Entrepreneurship Ch 12

The rule of thumb for evaluating current ratio is that the minimum acceptable ratio is:

2.0.

Expense

A decrease in owners' equity caused by consuming your product or service

Financial Accounting

A formal, rule-based set of accounting principles and procedures intended for use by outside owners, investors, banks and regulators

Which of the following is not something a manager needs in order to make good decisions?

A good support system.

Cost-volume-profit analysis

A managerial accounting technique which looks at the fixed and variable costs of a business to arrive at a number of unit sales (volume) to maximize profits

Identify the managerial accounting technique which looks at the fixed and variable costs of a business to arrive at a number of unit sales to maximize gains.

Cost-volume-profit analysis

To perform _____ analyses, only cash flows are considered. A. benchmarking B. net present value C. cost-benefit D. SWOT

B. net present value

purchases

The _____ budget shows the number of units that are expected to be acquired during the budget period.

Financial Strength

The ability of a business to survive adverse financial events

Which of the following is not one of the primary criteria for a small business's record keeping system?

The ability to outsource the task.

Articulate

The concept that information flows from the income statement through the statements of retained earnings and owners' equity to the balance sheet

Variance

The difference between an actual and budgeted revenue or cost

variance.

The difference between an actual and budgeted revenue or cost is called:

Economy of Scale

The idea that it is cheaper (per item) to make many of an item than few

Current ratio.

The value of current assets divided by current liabilities is called:

Payroll records

Which of the following accounting functions ensures that the employment taxes are kept current?

Fixed asset accounting

Which of the following accounting functions focuses the most on automatically calculating and accumulating depreciation?

Articulate concept

Which of the following concepts assume that information flows from the income statement through the statement of retained earnings, the statement of owners' equity to the balance sheet?

It produces financial reports that meet legal requirements.

Which of the following is a disadvantage of a computerized accounting system?

A financial plan for the future based on a single level of operations is called a(n):

budget

Eddie, the owner of a fast-food joint, finds that he spends far lesser when he bakes breads in dozens than when he bakes two or three loafs at a time. This idea of Eddie's is similar to the concept of:

economy of scale.

Financial flexibility of a business is a matter of judgment, whereas financial strength is an objective assessment.

false

Statement of cash flows is also referred to as the statement of financial position.

false

Current Ratio

the value of current assets divided by current liabilities

The process of determining the effect of price and quantity changes on revenues and expenses refers to:

variance analysis.

The primary purpose of managerial accounting is to ________.

support good decision making

To ensure your accounting information is accurate, reliable, and useful, the accounting system you choose should easily and efficiently maintain an internal "audit trail".

True

A comprehensive budget is also referred to as the: A. master budget. B. sales budget. C. purchases budget. D. universal budget.

A. master budget.

Activities involved in producing and selling goods and services are called _____ activities. A. operating B. investing C. financing D. marketing

A. operating

Managerial Accounting

Accounting methods that are specifically intended to be used by managers for planning, directing, and controlling the business

Financing Activities

Activities through which cash is obtained from and paid to lenders, owners, and investors

Which of the following ratios is used to estimate the liquidity of a business? A. Inventory turnover ratio B. Total assets to total liabilities ratio C. Current ratio D. Quick ratio

C. Current ratio

_____ is an accounting method which assigns costs based on the different types of work a business does in order to sell a particular product or service. A. Differential revenues and expenses B. Net present value analysis C. Cost-volume-profit analysis D. Activity-based cost estimates

D. Activity-based cost estimates

_____ is a measure of how quickly a company can raise money through internal sources by converting assets to cash. A. Absorbability B. Equitability C. Nominal value D. Liquidity

D. Liquidity

Which of the following is true of theories based on the bounded rationality models?

It assumes that people are inefficient processors of information.

The going concern expectation

Larry owns a successful business called Super Car-Hire. He plans to sell it to Bob. Bob assumes that he can keep up the high revenues if he can plan and execute the mission of the business well. Which of the following basic accounting concepts is reflected in Bob's assumption?

Pro Forma

Latin for "in the form of" when used to describe financial statements, indicates estimated or hypothetical information

Liabilities

Legal obligation to give up things of value in the future

________ information and reports are used when planning, organizing, staffing, directing, and controlling.

Managerial accounting

Which of the following is true of typical accounting functions used in businesses? A. Inventory accounting facilitates maintenance of appropriate levels of inventory and aids in calculation of appropriate stocking and reorder levels. B. Fixed assets record the improvements to leased property or equipment made by the business. C. Payroll records automatically calculate and accumulate depreciation. D. Accounts receivable records track what one owes and helps to make timely payments.

