ACG Midterm Study Guide
ACG MIDTERM STUDY GUIDE
Chapter 1 – Introduction Financial Accounting
1. Discuss the general uses of accounting and who uses it.
Financial Accounting – Designed primarily for decision makers outside of the company.
• General purpose reports for users outside the organization
• Must conform to GAAP
• Historic in nature
• Summarized information
Managerial Accounting – Designed primarily for decision makers within the company.
• Information for managers inside the organization to use
• Can be creative (no GAAP)
• Future oriented information
• Highly detailed information
• Generation depends upon the benefit exceeding the cost of the information
Financial Accounting Managerial Accounting
Who are the • Investors & Analysts • Top management
decision makers? • Creditors • Marketing teams
• Suppliers & Customers • Production & Operations
What decisions • Buy or sell stock? • Develop new strategy?
are made? • Lend or not? • Launch a new product or
• Purchase/sell goods or not?
not? • Manage operations
What • Sales & Costs • Product sales & costs
information is • Cash in and cash out • Department
needed? • Assets & Liabilities performance
• Budgets & Quality
reports
2. Discuss the advantages and disadvantages of the corporate entity form.
Corporation: A large number of owners or shareholders not involved in managing day-to-day operations
of the company.
Advantages
• Limited liability
• Ability to raise capital
• Ability to separate ownership from management
• Ease of transferability of ownership
Disadvantages
• Double taxation (corporate profits and dividends/capital gains
• Paperwork and formalities
3. Relate the three basic business activities to the financial statements.
A business plans activities, finances those activities, invests resources into those activities, and then
engages in operating activities.
• Operating Activities: The production, promotion, and selling of products and services.
Income = Revenues – Expenses (Income Statement – Reports the results of a company’s
operating activities over a period of time)
, ACG Midterm Study Guide
• Investing Activities: Activities that consist of acquiring and disposing of resources (assets) that a
company used to produce and sell its products or provide its services
• Financing Activities: Methods that companies use to fund investments. Sources include (1) Debt
financing (creditors) and (2) Equity financing (owners).
Assets = Liabilities + Equity (Balance Sheet – Lists the company’s investments and sources of
financing using the accounting equation)
4. Describe the institutions that regulate financial accounting and their role in establishing Generally
Accepted Accounting Principles (GAAP).
• Securities & Exchange Commission (SEC) - Regulates the issuance and trading of securities in the
U.S.
o Who must report to the SEC? Companies with more than $10 million of assets and whose
securities are held by more than 500 owners must file annual and other periodic reports.
• Financial Accounting Standards Board (FASB) – Currently establishes accounting standards in
the U.S.
o Developed a Conceptual Framework to serve as a guide for accounting issues not
covered by standards
5. Describe what an audit opinion says
• As assurance of accuracy and completeness, financial statements of publicly traded companies
must be audited by an independent audit firm.
• An audit opinion is not a guarantee.
• The auditor’s report is a statement to the board of directors of the company and to the
shareholders of the company by an independent auditor.
• It expresses an opinion as to whether the financial statements present fairly the financial
activities of the company and whether the financials were prepared in accordance with GAAP.
• A “clean” audit opinion indicates that the auditors do believe that the financial statements
present fairly the economic conditions of the firm. It does NOT state that the statements are
“accurate.”
6. Identify the four financial statements and their components and discuss how they are related.
Balance Sheet – Lists the company’s investments and sources of financing using the accounting
equation.
Income Statement – Reports the results of a company’s operating activities over a period of time.
Statement of Stockholder’s Equity – Reports on changes in equity over a period of time
• Contributed capital
o Amounts from issuing new stock during the period
o Common stock and additional paid-in capital
• Retained earnings
o Cumulative income since the company began business minus dividends paid out to
shareholders
• Other stockholders’ equity changes
Statement of Cash Flows – Reports net cash flows from operating, investing, and financing activities
over a period of time.
• Operating cash flows differ from net income because of differences in the time that
revenues and expenses are recorded and the time the cash is received and paid
7. Discuss components of the financial accounting conceptual framework.
, ACG Midterm Study Guide
Developed to help managers, accountants, auditors, and standard setters make reasonable choices
among accounting alternatives.
• Benefits > Costs – Reported accounting information must be cost effective
• Materiality – Information that is not large enough to affect one’s decision need not comply with
GAAP
• Understandability – Should be presented so that a knowledgeable reader can understand how it
relates to the decision process
• Relevance - Must have the ability to make a difference in a decision
o Timeliness
o Predictive value
o Feedback value
• Reliability – Must be accurate and free of misstatement or bias
o Representational faithfulness
o Verifiability
o Neutrality
• Comparability – Should enable users to identify similarities and differences between sets of
economic phenomena
• Consistency – Should exhibit conformity from one reporting period to the next with unchanging
policies and procedures
ACG MIDTERM STUDY GUIDE
Chapter 1 – Introduction Financial Accounting
1. Discuss the general uses of accounting and who uses it.
Financial Accounting – Designed primarily for decision makers outside of the company.
