MGMT 1 Chapter 17-18 Accounting and Financial Management

secured bond

bond issued with some form of collateral

cash flow

difference between cash coming and and cashing going out

cost of goods sold (cost of goods manufactured)

measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale

long term forecast

predicts revenues, costs, and expenses for a period longer than 1 year, sometimes as long as 5 or 10 years

assets

economic resources (things of value) owned by a firm including productive, tangible items like equipment, buildings, land, furniture, and cars that help generate income, as well as intangible items with value like patents, trademarks, copyrights, and goodwill

cash budget

estimates cash inflows and outflows during a particular period like a month or quarter

leverage

raising needed funds through borrowing to increase a firm's rate of return

cost of capital

rate of return of a company must earn in order to meet the demands of its lenders and expectations of its equity holders

trial balance

summary of all the financial data in the account ledgers that ensures the figures are correct and balanced

financial statement

summary of all the financial transactions that have occurred over a particular period; indicate a firm's financial health and stability and are key factors in management decision making

fixed assets

assets that are relatively permanent such as land, buildings, and equipment

What are 3 common liability accounts recorded on a balance sheet?

1) accounts payable 2) notes payable 3) bonds payable

What are the 3 categories of assets

1) current assets 2) fixed assets 3) intangible assets

What are the 3 steps of financial planning?

1) forecasting the firm's short term and long term financial needs 2) developing budgets to meet those needs 3) establishing financial controls to see whether the company is achieving its goals

statement of cash flows are related to what 3 major activities of a firm

1) operations: cash transactions associated with running the business 2) investments: cash used in or provided by the firm's investment activities 3) financing: cash raised by taking on new debt, or equity capital or cash used to pay business expenses, past debts, or company dividends

Kimberly trades some of her homegrown tomatoes to her neighbor, Ron, for some green peppers fresh from Ron's garden. This type of trade represents an example of: A) barter. B) e-commerce. C) direct exchange. D) tax avoidance.

A) BARTER Barter occurs when people trade goods and services for other goods and services.

Which of the following institutions monitors the monetary policies of member nations to ensure a global monetary system that works best for all nations? A) The International Monetary Fund B) The World Bank C) The International Development Administration D) The International Reserve Bank

A) The International Monetary Fund The International Monetary Fund was established to assist in the smooth flow of money among nations. Members of the IMF are required to inform the organization of any changes in monetary policy, and to modify those policies on the advice of the IMF to accommodate the needs of the entire membership.

Jose just graduated from college with a bachelor's degree in accounting. He plans to go to work for the American Cancer Society as an accountant. Jose will be a(n): A) private accountant. B) public accountant. C) forensic accountant. D) independent accountant.

A) private accountant. A private accountant works for a single business, government agency, or nonprofit organization.

fundamental accounting equation

Assets = Liabilities + Owner's equity basis for balance sheet and must always be balanced i.e. you have 50k but borrow 30k assets = liabilities + owner's equity 80k = 30k + 50k

Which of the following institutions primarily finances economic development projects in less-developed countries? A) The International Monetary Fund B) The World Bank C) The International Development Administration D) The International Reserve Bank

B) The World Bank The World Bank is primarily responsible for financing economic development. In recent years, most World Bank loans have gone to less-developed nations to improve productivity and raise standards of living.

The Federal Reserve fulfills its role as a "lender of last resort" when it loans funds to: A) small businesses that are unable to obtain loans from other sources. B) banks during banking emergencies. C) major corporations that are on the verge of bankruptcy. D) the federal government when deficits exceed borrowing limits set by Congress.

B) banks during banking emergencies. The Federal Reserve was established in the wake of the banking panic of 1907 and the resulting cash shortage. The Fed was intended to be a "lender of last resort" in such emergencies, standing ready to provide liquidity to banks when runs by nervous depositors depleted their reserves. References

A comparison of bookkeeping and accounting indicates that: A) the two are virtually the same in practice. B) bookkeeping involves recording financial information, while accounting is concerned with classifying, summarizing, and interpreting this information. C) bookkeeping is more useful for small businesses while accounting is more useful for large businesses. D) accounting is a subsystem of the process of bookkeeping.

B) bookkeeping involves recording financial information, while accounting is concerned with classifying, summarizing, and interpreting this information. The bookkeeping function in the accounting cycle involves the recording of transactions. The accounting function goes further and includes classifying, summarizing, and interpreting the recorded information.

Keith will graduate from Southern State University this year. He has accumulated $18,000 in student loans during his four years at college. An accountant would classify the loans as: A) assets. B) liabilities. C) owners' equity. D) intangibles.

B) liabilities. Liabilities represent debts or obligations of an individual or a firm.