A. Inventory accounting facilitates maintenance of appropriate levels of inventory and aids in calculation of appropriate stocking and reorder levels.

Which of the following is a feature that a chosen accounting system should have? A. It should facilitate the development of a cash budget. B. It should limit the production of custom reports that meet management needs. C. It should show the financial position of the business only after elaborate processing. D. It should have a limited context-independent help function.

A. It should facilitate the development of a cash budget.

Juan has an accounting philosophy according to which he keeps the loans borrowed from the business separate from the loans he takes from banks for his own purposes. Which of the following basic accounting concepts is reflected in Juan's accounting philosophy? A. The business entity idea B. The going concern expectation C. The accounting equation D. The revenue and expense premise

A. The business entity idea

Financial accounting is primarily intended for: A. bankers, investors, and regulators. B. calculating and reporting taxes. C. predicting the results of management decisions. D. avoiding penalties for noncompliance.

A. bankers, investors, and regulators.

Operating Activities

Activities involved in producing and selling goods and services

_____ is an accounting method which assigns costs based on the different types of work a business does in order to sell a particular product or service.

Activity-based cost estimates

MACRS Rate

An Internal Revenue Service acronym for the Modified Accelerated Cost Recovery System. The MACRS approach lets taxpayers depreciate more of the cost earlier in the life of a capital expense

Tax Accounting

An accounting approach based on specific accounting requirements set by governmental taxing agencies

managerial accounting.

An accounting method that is specifically intended to be used for planning, directing, and controlling a business is called:

Formal summaries of the content of an accounting system's records of transactions are called financial instruments.

False

Variable costs decrease if output increases.

False

Which of the following reconciles the net increase or decrease with the beginning cash balance and the ending cash balance?

Net change in cash balance

Depreciation

Regular and systematic reduction in income that transfers asset value to expense over time

depreciation

Regular and systematic reduction in income that transfers asset value to expense over time is called _____.

Going Concern Concept

The accounting concept that a business is expected to continue in existence for the foreseeable future

Business entity concept

The concept that a business has an existence separate from that of its owners

Owner's equity

The difference between assets and liabilities of a business

owners' equity.

The difference between assets and liabilities of a business is called its:

sales

The first step in preparing a master budget is to prepare a _____ budget.

Which of the following is true of financial statements?

The overall content and form of financial statements have been made standard by long usage.

Accounting Equation

The statement that assets equal liability plus owners' equity (A = L + E)

Retained Earnings

The sum of all profits and losses, less all dividends paid since the beginning of the business

Cost

The value given up to obtain something that you want

Which of the following is a difficulty that arises in understanding and interpreting the income statements?

There are disputes over when to recognize revenues.

net present value

To perform _____ analyses, only cash flows are considered.

Cash flow statements can be either direct statements or indirect statements.

True

Liquidity is a measure of the ability of a business to meet both short-term and long-term obligations.

True

One of the difficulties in understanding and interpreting the income statements is the dispute over when one should recognize revenues.

True

One reason why accounting is important to a small business is that it shows how much your business is worth.

True

The primary reason to acquire and use a computerized accounting system in your business is to ensure the accuracy of your accounting information.

True

Master Budget

A budget, also referred to as a comprehensive budget, consists of sets of budgets that detail all project receipts and spending for the budgeted period

Financial Flexibility

A business's ability to manage cash flows in such a manner that the company can respond appropriately to unexpected opportunities and needs

Which of the following concepts assume that information flows from the income statement through the statement of retained earnings, the statement of owners' equity to the balance sheet? A. Articulate concept B. Going concern concept C. Opportunity cost concept D. Leveraging concept

A. Articulate concept

Identify the managerial accounting technique which looks at the fixed and variable costs of a business to arrive at a number of unit sales to maximize gains. A. Cost-volume-profit analysis B. Marginal revenue costs analysis C. Break even analysis D. Cash flow analysis

A. Cost-volume-profit analysis

Financial statements containing estimated or hypothetical information are called: A. pro forma statements. B. assumed income statements. C. tentative balance sheets. D. annual report statements.

A. pro forma statements.

Breakeven point is the point at which: A. total costs equal gross revenue. B. fixed costs equal variable costs. C. total costs equal profit. D. variable costs equal gross revenue.

