A Corporation Is A Business Legally Separate From Its

A Corporation Is A Business Legally Separate From Its

Question 1

A corporation:

• Is a business legally separate from its owners.
• Is controlled by the FASB.
• Has shareholders who have unlimited liability for the acts of the corporation.
• Is the same as a limited liability partnership.
• Is not subject to double taxation.

Question 2

Risk is:

• Net income divided by average total assets.
• The reward for investment.
• The uncertainty about the expected return to be earned.
• Unrelated to expected return.
• Derived from the idea of getting something back from an investment.

Question 3

Owners of a corporation are called shareholders or stockholders.

True

False

Question 4

Of the following accounts, the one that normally has a credit balance is:

• Cash.
• Office Equipment.
• Wages Payable.
• Owner, Withdrawals.
• Sales Salaries Expense.

Question 5

A financial statement providing information that helps users understand a company's financial status, and which lists the types and amounts of assets, liabilities, and equity as of a specific date, is called a(n):

• Balance sheet.
• Income statement.
• Statement of cash flows.
• Statement of owner's equity.
• Financial Status Statement.

Question 6

Creditors' claims on the assets of a company are called:

• Net losses.
• Expenses.
• Revenues.
• Equity.
• Liabilities.

Question 7

A customer's promise to pay is called an account payable to the seller.

True

False

Question 8

The account used to record the transfers of assets from a business to its owner is:

• A revenue account.
• The owner's withdrawals account.
• The owner's capital account.
• An expense account.
• A liability account.

Question 9

An income statement reports on investing and financing activities.

True

False

Question 10

External auditors examine financial statements to verify that they are prepared according to generally accepted accounting principles.

True

False

Question 11

If equity is $300,000 and liabilities are $192,000, then assets equal:

• $108,000.
• $192,000.
• $300,000.
• $492,000.
• $792,000.

Question 12

Operating activities:

• Are the means organizations use to pay for resources like land, buildings and equipment.
• Involve using resources to research, develop, purchase, produce, distribute and market products and services.
• Involve acquiring and disposing of resources that a business uses to acquire and sell its products or services.
• Are also called asset management.
• Are also called strategic management.

Question 13

If the liabilities of a business increased $75,000 during a period of time and the owner's equity in the business decreased $30,000 during the same period, the assets of the business must have:

• Decreased $105,000.
• Decreased $45,000.
• Increased $30,000.
• Increased $45,000.
• Increased $105,000.

Question 14

Generally accepted accounting principles are the basic assumptions, concepts, and guidelines for preparing financial statements.

True

False

Paper For Above instruction

The fundamental concept of a corporation as a separate legal entity distinguishes it from other business forms, such as sole proprietorships or partnerships. A corporation is recognized as a distinct entity under the law, with its own rights and obligations. This separation provides advantages like limited liability for shareholders, meaning their personal assets are protected from business debts and liabilities. It also facilitates raising capital through issuing shares, attracting investors interested in limited personal risk. According to the Financial Accounting Standards Board (FASB), the primary responsibility for establishing accounting standards lies within the framework of generally accepted accounting principles (GAAP), which ensure consistency and transparency in financial reporting (FASB, 2020). Contrary to some misconceptions, shareholders in a corporation generally have limited liability, which means their investment risk is limited to the amount they have invested in shares. They are not personally responsible for the corporation's debts beyond their investment. This is significantly different from unlimited liability in partnerships or sole proprietorships (Mancera & Brigham, 2019).

Risk plays a central role in financial decision-making. It is defined as the uncertainty regarding the expected return on an investment. Investors seek to balance risk and reward, with higher potential returns usually associated with higher risk (Rittenberg et al., 2019). Understanding risk is vital for evaluating investment opportunities, and it involves considering market volatility, credit risk, and operational risks that can affect the likelihood of receiving expected returns. This concept emphasizes that risk is intrinsic to investing and must be managed appropriately to optimize financial outcomes (Damodaran, 2012).

The owners of a corporation are legally termed shareholders or stockholders. They hold ownership rights through shares of stock, which entitle them to a proportionate stake in the company's profits and control via voting rights (Brigham & Houston, 2021). The accountability structures and shareholder rights make corporations a flexible and appealing structure for raising capital while limiting individual liability (Kieso, Weygandt, & Warfield, 2019).

