Accounting Exam - BUS160
Balance Sheet
a financial statement that reports the financial position of a firm by identifying and reporting the value of the firm's assets, liabilities, and owners' equity
In the context of financial budgets, what does the capital expenditure budget identify?
a firm's planned investments in major fixed assets and long-term projects
Budgeting
a management tool that explicitly shows how a firm will acquire and use the resources needed to achieve its goals over a specific time period
Revenue: Accural - Basis Accounting
a method that recognizes revenue when it is earned and matches expenses to the revenues they helped produce
Developing the Key Budget Components: Master Budget
a presentation of an organization's operational and financial budgets that represents the firm's overall plan of action for a specified time period
Generally Accepted Accounting Principles (GAAP)
a set of accounting standards that is used in the preparation of financial statements
Statement of Retained Earnings
a simple statement that shows how retained earnings have changed from one accounting period to the next
Accounting
a system for recognizing, organizing, analyzing, and reporting information about the financial transactions that affect an organization. - the goal of this system is to provide its users with relevant, timely information that helps them make better economic decisions
Managerial Accounting - Cost Concepts: Activity-based Costing (ABC)
a technique to assign product costs based on links between activities that drive costs and the production of specific products
Key Users of Accounting Information: Government Agencies
accounting information is critical for meeting the reporting requirements of the IRS, the SEC and other federal and state agencies
Examples of Current Liabilities
accounts payable and salaries payable
What is a CPA firm?
an accounting firm that specializes in providing public accounting services
What is the most common outcome of an independent auditor's report?
an unqualified opinion
Key Users of Accounting Information: Creditors
before granting a loan, responsible bankers and other lenders want to assess a firm's credit worthiness by looking at its financial statements
The overstating of needs or setting low budget goals by managers in a budgeting process can result in what?
budgetary slack
What is a management tool that explicitly shows how a firm will acquire and use the resources needed to achieve its goals over a specific time period
budgeting
Examples of Current Assets
cash, accounts receivable and inventory
External Auditors
check the figures and examine the accounting *methods* the company used to obtain those figures
Liabilities
claims that outsiders have against a firm's assets
Examples of Owners' Equity
common stock and retained earnings
Developing the Key Budget Components: Operating Budgets
communicate an organization's sales and production goals and the resources needed to achieve these goals
Key Users of Accounting Information: Suppliers
companies that provide supplies want to know that the company can pay for the orders it places
Horizontal Analysis
compare account values reports on these statements over two or more years to identify changes and trends
Costs are deducted from revenue in several stages to show how net income is determined. The first step in this process is to deduct...
costs of goods sold
Balance sheets usually organize liabilities into what two broad categories?
current and long term
In the context of the calculation of the net income of a firm, the final step of the process comprises...
deducting the firm's interest expenses and taxes from its net operating income
In the context of managerial accounting, what costs are incurred as the result of some specific cost object?
direct costs
What do SEC guidelines require top management to do?
disclose any trends, events, or risks likely to have a significant impact on the firm's financial condition
What indicates the cash a firm spends, or other assets it uses up, to carry out the business activities necessary to generate its revenue?
expenses
Developing the Key Budget Components: Financial Budgets
focus on the firm's financial goals and identify the resources needed to achieve these goals
Key Users of Accounting Information: Stockholders
have a keen interest in its financial performance of their company, especially as indicated by the firm's financial statements
What do stakeholders often want to know?
how a firm's financial condition has changed over a period of several years, or to compare its results to those of other firms in the same industry
Independent Auditor's Report
included in the annual report the firm sends to its stockholders - if the auditors doesn't find any problems with the way a firm's financial statements were prepared and presented, the report will offer an unqualified opinion
Revenue
increases a firm's assets that result from the sale of goods, provision of services, or other activities intended to earn income
Managerial Accounting - Cost Concepts: Direct Costs
incurred directly as the result of some specific cost object
Examples of Other Expenses in am income statement
interest expense and taxes
Managerial Accounting - Cost Concepts: Out of Pocket Cost
involves the payment of money or other resources
In the context of budgeting, a flexible budget...
is designed to show the appropriate budgeted level of costs for each different level of sales
In the context of budget preparation, what is a disadvantage of participatory budgeting?
it can lead to budgetary slack
What is accumulated depreciation?
it is the decrease in the value of assets such as machinery, equipment, and property over time
In the context of balance sheets. what is a difference between liabilities and owners' equity?
liabilities: indicate the claims outsiders have against the firm's assets, whereas owners' equity refers to the claims the owners have against their firm's assets
Examples of Long Term Liabilities
long term debt, long term building lease
Key Users of Accounting Information: Managers
need information about sales in various regions and for various product lines ex: financial managers need up to date facts about debt, cash, inventory, and capital
Examples of Long Term Assets
office furniture, land, building, other fixed assets, and depreciation
Three activities that identify the amount of cash that flowed in and out of the firm
operating, investing, and financing
Preparing the Budget: Bottom-up Budgeting
organizations that use a participatory process allow middle and supervisory managers to participate actively in the creation of the budget
Government Accountants
perform a variety of accounting functions for local, state, or federal government agencies
Public Accountants
provide services such as tax preparation, external auditing, and management consulting to clients on a fee basis
In what ways do public accountants differ from management accountants?
