Ch. 1 Financial Accounting

Accounting assists corporations in making major decisions by (a) providing relevant economic information on costs and expected profits, (b) predicting the economic environment in which the corporation will exist, (c) mathematically integrating various economic and political models

(a) By knowing your costs and expected profits, you can then choose the most profitable course of action for the firm

The area of tax accounting is designed for the __________type of user (a) Government, (b) Internal, (c) External

(a) Government

Financial Accounting involves reporting financial information to (a) external users, (b) taxing authorities, (c) internal users, (d) B & C

(a) external users

Stapling inc. projects sales revenues will exceed $100M next year. This is an example of (a) managerial accounting, (b) tax accounting, (c) financial accounting (d) none of the above

(a) managerial accounting

Elson incorporated estimated the useful life of a patent and amoritized it over its useful life. This GAAP is known as (a) Monetary Concept, (b) matching, (c) economic entity, (d) going concern, (d) none of the above

(a) matching

A __________owns a corporation (a) stockholder, (b) individual, (c) two or more individuals

(a) stockholder

Academic accountants are members of which of the following associations (a) FASB, (b) AAA, (c) CASB, (d) SEC, (e) None of the above

(b) AAA

Bookkeeping is (a) communication system, (b) measuring and recording system

(b) Bookkeeping is a measuring and recording system, it does communicate the economic condition of a firm after the information is combined into reports

The area of managerial accounting is designed for the __________ type of user (a) Government, (b) Internal, (c) External

(b) Internal

Which of the following entities separates the individual from the entity both legally and with respect to accounting (a) proprietorship, (b) corporation, (c) partnership, (d) none of the above

(b) corporation

A___________owns a proprietorship (a) stockholder, (b) individual, (c) two or more individuals

(b) individual

The quality that assumes that information is reasonably free from error is (a) relevant, (b) conservatism, (c) understandability, (d) consistency, (e) none of the above

(b) none of the above (it is reliability)

Using an accelerated depreciation method for tax purposes would be an example of (a) Managerial accounting, (b) financial accounting, (c) tax accounting, (d) none of the above

(b) tax accounting

when the bookeeper or accountant of a business entity records an economic event, it is called a: (a) record, (b) transaction, (c) balance

(b) transaction

Which organization is recognized today as the authoritative voice of accounting principles (A) SEC, (b) AICPA, c) FASB, (d) AAA

(c) FASB; Over time, the authoritative body of accounting regulations has shifted. In 1934 congress established the SEC and charged it with the power to regulate the form and content of financial reports of publicly-traded companies. The SEC has given the accounting profession the power to regulate itself. The AICPA can be thought of as a trade association for practicing CPAs. As such, it views are representative of its constituency. On the other hand, the FASB consists of a board of 7 full-time members drawwn from public accounting, business, education, and government. The FASB strives to represent the interest of all users of financial information. The AAA is an academic association made up largely of accounting professors. Its objectives are research related

Which of the following is NOT a functional area of accounting? (a) managerial accounting, (b) tax accounting, (c) economic accounting, (d) financial accounting

(c) economic accounting; this is not considered a functional area of accounting. All forms of accounting measure economic events. Managerial accounting deals with internal management planning and control. Tax accounting measures an entity's tax obligations to federal, state, and local governments. Financial accounting, seeks to quantify the financial position and income for users external to the firm

The area of financial accounting is designed for the ________ type of user (a) government, (b) internal, (c) external

(c) external

Elvon inc. is a large multinational corporation located in the US. Elvon presents its financial statements in US dollars. This is an example of (a) managerial accounting, (b) tax accounting, (c) financial accounting, (d) none of the above

(c) financial accounting

Presenting an asset in the balance sheet at its historical cost less accumulated depreciation is an example of (a) managerial accounting, (b) tax accounting, (c) financial accounting

(c) financial accounting

A _______owns a partnership (a) stockholder, (b) individual, (c) two or more individuals

(c) two or more individuals

In a proprietorship (a) there is no legal distinction between the business and its owner, (b) there is a distinction between the business and its owner for accounting purposes, (c) there is a legal distinction between the business and its owner, (d) A & B

(d) A & B

Ellen Jones owns a small proprietorship. She keeps her personal checking account separate from her proprietorship's checking account. This is an example of the fundamental concept of (a) matching, (b) conservatism, (c) monetary concept, (d) economic entity

(d) economic entity; This concept is a GAAP. For accounting purposes, Ellen's checking account is separate and apart from the proprietorship. Matching involves matching revenues and expenses. The monetary concept dictates reporting in US dollars. Conservatism involves viewing accounting transactions in a way that minimizes revenues and maximizes expenses

