monetary Unit This principle requires that money is used as the unit of measure Disclosure This principle means that all significant and relevant information leading to the preparation of financial statements should be clearly reported so as not to make the financial statements misleading Materiality Also known as the Doctrine of Convenience This principle is a practical rule in accounting which dictates that strict adherence to the Generally Accepted Accounting Principles(GAAP) is not required especially when the items are not significant enough to affect the fairness of the financial statements. Consistency This Principle requires that the accounting methods and practices should be applied on a uniform basis from period to period. Conservatism This principle resolves uncertainties in accounting. When alternatives exist, the alternative which has the least favorable effect on owners equity should be chosen.

This principle is synonymous with Prudence, which is the desire to exercise care and caution in dealing with the uncertainties in the measurement process such that assets or income are not overstated and liabilities and expenses are not understated.