• General purpose reports for users outside the organization
• Must conform to GAAP
• Historic in nature
• Summarized information
Managerial Accounting – Designed primarily for decision makers within the company.
• Information for managers inside the organization to use
• Can be creative (no GAAP)
• Future oriented information
• Highly detailed information
• Generation depends upon the benefit exceeding the cost of the information
Financial Accounting Managerial Accounting
Who are the • Investors & Analysts • Top management
decision makers? • Creditors • Marketing teams
• Suppliers & Customers • Production & Operations
What decisions • Buy or sell stock? • Develop new strategy?
are made? • Lend or not? • Launch a new product or
• Purchase/sell goods or not?
not? • Manage operations
What • Sales & Costs • Product sales & costs
information is • Cash in and cash out • Department
needed? • Assets & Liabilities performance
• Budgets & Quality
reports
2. Discuss the advantages and disadvantages of the corporate entity form.
Corporation: A large number of owners or shareholders not involved in managing day-to-day operations
of the company.
Advantages
• Limited liability
• Ability to raise capital
• Ability to separate ownership from management
• Ease of transferability of ownership
Disadvantages
• Double taxation (corporate profits and dividends/capital gains
• Paperwork and formalities
3. Relate the three basic business activities to the financial statements.
A business plans activities, finances those activities, invests resources into those activities, and then
engages in operating activities.
• Operating Activities: The production, promotion, and selling of products and services.
Income = Revenues – Expenses (Income Statement – Reports the results of a company’s
operating activities over a period of time)
, ACG Midterm Study Guide
• Investing Activities: Activities that consist of acquiring and disposing of resources (assets) that a
company used to produce and sell its products or provide its services
• Financing Activities: Methods that companies use to fund investments. Sources include (1) Debt
financing (creditors) and (2) Equity financing (owners).
Assets = Liabilities + Equity (Balance Sheet – Lists the company’s investments and sources of
financing using the accounting equation)
4. Describe the institutions that regulate financial accounting and their role in establishing Generally
Accepted Accounting Principles (GAAP).
• Securities & Exchange Commission (SEC) - Regulates the issuance and trading of securities in the
U.S.
o Who must report to the SEC? Companies with more than $10 million of assets and whose
securities are held by more than 500 owners must file annual and other periodic reports.
• Financial Accounting Standards Board (FASB) – Currently establishes accounting standards in
the U.S.
o Developed a Conceptual Framework to serve as a guide for accounting issues not
covered by standards
5. Describe what an audit opinion says
• As assurance of accuracy and completeness, financial statements of publicly traded companies
must be audited by an independent audit firm.
• An audit opinion is not a guarantee.
• The auditor’s report is a statement to the board of directors of the company and to the
shareholders of the company by an independent auditor.
• It expresses an opinion as to whether the financial statements present fairly the financial
activities of the company and whether the financials were prepared in accordance with GAAP.
• A “clean” audit opinion indicates that the auditors do believe that the financial statements
present fairly the economic conditions of the firm. It does NOT state that the statements are
“accurate.”
6. Identify the four financial statements and their components and discuss how they are related.
Balance Sheet – Lists the company’s investments and sources of financing using the accounting
equation.
Income Statement – Reports the results of a company’s operating activities over a period of time.
Statement of Stockholder’s Equity – Reports on changes in equity over a period of time
• Contributed capital
o Amounts from issuing new stock during the period
o Common stock and additional paid-in capital
• Retained earnings
o Cumulative income since the company began business minus dividends paid out to
shareholders
• Other stockholders’ equity changes
Statement of Cash Flows – Reports net cash flows from operating, investing, and financing activities
over a period of time.
• Operating cash flows differ from net income because of differences in the time that
revenues and expenses are recorded and the time the cash is received and paid
7. Discuss components of the financial accounting conceptual framework.
, ACG Midterm Study Guide
Developed to help managers, accountants, auditors, and standard setters make reasonable choices
among accounting alternatives.
• Benefits > Costs – Reported accounting information must be cost effective
• Materiality – Information that is not large enough to affect one’s decision need not comply with
GAAP
• Understandability – Should be presented so that a knowledgeable reader can understand how it
relates to the decision process
• Relevance - Must have the ability to make a difference in a decision
o Timeliness
o Predictive value
o Feedback value
• Reliability – Must be accurate and free of misstatement or bias
o Representational faithfulness
o Verifiability
o Neutrality
• Comparability – Should enable users to identify similarities and differences between sets of
economic phenomena
• Consistency – Should exhibit conformity from one reporting period to the next with unchanging
policies and procedures