When the Fed increases the discount rate, banks: A) must purchase more government securities. B) must pay a higher rate when they borrow from the Fed. C) will lower the rate they charge to borrowers. D) must hold a greater amount of funds in reserve against deposits.

B) must pay a higher rate when they borrow from the Fed. The discount rate is the rate of interest the Fed charges when it makes loans to banks.

Perry is responsible for recording sales transactions at Turncoat Enterprises. Perry's company utilizes _____________________, to help minimize entry errors. A) auditing B) capital budgeting C) double-entry bookkeeping D) revenue assessment

C) double-entry bookkeeping Double-entry bookkeeping requires the bookkeeper to record two entries for each transaction. This procedure emphasizes accuracy in the recording of all transactions.

Scott Drilling Contractors recently issued a corporate bond on which it expects to pay interest for the next twenty years. Scott would record this as a __________ on its balance sheet. A) declining balance asset B) retained earning C) long-term liability D) long-term expense

C) long-term liability Long-term liabilities are obligations that come due in a time period greater than one year.

ratio analysis

assessment of a firm's financial condition using calculations and interpretations of financial ratios developed form the firm's financial statements

When the Fed buys U.S. government securities, the: A) size of the federal deficit falls. B) discount rate rises. C) money supply increases. D) banking system loses reserves.

C) money supply increases. When the Fed buys and sells government securities, it is engaging in open-market operations. When the Fed buys government securities, the money it pays for these securities enters circulation, resulting in an increase in the supply of money.

Use the fundamental accounting equation to solve the following: Assets minus liabilities equals: A) net income. B) gross margin. C) owners' equity. D) cash reserves.

C) owners' equity. Owners' equity is the residual claim of the owners on the assets of the business. After the creditors have made their claims against the assets of the firm, the remaining assets belong to the owners. In other words, owners' equity is the amount of the business that belongs to the owners minus any liabilities owed by the business.

Important provisions of the Sarbanes-Oxley Act: A) approve corporate loans to directors of the company. B) encourage the destruction of financial documents. C) require the CEO and CFO of corporations to certify the accuracy of financial reports. D) encourage outside CPA firms to deliver several services to their clients, including auditing services and consulting services.

C) require the CEO and CFO of corporations to certify the accuracy of financial reports. The Sarbanes-Oxley Act includes several key provisions. It disapproves of corporate loans to director; it disapproves of CPA firms providing both auditing and consulting services to clients. It considers the destruction of important financial documents as a crime that can result in felony charges.

Commercial banks, savings and loan associations, and credit unions: A) specialize solely in loaning money for home mortgages. B) operate as nonprofit organizations. C) deposit their excess funds with the U.S. Treasury. D) accept deposits and make loans.

D) accept deposits and make loans. Commercial banks, savings and loan associations, and credit unions are all depository institutions that accept deposits and make loans.

An increase in the rate of inflation would likely result from a(n): A) decrease in spending by the federal government. B) rise in the unemployment rate. C) rise in interest rates. D) increase in the supply of money in circulation.

D) increase in the supply of money in circulation. An increase in the money supply would stimulate an increase in total spending, putting upward pressure on prices and creating an increase in the rate of inflation.

When creating the income statement, which of the following statements is accurate? A) revenues, minus general operating expenses = gross profit. B) revenues, minus tax expense = gross profit. C) revenues, minus depreciation expense = gross profit. D) revenues, minus cost of goods sold = gross profit.

D) revenues, minus cost of goods sold = gross profit. The first line item on the income statement reports revenues earned over a period of time. The cost of goods sold is subtracted from revenues in order to determine gross profit.

T/F: The Sarbanes-Oxley Act strengthens the protection for whistleblowers who report wrongful actions of company officers.

TRUE. By definition, whistleblowers are stakeholders who report fraudulent and other illegal behavior to government authorities. The Sarbanes Oxley Act encourages whistleblowing.

T/F: Harrison Manufacturing owns land worth $600,000 and has $130,000 worth of cash in its bank account. In the asset section of the balance sheet, Harrison lists its land holdings prior to listing its cash since it is a higher value.

FALSE. A balance sheet lists assets in order of liquidity—i.e., how easily and quickly they can be converted into cash. The most liquid assets are called current assets, and they are listed first on the balance sheet. Obviously, cash is the most liquid asset of all. Land is not considered a liquid asset because it usually takes a significant amount of time and paperwork to sell it and collect the cash proceeds.

T/F: Although there are many new ways to perform electronic funds transfer, legally, the only way that an employer can pay an employee is by writing a check

FALSE. Employers are utilizing electronic funds transfer in several cost-effective ways, including when distributing payroll. Direct deposit and payroll debit cards have grown in popularity.

