BUSI 1301.3E01_Chpt 8_Accounting

out-of-pocket cost

A cost that involves the payment of money or other resources.

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.

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.

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.

accounting

A system for recognizing, organizing, analyzing, and reporting information about the financial transactions that affect an organization.

activity-based costing (ABC)

A technique to assign product costs based on links between activities that drive costs and the production of specific products.

Define accounting and describe how accounting information is used by a variety of stakeholders.

Accounting is a system for recognizing, organizing, analyzing, and reporting information about the financial transactions that affect an organization. This information is important to many different stakeholder groups. Owners want to know whether their firm made a profit or suffered a loss. Creditors want to make sure that the firm has the capacity to repay any loans they make. Employees want to know whether their company is performing well enough to provide job security and a good pay raise. The IRS wants to know the amount of taxable income the firm earns during each period

horizontal analysis

Analysis of financial statements that compares account values reported on these statements over two or more years to identify changes and trends.

accounting equation

Assets = Liabilities + Owners' Equity

Explain how the budget process can help managers plan, motivate, and evaluate their organization's performance.

Budgeting facilitates planning by translating goals into measurable quantities and requiring managers to identify the specific resources needed to achieve them. The budgeting process can help with both motivation and evaluation. Employees tend to be more highly motivated when they understand the goals they are expected to accomplish and believe they are ambitious but achievable. Managers can compare actual performance to budgeted figures to determine whether various departments and functional areas are making adequate progress toward achieving their organization's goals.

operating budgets

Budgets that communicate an organization's sales and production goals and the resources needed to achieve these goals.

financial budgets

Budgets that focus on the firm's financial goals and identify the resources needed to achieve these goals.

liabilities

Claims that outsiders have against a firm's assets.

direct cost

Costs that are incurred directly as the result of some specific cost object.

indirect costs

Costs that are the result of a firm's general operations and are not directly tied to any specific cost object.

fixed costs

Costs that remain the same when the level of production changes within some relevant range.

variable costs

Costs that vary directly with the level of production.

In the United States, the Securities and Exchange Commission (SEC) has delegated the responsibility for developing accounting standards to a private organization called the _____.

Financial Accounting Standards Board

Identify the purposes and goals of generally accepted accounting principles.

Generally accepted accounting principles (GAAP) are rules that govern the practice of financial accounting. The goal of GAAP is to ensure that the information generated by financial accounting is relevant, reliable, consistent, and comparable

Describe several methods stakeholders can use to obtain useful insights from a company's financial statements.

In addition to looking at the numbers in financial statements, it's also important to check out the independent auditor's report, read the management discussion, and examine the endnotes that accompany these statements. The auditor's report indicates whether the financial statements were prepared in accordance with GAAP and fairly present the financial condition of the company. The management discussion provides insights by top management to put the numbers in context. Endnotes often disclose key information that isn't directly available in the statements themselves. It's also a good idea to compare the figures reported in current statements to those from earlier statements to see how key account values have changed

revenue

Increases in a firm's assets that result from the sale of goods, provision of services, or other activities intended to earn income.

____ are costs that are the result of a firm's general operations and are not tied to any specific cost object.

Indirect costs

____ work within their organizations to detect problems such as waste, mismanagement, embezzlement, and employee theft

Internal auditors

Which of the following statements is true of managerial accounting?

It involves presenting customized information on request

Which of the following statements is true of the Financial Accounting Standards Board (FASB)?

It is a private organization responsible for developing accounting rules.

Which of the following is a difference between managerial accounting and financial accounting?

Managerial accounting is intended to provide information to internal stakeholders, whereas financial accounting is primarily intended to provide information to external stakeholders.

Explain the role of managerial accounting and describe the various cost concepts identified by managerial accountants.

Managerial accounting provides information to an organization's managers and other internal stakeholders so that they can make better decisions. One key type of information provided by managerial accounting involves the classification and measurement of costs. Explicit (or out-of-pocket) costs involve monetary payments. Implicit costs arise when a company gives up an opportunity to use an asset in an alternative way. Fixed costs don't change when a firm changes its rate of output. Variable costs rise when production increases and fall when it decreases. Direct costs are tied to the production of a specific good, while indirect costs are incurred as the result of a firm's overall operations and are not tied directly to a specific good.