A. total costs equal gross revenue.

Activity-Based Cost Estimates

An accounting method which assigns costs based on the different types of work a business does in order to sell a particular product or service

Which of the following is a statement of what a business owns, what it owes to others, and how much value the owners have invested in it? A. Income statement B. Balance sheet C. Cash flow statement D. Statement of retained earnings

B. Balance sheet

_____ is the idea that it is cheaper (per item) to make many of an item than few. A. Inventory turnover B. Economy of scale C. Breakeven point D. Historical value

B. Economy of scale

_____ is an indicator of the business's ability to manage cash flows so that the company has the fiscal ability to respond appropriately if an unexpected opportunity or problem arises. A. Liquidity B. Financial flexibility C. Absorbability D. Equitability

B. Financial flexibility

Which of the following is a disadvantage of a computerized accounting system? A. It makes the accounting process complicated and extensive. B. It produces financial reports that meet legal requirements. C. It reduces the accuracy of the accounting information. D. It makes the process of error checking complicated.

B. It produces financial reports that meet legal requirements.

____ analysis is based on the concept that a dollar to be received right now has more utility than does a dollar to be received at some time in the future. A. Liquidity B. Net present value C. Financial strength D. Budget

B. Net present value

Larry owns a successful business called Super Car-Hire. He plans to sell it to Bob. Bob assumes that he can keep up the high revenues if he can plan and execute the mission of the business well. Which of the following basic accounting concepts is reflected in Bob's assumption? A. The business entity idea B. The going concern expectation C. The accounting equation D. The revenue and expense premise

B. The going concern expectation

Which of the following statements is true about fixed costs? A. They can be assigned to a specific item sold or manufactured. B. They are unaffected by changes in output. C. They increase as the number of units produced increases. D. They include expendables.

B. They are unaffected by changes in output.

Aaron, a businessman, has a method of keeping track of accounts receivable by sorting them into groups of those that are 30, 60, 90, and over 90 days past due. Aaron's key in controlling receivables is to have them _____, by sorting them into groups. A. collected B. aged C. merged D. written-off

B. aged

The value of current assets divided by current liabilities is called: A. inventory turnover ratio. B. current ratio. C. total assets to total liabilities ratio. D. current equity ratio.

B. current ratio.

Eddie, the owner of a fast-food joint, finds that he spends far lesser when he bakes breads in dozens than when he bakes two or three loafs at a time. This idea of Eddie's is similar to the concept of: A. break-even point. B. economy of scale. C. economy of scope. D. monopoly.

B. economy of scale.

The difference between assets and liabilities of a business is called its: A. net income. B. owners' equity. C. cost of capital. D. current ratio.

B. owners' equity.

The sum of all profits and losses, less all dividends paid since the beginning of the business is called: A. liabilities. B. retained earnings. C. net income. D. tax liability.

B. retained earnings.

The process of determining the effect of price and quantity changes on revenues and expenses refers to: A. accounting analysis. B. variance analysis. C. pro forma budgeting. D. financial flexibility.

B. variance analysis.

Total costs equal gross revenue.

Breakeven point is the point at which:

The accounting equation is simply stated as Assets = Liabilities - Owners' Equity.

False

The rule of thumb for evaluating current ratio is that the minimum acceptable ratio is: A. 3.0. B. 1.0. C. 2.0. D. 4.0.

C. 2.0.

Aaron, a businessman, has a method of keeping track of accounts receivable by sorting them into groups of those that are 30, 60, 90, and over 90 days past due. Which of the following actions will the collection agency which buys the delinquent account from Aaron do? A. Collect the entire amount owed and return it to Aaron. B. Sell it back to Aaron after collecting the entire amount owed. C. Collect the entire amount owed and keep all the money it obtains. D. Take mild actions and collect a token amount.

C. Collect the entire amount owed and keep all the money it obtains.

_____ refers to the ability of a business to survive adverse financial events. A. Liquidity B. Financial flexibility C. Financial strength D. Profitability

C. Financial strength

Which of the following statements lists revenues and expenses and shows the amount of profit a business makes for a specified period of time? A. Balance sheet B. Statement of retained earnings C. Income statement D. Cash flow statement

C. Income statement

Which of the following reconciles the net increase or decrease with the beginning cash balance and the ending cash balance? A. Net effect of foreign exchange rates B. Noncash investing and financing C. Net change in cash balance D. Noncash operating activities

C. Net change in cash balance

Which among the following is an example of a variable cost? A. Lighting B. Security C. Shipping D. Cleaning

C. Shipping

Which of the following is a difficulty that arises in understanding and interpreting the income statements? A. There is difficulty deciding whether to report the revenues. B. There is difficulty deciding what should be considered as expenses. C. There are disputes over when to recognize revenues. D. There are disputes over the preferred tax rate to incorporate.

C. There are disputes over when to recognize revenues.

Lenders use operating income as: A. a measure of how well management achieved sales. B. an indication of future sales. C. a measure of how much debt a business can support. D. an indication of a business's ability to control costs.