public accountants: conduct external audits management accountants: analyze the financial statements of their own organization
Examples of Cost of goods sold
raw materials, factory labor and manufacturing costs
Through GAAP, the FASB aims to ensure that financial statements are...
relevant, reliable, consistent, and comparable
Managerial Accounting - Cost Concepts: Fixed Costs
remain the same when the level of production changes within some relevant range
Assets
resources owned by a firm
Expenses
resources that are used up as the result of business operations
Examples of Operating Expenses
salaries, advertising expenses, rent, utility expenses, and other general expenses
The preparation of operating budgets begins with the development of a...
sales budget
In the context of statement of cash flows, cash flows from operating activities show the amount of cash that flowed into the company from...
sales revenue
Investing Activities
show the amount of cash received from the sale of fixed assets (land & building) and financial assets bought as long term investments - also shows any cash used to buy fixed assets or make long term financial statements
Operating Activities
show the amount of cash that flowed into the company from the sale of goods and services, and dividends and interest received from ownership of the financial securities of other firms - also shows the amount of cash used to cover expenses resulting from operations and any cash payments to purchase securities held for short term trading purposes
Financing Activities
show the cash the firm received from issuing additional shares of its own stock or from taking out short term and long term loans
Stockholders' Equity Statement
shows how net income and dividends affect retained earnings - also shows other changes in stockholder's equity, such as those that arise from the issuance of additional shares of stock
Preparing the Budget: Budgetary Slack
some middle managers may be tempted to overstate their needs or set low budget goals in order to make their jobs easier
Key Users of Accounting Information: Employees
strong financial performance would help employees make their case for ice pay raises and hefty bonuses - if earnings drop, it could result in layoffs
Financial Accounting
the branch of accounting that prepares financial statements for use by owners, creditors, suppliers, and other external stakeholders
Managerial Accounting
the branch of accounting that provides reports and analysis to managers to help them make informed business decisions
Owners' Equity
the claims a firm's owners have against their company's assets - often called "stockholder's equity" on balance sheets of corporations)
Net Income
the difference between the revenue a firm earns and the expenses it incurs in a given time period
What is the logic behind the accounting equation?
the fact that firms must finance the purchase of their assets, and owners and non owners are the only 2 sources of funding
Income Statement
the financial statement that reports the revenues, expenses, and net income that resulted from a firm's operations over an accounting period
Managerial Accounting - Cost Concepts: Implicit Cost
the opportunity cost that arises when a firm uses owner-supplied resources
Financial Accounting Standards Board (FASB)
the private board that establishes the generally accepted accounting principles used in the practice of financial accounting
Managerial Accounting - Cost Concepts: Indirect Costs
the result of a firm's general operations and are not directly tied to any specific cost object
How do accountants define cost?
the value of what is given up in exchange for something
In the context of accounting, what best defines cost?
the value of what is given up in exchange for something else
In the context of owners' equity, what are retained earnings?
they are accumulated earnings reinvested in a company rather than being paid to the owners
What are current assets?
they are resources that a firm expects to use up within a year
Sarbanes-Oxley Act 2002 (SOX)
this banned business relationships that might create conflicts of interest between CPA firms and the companies they audit - it also establishes a private sector nonprofit corporation known as the Public Company Accounting Oversight Board (PCAOB)
What do US securities require of publicly traded corporations in the US?
to have an independent CPA firm perform an annual external audit of their financial statements
What is the purpose of an audit?
to verify that a company's financial statements were properly prepared in accordance with generally accepted accounting principles and fairly present the financial condition of the firm
Preparing the Budget: Top-down Budgeting
top management prepares the budget with little or no input from middle and supervisory managers
If the external auditor doesn't find any problems with the way the financial statements were prepared, what opinion will they give?
unqualified
Managerial Accounting - Cost Concepts: Variable Costs
vary directly with the level of production
Adverse Opinion
when auditors discover more serious and widespread problems with a firm's statements - indicates that the auditor believes the financial statements are seriously flawed and they may be misleading an unreliable
Qualified Opinion
when the auditor identifies some minor concerns but believes that on balance the firm's statements remain a fair and accurate representation of the company's financial position
Independent Auditors Report
where the results of the audit are presented and include the annual report of the firm sends to its stockholders
Management Accountants
work within a company and provide analysis, prepare reports and financial statements, and assist managers in their own organization Ex: internal auditors
Internal Auditors
work within their organizations to detect internal problems Ex: waste, mismanagement, employee theft
PCAOB (Public Company Accounting Oversight Board)
"To protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports"
Statement of Retained Earnings Equation
Dividends - Net Income = Retained Earnings
Which of the following is a difference between managerial accounting and financial accounting?
FA: governed by a set of generally accepted accounting principles MA: uses procedures developed internally that are not required to follow generally accepted accounting principles
Accounting Equation
Liabilities + Owner's Equity = Assets
Income statement equation
Revenue + Expenses = Net Income
Who has the ultimate legal authority to set and enforce accounting standards?
SEC