____ are budgets that identify projected sales and production goals and the various costs the firm will incur to meet these goals.

Operating budgets

expenses

Resources that are used up as the result of business operations.

In the United States, the ultimate legal authority to set and enforce accounting standards lies with the _____.

Securities and Exchange Commission

Describe the key elements of the major financial statements.

The balance sheet shows the firm's financial position at a specific point in time by reporting the value of its assets, liabilities, and owners' equity. The income statement shows the net income (profit or loss) the firm earns over a stated time period by deducting expenses from revenues. The statement of cash flows shows the inflows and outflows of cash that result from a firm's operations, financing activities, and investing activities in a given time period and the net change in the amount of cash the firm has over that time period.

financial accounting

The branch of accounting that prepares financial statements for use by owners, creditors, suppliers, and other external stakeholders.

managerial (or management) 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 "stockholders' 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

statement of cash flows

The financial statement that identifies a firm's sources and uses of cash in a given accounting period

income statement

The financial statement that reports the revenues, expenses, and net income that resulted from a firm's operations over an accounting period.

accrual-basis accounting

The method of accounting that recognizes revenue when it is earned and matches expenses to the revenues they helped produce.

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.

cost

The value of what is given up in exchange for something.

Which of the following statements is true of management accountants?

They assist their superiors in preparing financial statements.

In the context of external audits of financial statements, which of the following statements is true of CPA firms?

They must be independent of the companies they are auditing

In the context of the balance sheet, which of the following serves to be the rationale behind the accounting equation?

a. A firm must finance the purchase of their assets, and the owners and nonowners should contribute toward it. b. A firm's assets should be bought through the contingency fund of the firm and partly through public funding. d. The average amount spent on the salary of the employees of a firm should be equal to the value of the assets of the firm.

In the context of an independent auditor's report, which of the following is a difference between an unqualified opinion and a qualified opinion?

a. An unqualified opinion is given if the independent auditor does not find any problems with the way a firm's financial statements were prepared and presented, whereas a qualified opinion is given if the independent auditor identifies minor concerns but believes that on balance the firm's statements are a fair representation of the company's financial position. b. An unqualified opinion is given if the independent auditor discovers widespread and serious problems with a firm's statements, whereas a qualified opinion is given if the independent auditor does not find problems with the way the firm's financial statements were prepared and presented. c. An unqualified opinion is given if the independent auditor identifies minor concerns but believes that on balance a firm's statements are a fair representation of the company's financial position, whereas a qualified opinion is given if the independent auditor discovers widespread and serious problems with the firm's statements.

In the context of the approaches to budget preparation, which of the following statements is true of participatory budgeting?

a. It demotivates the middle and first-line managers. b. It is less time consuming than the top-down approach. c. It includes entry-level employees in the budgeting process. d. It is more resource intensive than the top-down approach.

The opportunity cost that arises when a firm uses owner-supplied resources is known as a(n) _____.

a. fixed cost b. implicit cost d. indirect cost

Companies that are not publicly traded:

a. obtain external audits at their own discretion. b. are mandated by the Securities and Exchange Commission to provide comparative financial statements. c. do not incur any out-of-pocket costs. d. are required to perform horizontal analysis to identify changes in their key account values.

Financial accounting:

addresses the needs of stockholders, creditors, and government regulators.

In the context of an independent auditor's report, _____ indicates that the auditor believes the financial statements are seriously flawed and that they may be misleading and unreliable.

an adverse opinion

If a firm's assets equal $18,000 and its liabilities equal $7,500, then the owners' equity is _____.

b. $10,500

In the context of financial statements, which of the following statements is true of long-term liabilities?

b. They are debts that don't come due until more than a year after the date on the balance sheet.