In financial accounting, various accounts can have different typical balances. For example, assets such as cash and office equipment normally carry debit balances, reflecting resources owned by the business. Conversely, liabilities like Wages Payable generally have credit balances, representing obligations owed to external parties. Among the options provided, Wages Payable is the account most consistently associated with a credit balance under normal accounting practices (Horngren et al., 2019).

A balance sheet, also known as the statement of financial position, provides a snapshot of a company's financial status at a specific point in time. It displays the types and amounts of assets, liabilities, and equity, enabling stakeholders to assess financial stability and solvency. The balance sheet thus offers critical insights into the company's resource base and obligations as of the reporting date (Wild, Subramanyam, & Halsey, 2014).

Creditors’ claims on the assets of a company are called liabilities. These are obligations arising from borrowings, accounts payable, accrued expenses, and other commitments that the company must settle in the future (Schroeder, Clark, & Cathey, 2019). Liabilities, alongside equity, constitute the claims against a firm's resources, highlighting the sources of funding used to acquire assets.

A customer's promise to pay for goods or services received is called an account receivable, not payable. An account payable refers to the company’s obligation to pay suppliers or creditors. This distinction is central in accounting, as accounts receivable are assets, indicating amounts owed to the business by customers (Kieso et al., 2019).

The account used to record transfers of assets from a business to its owner is the owner’s withdrawals account, particularly in sole proprietorships and partnerships. It captures reductions of owner’s equity when they withdraw resources for personal use. The owner’s capital account, on the other hand, records investments and retained earnings, reflecting the owner’s residual interest in the business (Weygandt, Kimmel, & Kieso, 2018).

An income statement reports a company's revenues and expenses over a specific period, primarily reflecting operating results. It does not focus on investing or financing activities directly, which are instead detailed in the statement of cash flows. Proper understanding of income statement components helps assess profitability and operational efficiency (Martin & Osborn, 2018).

External auditors play a crucial role by examining financial statements to ensure they comply with GAAP. Their independent verification enhances stakeholder confidence, as auditors assess whether the financial reports fairly present the company’s financial position and results (Arens, Elder, & Beasley, 2017).

The accounting equation, Assets = Liabilities + Equity, means that if liabilities increase and equity decreases, assets must have changed correspondingly. Here, liabilities increased by $75,000, and equity decreased by $30,000, indicating asset changes of $45,000. Since the increase in liabilities suggests additional resources or financings, combined with the decrease in equity, total assets increased by $45,000 (Weygandt et al., 2018).

Operating activities involve the core functions of a business—producing, purchasing, distributing, and selling goods and services. They also include the use of resources to develop and market products. These activities are central to generating revenues and cash flows, distinguishing them from investing or financing activities (Wild et al., 2014).

Generally accepted accounting principles (GAAP) serve as the foundation for financial reporting. They are a set of rules, standards, and conventions that accountants follow to produce consistent and reliable financial statements. Adherence to GAAP ensures comparability across different entities and periods, fostering transparency and trust (FASB, 2020).

References

• Arens, A. A., Elder, R. J., & Beasley, M. S. (2017). Auditing and Assurance Services: An Integrated Approach. Pearson.
• Brigham, E. F., & Houston, J. F. (2021). Fundamentals of Financial Management. Cengage Learning.
• Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley.
• FASB (Financial Accounting Standards Board). (2020). Accounting Standards Codification. FASB.
• Horngren, C., Sundem, G., Elliott, J., & Philbrick, D. (2019). Introduction to Financial Accounting (11th ed.). Pearson.
• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (16th ed.). Wiley.
• Mancera, S., & Brigham, E. F. (2019). Corporate Finance. Academic Press.
• Martin, R., & Osborn, R. (2018). Financial Accounting. South-Western College Publishing.
• Rittenberg, L., Johnstone, K., & Gramling, A. (2019). Financial Accounting: A Business Perspective. Cengage Learning.
• Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis. Wiley.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial Accounting (11th ed.). Wiley.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2014). Financial Statement Analysis. McGraw-Hill Education.