C. a measure of how much debt a business can support.

Sharon handles a home-made gifts business which has gained popularity in her town. After Sharon moved into a big city, however, her marketing efforts could barely help her get just enough revenue to meet her costs. This means Sharon's business is at: A. economy of scale. B. monopoly. C. break-even point. D. bankruptcy.

C. break-even point.

Activities through which cash is obtained from and paid to lenders, owners, and investors are called _____ activities. A. operating B. investing C. financing D. marketing

C. financing

The first step in preparing a master budget is to prepare a _____ budget. A. production B. direct materials C. sales D. direct labor

C. sales

The difference between an actual and budgeted revenue or cost is called: A. liquidity. B. financial flexibility. C. variance. D. investing activities.

C. variance.

Aaron, a businessman, has a method of keeping track of accounts receivable by sorting them into groups of those that are 30, 60, 90, and over 90 days past due. Which of the following actions will the collection agency which buys the delinquent account from Aaron do?

Collect the entire amount owed and keep all the money it obtains.

Which of the following is true of the differential revenues and expenses method? A. It is used to increase the magnitude and complexity of the information that must be considered in making an appropriate investment decision. B. It is estimated by only using cash flows. C. It is based on the concept that a dollar to be received right now has more value than does a dollar to be received at some time in the future. D. It comprises of estimating the changes in revenues and expenses from current operating results that will occur if an alternative is chosen.

D. It comprises of estimating the changes in revenues and expenses from current operating results that will occur if an alternative is chosen.

Accurate and timely _____ are essential for making decisions concerning the extension of credit. They also help produce accurate billing of customers, and thus help to maintain good customer relations. A. payroll records B. leasehold records C. accounts payable records D. accounts receivable records

D. accounts receivable records

Which of the following statements is true regarding the balance sheet? A. It is rarely useful to the owners and managers of businesses. B. It contains an exhaustive list of a business's assets and liabilities. C. It always contains exact amounts. D. it's values are considered as historical values.

D. it's values are considered as historical values.

A(n) _____ analysis is a simplification methodology used to reduce the magnitude and complexity of the information that must be considered in making an appropriate decision when choosing from among investment alternatives. A. SWOT B. time-series C. auditor's report D. net present value

D. net present value

The _____ budget shows the number of units that are expected to be acquired during the budget period. A. cash receipts B. labor C. sales D. purchases

D. purchases

The decision rule for an NPV analysis is to accept: A. the smallest negative NPV. B. the largest negative NPV. C. the NPV closest to zero. D. the largest positive NPV.

D. the largest positive NPV.

GAAP

Generally accepted accounting principles are the standardized rules for accounting procedures set out by the Financial Account Standards Board and used in all audits and submissions of accounting reports to the government

Break-even Point

The point at which total costs equal gross revenue

Variance Analysis

The process of determining the effect of price and quantity changes on revenues and expenses

Investing activities

The purchase and sale of land, buildings, equipment, and securities

Variable Costs

Those costs that change with each unit produced, for example, raw materials

Fixed Costs

Those costs that remain constant regardless of quantity of output, for example, rent

Balance sheet

Which of the following is a statement of what a business owns, what it owes to others, and how much value the owners have invested in it?

It is forward-looking in nature.

Which of the following is true of managerial accounting?

Inventory accounting facilitates maintenance of appropriate levels of inventory and aids in calculation of appropriate stocking and reorder levels.

Which of the following is true of typical accounting functions used in businesses?

it's values are considered as historical values.

Which of the following statements is true regarding the balance sheet?

Economy of scale

_____ is the idea that it is cheaper (per item) to make many of an item than few.

Financial strength

_____ refers to the ability of a business to survive adverse financial events.

Lenders use operating income as:

a measure of how much debt a business can support.

Cost of Goods Sold Budget

A schedule that shows the predicted cost of product actually sold during the accounting period

Cash Flow Statement

A statement of the sources and uses of cash in a business for a specific period of time

Balance Sheet

A statement of what a business owns (assets), what it owes to others (liabilities), and how much value the owners have invested in it (equity)

Income Statement

A statement that lists revenues and expenses and shows that amount of profit a business makes for a specified period of time

Internal (cost) factors

Aspects of or choices within the business which could cause the business's costs to change

External (cost) factors

Aspects of the world outside the business which could cause the business's costs to change

Which of the following is true of accounting equation? A. It is used to place records into understandable categories that are useful for managing a business. B. It assumes that a successful business will stay in business and this enables long-range planning and strategy. C. It underlies the legal forms of establishing businesses, such as corporations, limited partnerships, and limited liability companies. D. It ensures that accounting information is useful to the firm's stakeholders.