Preparing a production plan would be an example of (a) tax accounting, (b) managerial accounting, (c)financial accounting, (d) none of the above

(d) managerial accounting

In periods of rising prices, which of the following generally accepted accounting principles is violated (a) matching, (b) conservatism, (c) going concern, (d) monetary concept

(d) monetary concept

Which of the following is NOT an accounting entity (a) The Coca-Cola Company, (b) a limited partnership, (c) an unincorporated beauty parlor owned by Andrea Jones, (d) the loan department of a bank

(d) the loan department of a bank; this would generally be considered a part of the bank accounting entity. That is, the loan department would not maintain its own set of books to prepare its own statements. The other firms listed, are all forms of accounting entities

Information that can make a difference to the decision at hand is considered to be (a) reliable, (b) comparable, (c) conservatism, (d) understandability, (e) none of the above

(e) none of the above

the concept that it is better to understate rather than overstate revenues and to overstate rather than understate expense is called (a) consistency, (b) matching, (c) clarity/understanding, (d) reliability, (e) none of the above

(e) none of the above, the concept is conservatism

cost effectiveness

A concept underlying all useful data gathering is that the cost of gathering and communicating the data should not exceed the benefit to be derived.

GAAP is (a) the collection of accounting standards and conventions that has evolved over the years to govern the profession, (b) the Governmental Association of Accounting Professionals, (c) the rule making committee of the AICPA, (d) a chain of clothing stores

A; the abbreviation for Generally Accepted Accounting Principles. GAAP is similar in nature to English Common Law in that it consists of the interpretation of rules and procedures

Matching

All expenses incurred to generate revenues should be recognized during the same period as those revenues. Some expenses, such as cost of goods sold, can be linked directly with revenue. If production anticipates that the press will produce revenue for eight years, then you should incur the expense for eight years, not consolidate into one

A company's annual report is used primarily by the taxing authorities T/F

False

A non-profit organization such as a school does not prepare reports for external users T/F

False

Managerial accounting must follow strict rules which govern internal accounting procedures T/F

False

The SEC is the rule making body of GAAP T/F

False

The annual report is a good example of tax accounting T/F

False

Except for some minor differences, tax accounting and financial accounting are the same T/F

False; Because of the different objectives of financial accounting and tax accounting, very major disparities can exist between income for tax purposes and income for reporting to external users. Although timing may account for some of these differences, it certainly does not measure all deviations

C.P.A. stands for "Certified Private Accountant" T/F

False; C.P.A is the abbreviation for "Certified Public Accountant. A CPA is a professional certified to attest to the fairness and validity of the financial data of a business entity

Large corporations, like GM, are required to round off their figures to the nearest million dollars on their financial reports T/F

False; Corporations are not directly told where they have to round off their numbers; rather they are faced with the concept of materiality which strikes a balance between triviality and accuracy

Financial accounting, like managerial accounting, has no firm guidelines that it must follow T/F

False; Financial accounting is used to prepare the financial statements that go to external users. These financials follow a framework of conventions called "Generally Accepted Accounting Principles" (GAAP). Even though GAAP allows room for flexibility and judgment on the part of the accountant, it is specific enough to provide a basis for comparison among financial statements of different corporations.

In order to obtain a copy of a corporation's financial reports, you must be either a stockholder or a lender to the firm T/F

False; Large corporations are only required to send a copy of their financial statements to the Securities and Exchange Comission, their stockholders, and to their creditors when asked. However, most firms are happy to provide their financial statements to anybody who makes a formal request. This is, after all, a necessary service to attract new investors to the firm.

Event though tax laws are constantly changing, they are fairly easy to predict T/F

False; The government has the power to levy a tax on anything it chooses in the interests of generating revenue for public spending and directing of the economy. Many new tax laws are passed each year, and it is exceedingly difficult to keep a current knowledge of all the changes. For this reason, most larger firms employ tax planning staffs whose responsibilities include anticipating tax changes and their resulting impacts on the profitability of their firms.

The 10-K is required by the FASB T/F

False; the SEC requires all publicly-traded corporations over a minimum size to file an annual report summarizing the year's financial results

Monetary Concept

For accounting information to useful, economic events must be measured in a common denominator. In the U.S. we call this unit the dollar. A stable unit of measurement assures that apples and oranges can be meaningfully added together

Reliability

If accounting information is not reliable, investors will not have any confidence in the information it conveys. Reliability implies that information is reasonable free from bias and error and faithfully represents what it purports to represent. Ex. don't have people guess at the expenses or worth for an income statement

comparability

In order to allow comparison between similarly sized companies an implicit assumption is that the statements of different companies be comparable. While the format of accounting statements need not be identical, the footnotes to the statements should provide enough information that any two sets of financial statements can be compared.