Lance signs a contract with Gerove Corp. to perform an external audit for the company. In his audit, he finds certain minor issues in the firm's financial statements but is of the view that the statements are, nevertheless, an accurate representation of the firm's financial status. In this scenario, Lance is most likely to issue a(n) _____ opinion.

b. concurring c. qualified d. adverse

Frank is a loan officer who approves loans for small businesses. One factor he looks at carefully when making loan decisions is the amount of outstanding debt a firm already has—an information that he can find in the firm's:

balance sheet

The major responsibilities involved in financial accounting are the preparation of the:

balance sheet, income statement, and statement of cash flows

The _____ is a financial budget and shows how a firm's operations, investing, and financing activities are expected to affect all of the asset, liability, and owners' equity accounts.

budgeted balance sheet

In the context of budget preparation, the document created in the final stage of an operating budget is referred to as a _____.

budgeted income statement

Which of the following is a difference between a statement of retained earnings and a stockholders' equity statement?

c. A statement of retained earnings only shows how net income and dividends affect retained earnings, whereas a stockholders' equity statement also shows changes in stockholders' equity that arise from the issuance of additional shares of stock.

The top managers of Promedium Inc. are creating a master budget for the company. They require a statement of the budget goals from each of its departments to be able to make an appropriate master budget. Karren, the manager of the sales department, overstates her needs in the budget and presents the statement to the top managers. The outcome of Karren's actions is known as _____. a. a budgetary crisis

c. budgetary slack

The accountants at Gamone Phones, a cell phone manufacturing company, discover that the firm has performed poorly over the last two quarters, leading to negative financial implications. Instead of stating the actual figures, the managers decide to wrongly present the firm's debts and overstate its earnings. The aspect of financial accounting that should be emphasized to avoid such incidents of accounting fraud is:

c. ethics in accounting.

In the context of comparative financial statements, comparative balance sheets

can be used to check if the owners' equity had increased.

The Securities and Exchange Commission requires publicly traded corporations to provide _____.

comparative financial statements

In the context of financial statements, _____ are debts that come due within a year of the date on the balance sheet.

current liabilities

_____ refers to the claims owners have against their firm's assets. a. Minority interest

d. Stockholders' equity

In the context of financial statements, the specific accounts listed in the stockholders' equity section of a balance sheet depend on the:

form of business ownership.

In the context of interpreting financial statements, using comparative statements to identify changes in key account values over time is called __

horizontal analysis

Lecona, a start-up company, failed to acquire any major funding from potential investors. Therefore, the owners of the company set up their office in an unoccupied apartment owned by one of them. In this scenario, the company most likely incurred a(n) _____.

implicit cost

Stockholders typically want to view a firm's accounting information to

know if management has generated a strong-enough return on investment.

The _____ of a firm organizes the operating and financial budgets into a unified whole, representing the firm's overall plan of action for a specified time period.

master budget

In the context of managerial accounting, _____ are usually easy to measure because they involve actual expenditures of money or other resources.

out-of-pocket costs

Generally accepted accounting principles (GAAP) are a set of accounting standards that is used in the:

preparation of financial statements

Mark, an accountant, is given the task to lead an external auditing project for a multinational company. In his spare time, Mark also acts as a consultant for Mayfair Hut Inc., a local company. In this scenario, Mark is a:

public accountant.

Assets

resources owned by a business/Resources owned by a firm.

Increases in a firm's assets that result from the sale of goods, provision of services, or other activities intended to earn income are referred to as _____.

revenue

In the context of budget preparation, the cash budget is a financial budget document that identifies:

short-term fluctuations in cash flow.

In the context of statement of cash flows, cash flows from investing activities:

show the amount of cash received from the sale of fixed assets

As a shareholder of Syder Corporation, Carl wants to know whether the company had earned a profit over the last financial year. He begins by looking into the net income of the company to know if it has sufficient amount of money to pay off the workers and suppliers and also the amount of money remaining with the owners. In this scenario, Carl is looking at Syder Corporation's ____

statement of cash flows

In the context of managerial accounting, _____ are costs that change directly with the level of production.

variable costs