A. It is used to place records into understandable categories that are useful for managing a business.

Financial Statements

Formal summaries of the content of an accounting system's records of transactions

Which of the following is more indicative of a business's financial strength? A. Short-term investments B. Prepaid expenses C. Accounts payable D. Inventories

A. Short-term investments

Liquidity

A measure of how quickly a company can rise money through internal sources by converting assets to cash

Revenue

An increase in owners' equity caused by selling your product or service

The usefulness of the income statement for managing a small business is related to the amount of detail available in the statement.

True

Favorable/Unfavorable Variance

A label applied to variances to indicate their effect upon the income statement; favorable variances would result in profits being greater than budgeted, all other things being equal; unfavorable variances would result in profits being less than budgeted, all other things being equal

_____ is an accounting approach based on specific accounting requirements set by governmental taxing agencies. A. Tax accounting B. Managerial accounting C. Benchmarking D. Forensic accounting

A. Tax accounting

Budget

A financial plan for the future, based on a single level of operations; a quantitative expression of the use of resources necessary to achieve a business's strategic goals

Which of the following is a correct representation of typical accounting functions? A. Credit card sales function helps to ensure that payroll and employment taxes are kept current. B. Accurate and timely accounts receivable records are essential for making decisions concerning the extension of credit. C. Leasehold records help to ease the problems of keeping necessary insurance coverage current and in force. D. Insurance register helps to track the amount of discount and charge backs taken by your credit card provider.

B. Accurate and timely accounts receivable records are essential for making decisions concerning the extension of credit.

Which of the following does the accounting equation state? A. Revenue = Expense B. Assets = Liabilities + Owners' Equity C. Liabilities = Owners' Equity D. Net income = Long-term Liabilities

B. Assets = Liabilities + Owners' Equity

Which of the following is true of financial statements? A. The customization of financial reports is illegal in all states. B. The overall content and form of financial statements have been made standard by long usage. C. Bankers and investors are typically new and unacquainted with standard financial statements. D. The differences unique to each industry cannot be represented accurately in financial statements.

B. The overall content and form of financial statements have been made standard by long usage.

An accounting method that is specifically intended to be used for planning, directing, and controlling a business is called: A. tax accounting. B. managerial accounting. C. benchmarking. D. forensic accounting.

B. managerial accounting.

Which of the following accounting functions has been accurately described? A. Investments records help produce accurate billing of customers, and thus help to maintain good customer relations. B. Payroll records track if your business keeps surplus cash invested in securities. C. Accounts payable records help to make timely payments in order to capture prompt pay discounts and to maintain a good credit rating for the business. D. Credit card sales function enables that payroll and employment taxes are kept current.

C. Accounts payable records help to make timely payments in order to capture prompt pay discounts and to maintain a good credit rating for the business.

_____ is a formal, rule-based set of accounting principles and procedures intended for use by outside owners, investors, banks, and regulators. A. Tax accounting B. Managerial accounting C. Financial accounting D. Forensic accounting

C. Financial accounting

Which of the following accounting functions aids in calculation of appropriate stocking and reorder levels? A. Insurance register B. Investment records C. Inventory accounting D. Payroll records

C. Inventory Accounting

Which of the following is true of managerial accounting? A. It is used to produce tax returns and schedules. B. It is a rule-based system intended primarily for absentee owners. C. It is forward-looking in nature. D. It is primarily for bankers, investors, and regulators.

C. It is forward-looking in nature.

Which of the following accounting functions ensures that the employment taxes are kept current? A. Leasehold records B. Investments records C. Payroll records D. Accounts receivable records

C. Payroll records

The "business entity" concept of accounting indicates that: A. a successful business will stay in business. B. assets = liabilities + owners' equity. C. a business has an existence that is separate from its owner. D. accounting information must be useful to the owners and managers of businesses.

C. a business has an existence that is separate from its owner.

Regular and systematic reduction in income that transfers asset value to expense over time is called _____. A. appreciation B. contribution margin C. depreciation D. benchmarking

C. depreciation

Formal summaries of the content of an accounting system's records of transactions are called _____. A. financial securities B. financial instruments C. financial statements D. financial derivatives

C. financial statements

Legal obligations to give up things of value in the future are known as _____. A. assets B. borrowings C. liabilities D. owners' equity

C. liabilities

Expendables are necessarily fixed costs.

False

Expenses are the value given up to obtain something that the owner wants.

False

Financial accounting is forward-looking and attempts to predict the results of management decisions.

False