Three international professional organizations for financial reporting practices

International Accounting Standards Committee(IASC), The International Organization of Securities Commissions and Similar Organizations (IOSCO),

MNC

Multinational Corporations

Relevance

People base decisions on the information communicated through financial statements. Data needs to be delivered in a package that a person with a general knowledge of business and reasonable diligence can comprehend

Accounting is a set of rules and methods by which economic information of a business is collected and made into reports that are useful to end users T/F

True

An accounting entity is considered to be any organization for which separate accounting data gathered and processed T/F

True

Owners in corporations are liable only for the amount they have invested T/F

True

Congress has authorized the SEC to govern the financial reporting of public corporations T/F

True; Congress established the SEC in 1934 and charged it with the power to prescribe the form and content of financial reports that corporations release to the public. The most important part of a corporation's submitted statements is the 10-K

Managerial accounting can be used for comparing budgeted and forecasted costs with actual performance T/F

True; Managers frequently find it useful to prepare internal reports that compare budgeted-to-actual and forecasted-to-actual costs and revenues. Since there are no firm requirements governing internal accounting procedures, managers are at liberty to use any format or report they feel may be helpful and relevant to their requirements

when the owner of a proprietorship or one of the partners in a partnership dies, the business ceases to exist T/F

True; With either a proprietorship or a partnership, there is a legal distinction between the business and its owner. Corporations, on the other hand, are the legal entities unto themselves, created in accordance with the individual state laws under which they are incorporated. Therefore, corporations continue to exist after the death of an owner (Stockholder)

two international political organizations involved in financial disclosure (political only, no enforcement)

United Nations & The Organization for Economic Cooperation and Development

Materiality

When presenting financial information to users, the accountant must determine what is a material item. A $20 tip expense is immaterial when compare to a million dollar deal and does not merit separate disclosure as a line item in the income statement.

going concern

a firm has value beyond the liquidation value of its assets

consistency

accounting entities must consistently apply the elections available to them so that results from different periods can be compared; The FASB is particularly sensitive to companies changing depreciation methods or inventory costing on a willy-nilly basis

revenue/expense matching

accounting entities should aspire to recognize expenses in the same accounting periods as the revenues they generate

proprietorship

an unincorporaated business organization with one owner;no legal distinction between business and owner; the business is considered an accounting entity separate from the owner

Accounting Principles

economic entity, going concern, monetary concept, accounting period, matching, conservatism, understandability, relevance, reliability, comparability, consistency, materiality, cost effectiveness

accounting entity

financial accounting revolves around this;examples include non-profits, individuals, and businesses

understandability

financial conditions and results should be communicated so that they are understandable by an educated user of financial information

relevance

financial data must also be relevant to a user to be of value, extraneous information need not appear

monetary unit

financial transactions are denominated in a stable unit of measure

three areas of accounting

financial, managerial, and tax

conservatism

given an uncertain and imprecise environment, it is better to understate than overstate economic well-being; accounting theory advocates that it is better for potential measurement errors to understate rather than overstate profits. Similarly, no revenue should be anticipated before it is earned.

bookkeeping

identifying, measuring, and recording

most users of financial accounting are external to a firm

includes lenders, investors, analysts, competitors and others

Managerial accounting is involved in

internal reports

MNE

mutinational enterprises

Economic Entity

one firm, one set of books; these do not have to correspond to legal entities; however, a degree of ownership must exist before a company or individual can claim the financial results of another enterprise as its own.

Generally Accepted Accounting Principles (GAAP)

principles set and overseen by the Financial Accounting Standards Board and Securities and Exchange Commission

partnership

same as proprietorship except it has two or more owners; not a legal entity but is recognized as such for accounting purposes

Pervasive Principles

the highest order of GAAP principles; includes economic entity, going concern, monetary unit, accounting periods, revenue/expense matching

accounting

the process of recording, classifying, and communicating financial information concerning the economic activity of an enterprise

accounting periods

the results of operations for an entity must be reported on a periodic basis (usually yearly)

materiality

there is cost/benefit aspect to financial reporting; insignificant data need not be reported if it would not affect a user's decision making

A partnership is the same as a proproetorship except that it is owned by two or more individuals T/F

true