T/F: Accounting is not important for nonprofit organizations since financial data is not critical to their success.

FALSE. Nonprofit organizations require accounting information. These organizations hire accountants to show contributors how their money is being used.

T/F: Recently, the Fed announced a reduction in the discount rate and the reserve requirement. These actions clearly suggest that the Fed intends to decrease the money supply.

FALSE. Reducing the reserve requirement will free up funds and encourage banks to make more loans. Reducing the discount rate will enable banks to borrow funds from the Fed at lower cost, thus also encouraging banks to make more loans. Thus, both policies are likely to increase the money supply.

T/F: As a relatively poor nation, Liberia wants to obtain funds for a project to improve the availability of water and electricity. Liberia should contact the International Monetary Fund.

FALSE. The World Bank is primarily responsible for financing economic development. In recent years the World Bank has lent most of its funds to less-developed nations to help improve productivity and standards of living. In contrast, the International Monetary Fund is more concerned with overseeing the monetary and exchange rate policies of member nations.

T/F: Hendry, Inc., has recorded its unpaid bill for supplies under a current liabilities account on the balance sheet. This payment will be due to the supplier in less than a year.

TRUE. Current liabilities are debts that are due in less than one year.

T/F: The federal funds rate is the interest rate that banks charge each other.

TRUE

T/F: The wave of bank failures during the Great Depression prompted the government to establish federal deposit insurance to protect the public from bank failures.

TRUE. Despite the presence of the Federal Reserve System to serve as a "lender of last resort," many banks failed during the early years of the Great Depression. Congress responded by passing legislation to strengthen the U.S. banking system in 1933 and 1935. One of the most important results of this legislation was the establishment of federal deposit insurance.

T/F: A firm's financial statements represent a health report regarding the condition of the firm.

TRUE. Financial statements tell the owner, manager, and other stakeholders about the financial health of the business.

T/F: Citywide Insurance Corporation's internal accountants can prepare an audit for the company.

TRUE. Internal audits are performed by accountants within the organization to ensure that proper accounting procedures and reports are being carried on within the company. Accountants outside of the firm prepare independent audits.

T/F: The currencies of some countries, although durable and portable, are relatively unstable, which makes international exchanges difficult.

TRUE. The currencies of other nations are not always equally stable, even though they may be equally portable, divisible, and durable.

T/F: An increase in the discount rate produces a decrease in money supply.

TRUE. When the Fed increases the discount rate, the rate it charges member banks to borrow money, the result is a decrease in loans. Member banks must raise the interest rate they charge to customers, in order to cover the increase in what they had to pay to borrow the funds from the Fed.

T/F: Good decisions are based on good information. Organizations need accounting—to provide good financial information.

TRUE.Accounting provides management and other interested parties the information they need to make better decisions.

T/F: Accounting reports and financial statements reveal as much about a business's health as pulse and blood pressure readings tell us about a person's health

True. you should know something about accounting if you want to succeed in business. It's almost impossible to understand business operations without being able to read, understand, and analyze accounting reports and financial statements

financial accounting

accounting information and analyses prepared for people OUTSIDE the organization.

intangible assets

long term assets like patents, trademarks, copyrights that have no real physical form but do have value

accounting cycle

a 6 step procedure that results in the preparation and analysis of the major financial statements 1) Analyze source documents (sales slips, travel records, etc) 2) record transactions in journals 3) transfer (post) journal entries to ledger 4) take a trial balance 5) prepare financial statements (balance sheet, income statement, statement of cash flows) 6) Analyze financial statements

unsecured bond

a bond backed only by the reputation of the issuer, also called a debenture bond; investors simply trust organization issuing the bond will make good on its financial commitments

line of credit

a given amount of unsecured short term funds a bank will lend to a business, provided the funds are readily available; speeds up borrowing process since a firm doesn't have to apply for a new loan every time it needs funds

revolving credit agreement

a line of credit that's guaranteed but usually comes with a fee

managerial accounting

accounting used to provide information and analyses to managers inside the organization to assist them in decision making; measuring and reporting costs of production, marketing and other functions; preparing budgets; checking whether or not units are staying within their budgets; and designing strategies to minimize taxes

retained earnings

accumulated earnings from a firm's profitable operations that were reinvested in the business and not paid out to stockholders in dividends

owner's equity

amount of business that belongs to the owners minus any liabilities owed by that business; assets minus liabilities

certified public accountant (CPA)

an accountant who passes a series of examinations established by the American Institute of Certified Public Accountants

public accountant

an accountant who provides accounting services to individuals or businesses on a fee basis

private accountant

an accountant who works for a single firm, government agency, or nonprofit organization

