Accounting for Decision Makers

1) Which of the following is the most correct definition of accounting? a. The preservation of a systematic, quantitative record of an activity. b. A system for providing quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions. c. The procedures and processes used by a company to analyze transactions and handle routine bookkeeping tasks. d. An entity without a profit objective, oriented toward providing services efficiently and effectively. - correct answer b. A system for providing quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions. Cash Flow Adequacy Ratio - correct answer Cash flow from operations ÷ (Long-term debt paid + Fixed assets purchased + Cash dividends distributed) Any result higher than 1 indicates that a firm is generating sufficient cash flow to maintain itself a business generates $500,000 of cash flows from operations in its most recent year of operations. During that time, it also paid down $225,000 of debt, acquired $175,000 of fixed assets, and paid out $75,000 of dividends. Its cash flow adequacy ratio is - correct answer calculated as: $500,000 Cash flow from operations ÷ ($225,000 Debt payments + $175,000 Fixed asset purchases + $75,000 Dividends) = 1.05 Cash flow adequacy ratio Statement of Retained Earnings - correct answer The statement that summarizes the income earned and dividends paid over the life of a business Managerial Accounting - correct answer INternal- the area of accounting that focuses on reporting information to internal users. eg product costs, break-even analysis, budgets, performance evaluation numbers, outsourcing information, sales by store, detailed data for daily decisions. A competitive tool like a great product, or relationships. Motivated by Financial Accounting - correct answer External- It focuses on historical information. Only external party transactions. eg for credit analysis, investors use it to estimate the value of the company reports, investors, summary data for occasional decisions. An unbiased scorecard that can compare different companies notes to the financial statements (footnotes) - correct answer clarify and expand upon the information presented in the financial statements assets = - correct answer Liabilities + Owner's Equity Accounting Equation - correct answer Assets = Liabilities + Owner's Equity Bookkeeping is the preservation - correct answer of a systematic, quantitative record of an activity. Bookkeeping systems can be very primitive— making marks in a stick to tally how many sheep you have or moving beads on a string to track the score in a billiards game. The double-entry bookkeeping system used by businesses today has been in existence for over 500 years. eg checking account double-entry bookkeeping - correct answer still in use today (described later in our discussion of "The Accounting Information System") was developed in the 1300s and 1400s in Italy bookeeping vs accounting - correct answer bookkeeping just write it all down. Accounting is the next level where you can organize and analyze and forecast and make decisions 2) Businesses use accounting systems to a. Analyze transactions b. Handle routine bookkeeping tasks c. Evaluate the performance and health of the business d. All of the above - correct answer d. All of the above accounting - correct answer is formally defined as a system of providing "quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions. accounting system - correct answer is used by a business (1) to handle routine bookkeeping tasks and (2) to structure the information so it can be used to evaluate the performance and status of the business. These two functions of an accounting system Describe the three financial statements. - correct answer The balance sheet The income statement The statement of cash flows Balance Sheet - correct answer A point in time. reports a company's assets, liabilities, and owners' equity. A snapshot. It reports the financial position of a firm at a point in time and lists the company's resources (assets-short term and long term), obligations (liabilities short term and long term), and net ownership interest (owners' equity). Sources of money to buy the assets eg. cash and receivables Income Statement - correct answer How much did you make for this quarter or this year. A period of time-economic profits created. reports the amount of net income earned by a company during a period. Net income is the excess of a company's revenues over its expenses. It reports the financial performance of a firm over a period of time. A financial statement showing the revenue (assets generated) and expenses for a fiscal period. eg. revenues and expenses Net Income - correct answer the difference between total revenue and total expenses when total revenue is greater. The bottom line. It can be put back into the business or cashed out as dividens Statement of Cash Flows - correct answer For a period of time like a year. The statement of cash flows reports the amount of cash collected and paid out (short term) by a company in the following three types of activities: operating, investing, and financing over a period of time. tells the cash in and cash out. Where did the cash come from and what do you spend it on. A detailed reconciliation of why cash changed. are we going to be able to pay employees or are we short? Its on one page and a forecasting tool Financial Statements - correct answer Reduce the overall cloud of financial uncertainty so lenders and investors can target the financing and investing to the need if its low risk or high risk. Financial reports that summarize the financial condition and operations of a business eg. income statement, balance sheet, statement of cash flow retained earnings - correct answer the amount of net income retained in the corporation current assets - correct answer cash and other assets expected to be exchanged for cash or consumed within a year. eg cash, inventory, and accounts recievalbe Operating Cycle - correct answer The period of time between the purchase of inventory and the collection of any receivable from the sale of the inventory. Lenders - correct answer Banks use companies' financial statements in making decisions about commercial loans. The financial statements are useful because they help the lender predict the future ability of the borrower to repay the loan. Investors - correct answer Investors want information to help them estimate how much cash they can expect to directly receive from the business in the future if they invest in it now Company Management - correct answer Managers use financial accounting data to formulate company goals, to compute bonuses for employees, and to illuminate company weaknesses. Suppliers and Customers - correct answer and employees use financial statements to tell them about the long-run prospects of a company. Employees - correct answer Financial statement data, as mentioned earlier, are used in determining employee bonuses. In addition, financial accounting information can help an employee evaluate the employer's ability to fulfill its long-run promises, such as for pensions and retiree health care benefits. Financial statements are also important in contract negotiations between labor and management. Competitors - correct answer use financial accounting information to reveal strategic opportunities within their industry. Government Agencies - correct answer use financial statement data to bolster political and regulatory positions for and against companies. Politicians . - correct answer use financial statement data to bolster political and regulatory positions for and against companies The Press - correct answer Reporters use financial accounting data as background information and to indicate which companies are undergoing significant changes in financial status. The Financial Accountings Standards Board (FASB) - correct answer sets accounting rules for the private section in the U.S.. It is a private, non-profit body established and supported by the joint efforts of the U.S. business community, financial analysts, and practicing accountants. Securities and Exchange Commission (SEC) - correct answer has the legal authority to set accounting rules, but has deferred that responsibility to the FASB in most cases. The SEC regulates U.S. stock exchanges and seeks to create a fair information environment in Net Income - correct answer is typically viewed as the fundamental measure of a company's profitability, but there are also a variety of other measures of "income." The best measure of sustainable profitability is income from continuing operations. Accrual accounting - correct answer The process that accountants use in adjusting raw transaction data into refined measures of a firm's economic performance. It may take 2 months. is the process that accountants use in adjusting raw transaction data into refined measures of a firm's economic performance. For example, imagine that you have just completed a $20,000 consulting contract but so far have only collected $3,000 of your fee in cash. To state that you made $3,000 on the contract is very misleading financial capital maintenance - correct answer Capital is viewed as the financial amount, or money amount, invested in a bought house for $200K and sold for$ 220K your income was $20K -more cash at the end of the year than the beginning of the year Physical capital maintenance - correct answer . A CPA is someone who has taken a minimum number of college-level accounting classes, has passed the CPA exam, and has met other requirements set by his or her state. A CPA firm - correct answer is a company that provides freelance business advice, particularly in connection with accounting issues and executes the vast majority of external audits in the US. AICPA sets ethical standards for CPAs, - correct answer provides continuing education for them, writes and grades the CPA exam, lobbies for legislation favored by CPAs, and provides other support to CPAs. Its oversight of the CPA exam is its main role in accreditation. However, to be accredited as a CPA - correct answer you must meet the requirements of the state in which you plan to practice. The requirements for each state are set by that state's legislature and overseen by that state's Board of Accountancy, which is a state agency. Public Company Accounting Oversight Board (PCAOB) - The PCAOB - correct answer determines who can audit public companies regardless of whether the audit firm is accredited by a state Board of Accountancy. Thus, they accredit firms that can audit public companies. Describe current trends that are causing changes in the field of accounting. Globalization - - correct answer As more and more business do business globally, capital flows more freely across national boundaries.This means investors can choose to invest in firms all over the planet.To help them make investment decisions, the global accounting and regulatory communities are working to bring accounting standards around the world into agreement the IASB Technology - - correct answer Information technology has speeded up the pace with which accounting data and reports are produced and dramatically increased the volume of accounting information that firms can provide to investors. The three main sections of the Balance Sheet are - correct answer Assets, Liabilities, and Equity. Both assets and liabilities are further separated into current and long term based on whether the asset is expected to be consumed or the liability paid within a year. Assets expected to be consumed and liabilities expected to be paid within a year are current and those that will be consumed or paid after a year are long-term. Equity - correct answer is separated into paid-in capital (also referred to as capital stock) and retained earnings. Paid in capital is created when an owner buys stock from the firm. The owner's investment in the company- capital How does owner's equity increase? - correct answer 1. By investing personal assets in the business. 2. Revenue=incoming money Retained earnings - correct answer are the accumulated earnings of the firm (i.e., net income over time) that have not been paid back in dividends. Paid in capital also is referred to as contributed capital while retained earnings is earned capital. leveraged buyout. - correct answer an attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing company's assets - correct answer mix is the proportion of total assets in each asset category and is largely determined by the industry in which the company operates. Financing mix is the result of management decisions. Owners' equity - correct answer is the residual interest in the assets of a company that remains after deducting its liabilities. By definition, Assets = Liabilities + Owners' Equity; this relationship is called the accounting equation. Assets - correct answer Resources or they are probable future economic benefits obtained or controlled by a company as a result of past transactions or events. eg. Cash, notes receivable, land, buildings, equipment, store supplies, accounts receivables, inventory Accounts Receivable - correct answer Amounts to be received in the future due to the sale of goods or services. It is an asset. You are going to receive money. Liabilities - correct answer are probable future sacrifices of economic benefits arising from present obligations of a company to transfer assets or provide services in the future as a result of past transactions or events. debt-creditors claims on assets eg accounts payable, notes payable, taxes payable, wages payable recognition - correct answer which items are listed in the balance sheet and which aren't Valuation - correct answer The practice of assigning monetary value to seemingly intangible benefits and natural capital. what dollar amounts to associate with the listed items The Balance Sheet equation: - correct answer Assets = Liabilities + Equity. Given values for any two of the three components you can always calculate to third component using this equation. For example, if you know a firm's total assets and liabilities, you can calculate owners' equity by: Assets - Liabilities = Equity The Income Statement describes - correct answer a company's financial performance for a period of time. A company's expenses are subtracted from its revenues and gains and losses are also factored in computing net income. Net income helps explain the change in retained earnings between two Balance Sheet dates, along with dividends and unrealized gains and losses. net ownership interest - correct answer owners' equity A single step income statement - correct answer lumps all revenues together and subtracts all expenses to calculate net income. adjusting entries - correct answer journal entries recorded to update general ledger accounts at the end of a fiscal period. When cash hasnt come in yet or if it did previously Accrual Accounting - correct answer economic performance of a company. Revenue recognition. How much revenue do your recognize for year one? It is the money that is actually collected net income - correct answer the difference between total revenue and total expenses when total revenue is greater Revenue should be recognized when - correct answer value has been delivered to customers which is typically only after the required work has been performed and after the collection of cash is reasonably assured. Individual transactions impacting income - correct answer can be analyzed using the expanded accounting equation, which is: Assets = Liabilities + Paid-in Capital + (Revenues - Expenses - Dividends) Accrual accounting is the process that accountants use in adjusting - correct answer raw transaction data into refined measures of a firm's economic performance. For example, imagine that you have just completed a $20,000 consulting contract but so far have only collected $3,000 of your fee in cash. To state that you made $3,000 on the contract is very misleading since you fully expect to collect the additional $17,000 in the future. A multiple-step income statement - correct answer presents subtotals that highlight key performance measures financial capital maintenance - correct answer Did the dollar amount go up? The approach that accountants typically use in computing a company's income in which inflation is ignored and a company is said to have income when its financial resources increase. and states that income exists when the dollar amount of a company's net assets (assets - liabilities, or owners' equity) increases during the bought house for $200K and sold for$ 220K your income was $20K -more cash at the end of the year than the beginning of the year physical capital maintenance - correct answer income is earned only when one experiences an increase in actual physical resources. , states that income is earned only when one experiences an increase in actual physical resources. If you sell your house and then buy it you really made nothing if you consider the amount of intrest the bank would have paid eg if you improved the physical component of the house like adding a pool Gross Profit - correct answer equals sales revenues minus the cost of goods sold. This is the money you take in from selling goods and how much those good cost you. I bought it for this amount and sold for this amount Net Profit - correct answer equal gross profit minus fixed costs. Start with gross profit and subtract fixed costs (rent, salaries, taxes, utilities, fees, amortization, depreciation. Operating income - correct answer gross profit - operating expenses measures the performance of the fundamental business operations conducted by a company and is computed as gross profit minus operating expenses. A general rule of thumb is that all expenses are operating expenses except interest expense and income tax expense. Accordingly, another name for operating income is EBIT Operating expenses - correct answer All of the expenses involved in running a business except interest and income taxes EBIT - correct answer earnings before interest and taxes Income from continuing operations - correct answer the segments of a company's business that it considers to be normal, and expects to operate in for the foreseeable future is computed by subtracting interest expense, income tax expense, and other miscellaneous items from operating income. Income from continuing operations is significant because of the two categories of items that it excludes: income from discontinued operations - correct answer On occasion, a company elects to dispose of a major business segment. After such a decision is made, the results of the discontinued segment are reported separately, along with any gain or loss associated with the disposing of the segment. Extraordinary Gains and Losses - correct answer . For accounting purposes, extraordinary items are defined as events or transactions that are unusual in nature and infrequent in occurrence. For example, a company suffering a large uninsured loss from an earthquake would report the loss as an extraordinary item is the accountant's attempt to summarize in one number the overall economic performance of a company for a given period. Because net income is an overall summary number. The bottom line - correct answer net income Comprehensive Income - correct answer Comprehensive income The number used to reflect an overall measure of the change in a company's wealth during the period is the number used to reflect an overall measure of the change in a company's wealth during the period. In addition to net income, comprehensive income includes items that, in general, arise from changes in market Other Comprehensive Income (OCI) - correct answer unr