independent audit

an evaluation and unbiased opinion about the accuracy of a company's financial statements

bonds payable

long term liabilities that represent money lent to the firm that must be paid back

differences among the financial statements (balance sheet, income statement, statement of cash flows)

balance sheet details what the company owns and owes on a certain day. income statement shows the revenue a firm earned selling its products compared to selling costs (profit or loss) over a specific period of time. statement of cash flows highlights the difference between cash coming in and cashing out out of a business

capital expenditures

major investments in either tangible long term assets such as land, buildings, and equipment or intangible assets such as patents, trademarks, and copyrights

accounts payable

current liabilities or bills the company owes to others for merchandise or services purchased on credit but not yet paid for

current liabilities

debts due in one year or less

long term liabilities

debts not due for one year or more

financial managers

managers who examine financial data prepared by accountants and recommend strategies for improving the financial performance of the firm

budget

financial plan that sets forth management's expectations and, on the basis of those expectations, allocates the use of specific resources throughout the firm; depends heavily on accuracy of firm's balance sheet, income statement, statement of cash flows, and short term and long term financial forecasts

finance

function in a business that acquires funds for the firm and manages them within the firm

short term financing

funds needed for a year or less

long term financing

funds needed for more than a year (usually 2 to 10 years)

debt financing

funds raised through various forms of borrowing that must be repaid

capital budget

highlights a firm's spending plans for major asset purchases that often require large sums of money

gross profit (gross margin)

how much a firm earned by buying (or making) and selling merchandise

statement of cash flows

provides a summary of money coming into and going out of the firm; tracks a company's cash receipts and cash payments

current assets

items that can or will be converted into cash within one year; cash, accounts receivable (amount of money owed to firm that it expects to receive within one year), and inventory

financial management

job of managing a firm's resources to meet its goals and objectives

auditing

job of reviewing and evaluating the information used to prepare a company's financial statements; usually done by private accountants within the organization by way of internal audits to guarantee that the organization is carrying out proper accounting procedures and financial reporting

secured loan

loan backed by collateral, something valuable such as property; if borrower fails to pay loan, lender may take possession of the collateral

unsecured loan

loan that doesn't require any collateral; more difficult to obtain; lenders give unsecured loans to only highly regarded customers (long standing businesses or those considered financially stable)

equity financing

money raised from within the firm, from operations or through the sale of ownership in the firm (stock or venture capital)

venture capital

money that is invested in new or emerging companies that are perceived as having great profit potential

commercial finance companies

organizations that make short term loans to borrowers who offer tangible assets as collateral like property, plant, and equipment collateral; usually when business is unable to secure a short term loan from a bank

trade credit

practice of buying goods or services now and paying for them later

short term forecast

predicts revenues, costs, and expenses for a period of one yer or less

cash flow forecast

predicts the cash inflows and outflows in future periods; usually months or quarters

risk/return trade off

principle that the greater the risk a lender takes in making a loan, the higher the interest rate required based on adequacy of collateral, the firm's credit rating, and general level of market interest rates

financial control

process in which a firm periodically compares its actual revenues, costs, and expenses with its budget

pledging

process in which accounts receivable are used as collateral for a loan; a percentage of a value of a firm's accounts receivable (usually about 75%) is advanced to the borrowing firm

factoring

process of selling accounts receivable for cash

term loan agreement

promissory note that requires the borrower to repay the loan in specified installments

journal

record book or computer program where accounting data are first entered

balance sheet

reports the firm's financial condition on a specific date

net income

revenue left over or depleted after all costs and expenses including taxes are paid

notes payable

short term or long term liabilities that a business promises to repay by a certain date

ledger

specialized accounting book or computer program in which info from accounting journals is accumulated into specific categories and posted so that managers can find a ll the info about one account in the same place

income statement

summarize revenues, cost of goods, and expenses (including taxes), for a specific period and highlights the total profit or loss the firm experienced during that period; summarizes resulting net income or net loss

liquidity

the ease with which an asset can be converted into cash; speedier conversion means higher liquidity

double-entry bookkeeping

the practice of writing every business transaction in two places

Accouunting

the recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions

indenture terms

the terms of agreement in a bond issue

operating (master) budget

ties together the firm's other budgets and summarizes its proposed financial activities

commercial paper

unsecured promissory notes of $100,000 and up that mature (come due) in 270 days or less); states a fixed a mount of money the business agrees to repay the lender on a specific date at a specified rate of interest

liabilities

what the business owes to others (debts)

promissory note

written contract with a promise to pay a supplier a specific sum of money at a definite time; most widely used source of short term funding, the least expensive, and most convenient; relied upon heavily by small businesses

annual report

yearly statement of financial condition, progress, and expectations of an organization