Small Business Management Chapter 12
cash flow statement
A statement of the sources and uses of cash in a business for a specific period of time
going concern
concept that a business is expected to continue in existence for the foreseeable future
The accounts of assets, liabilities, and owners' equity, excluding accounts for revenues and expenses, are called _____.
permanent accounts
Which of the following is an example of a variable cost?
product shipping, sales commissions, raw materials
Which of the following methodologies help reduce the trouble of selecting from among investment options?
net present value analysis / differential revenues and expenses
inventory budget
combines a purchases budget and a cost of goods sold budget
If a firm owner's equity in the firm is $100,000 and he or she has liabilities that amount to $22,000, then according the accounting equation, his or her assets would be worth _____.
$122,000
Which of the following tasks should an accounting system easily and efficiently accomplish?
Aiding in the development of a cash budget / Enabling an exhaustive context-sensitive help function
investment
An asset that is acquired for the purpose of either generating future incomes and cash flows or appreciating in value to provide an increase in future wealth
Which of the following are assumptions that underlie basic accounting concepts
An operating business will continue to remain in business / A business is separate from its owners
Which of the following statements regarding variances is correct?
Budgets will always at least have a small variance / A business owner should examine the variance to determine the significance between the budget and actual spending / An owners may be able to determine where the business is not meeting its goals by studying the variances report / Small variances should be ignored
outsourcing
Contracting with people or companies outside a business to do work for that business
Which of the following assets and liabilities are excluded from the balance sheet?
Employee loyalty and morale / Value of licenses
Which of the following are limitations of the balance sheet?
Estimated amounts listed in the sheet can be significantly wrong / The values are listed as historical values
Which of the following statements about the balance sheet are correct?
It is a statement of what a business owns, owes, and the value that the owners have invested in it. It contains a business' assets, liabilities, and equity. This statement is called a balance sheet because of accounting equation must balance.
Which of the following are true of cost-volume-profit analysis?
It is a way to plan operations that help achieve a certain profit goal / One of its specific applications is break-even analysis
Identify true statements about the Modified Accelerated Cost Recovery System (MACRS)
It is set by the Internal Revenue Service (IRS) / It allows taxpayers to depreciate more of a cost earlier in the life of a capital expense
Which of the following statements about the business entity concept are correct?
It makes it possible to separate business and personal transactions. It underlies the legal forms of establishing businesses such as corporations, limited partnerships, and limited liability companies. It is implicit in all business regulation.
Which of the following statements about the balance sheet are correct?
It presents a snapshot of a business' financial holdings and liabilities at the close of business on a specified date / It is also called the statement of financial position / It provides information on current and long-term assets and liabilties
Which of the following is one of the five primary criteria for a small business' record-keeping system?
It should be understandable to the manager / Its data must be secure / It should be simple to use / It must assure that the details are accurate / Its reports must be timely
In the context of the labor budget, which of the following steps are included in predicting labor costs when they vary with the output amount?
Multiplying the labor cost per unit with the number of units produced Estimating the amount of labor required to produce each unit
Which of the following statements regarding variance are correct?
One reason variances occur is because prices are different than previously estimated / Another reason for a variance to occur is due to a difference in quantity than estimated / Variances measure the effect of changes in prices and the quantity used or produced
pro forma financial statements
Planning documents for future business activities that are formatted to look like the common financial statements of the income statement, balance sheet, and statement of cash flows
Which of the following statements about budgeting are correct?
The budget becomes the basis for controlling activities and the use of resources / It becomes a standard against which a business' performance can be measured / It is a quantitative expression of the use of resources necessary to achieve a business' strategic goals / The first step of budgeting is making a forecast of future sales
Which of the following statements describing a business that is financially flexible are correct?
The business is able to sell nonoperating assets / The business has the ability to increase efficiency and lower operation costs / The business has the ability to obtain loans or sell additional stock
profit planning
The process of creating a set of interconnected budgets that combine into a master budget that can be used for assessing and controlling the business processes
business entity concept
a concept that a business has an existence separate from that of its owners
expense
a decrease in owners' equity caused by consuming a business' product or service
budget
a financial plan for the future based on a single level of operations
liquidity
a measure of how quickly a company can raise money through internal sources by converting assets to cash
income statement
a statement that lists revenues and expenses and shows the amount of profit a business makes for a specified period of time
financial strength
ability of a business to survive adverse financial events
In the context of accounting functions, _____ records to track what a business owes and to make timely payments in order to capture prompt pay discounts and help maintain a good credit rating for a business.
accounts payable
operating activities
activities involved in producing and selling goods and services
financing activities
activities through which cash is obtained and paid to lenders, owners, and investors
Which of the following formulas is used in a purchases budget to produce most of the schedules of a master budget?
amount to be bought = amount to be used + desired ending amount - beginning amount
revenue
an increase in owner's equity caused by selling a product or service
Generally accepted accounting principles (GAAP)
are standardized rules for accounting procedures set out by the Financial Accounting Standards Board, and used in all audits, and submissions of accounting reports to the government
external factors
aspects of the world outside a business that could change the business' costs
internal factors
aspects within a business that could change the business' costs
An easy and effective accounting system helps a firm maintain an internal "_____" that records all entries and modifications to the accounting system to allow errors to be identified and corrected.
audit trail
fixed asset
automatically calculates and adds depreciation
inventory
calculates appropriate stocking and reorder levels
the accounting equation
demonstrates that the claims of creditors and owners in total cannot be greater than the asset value of a business
purchases budget
depicts the number of units that are expected to be acquired during a budget period
When a seller sells merchandise on account, it means that the buyer _____.
is allowed to take the merchandise and has vowed to pay for the merchandise in the future
liabilities
legal obligations to give up things of value in the future
Owners' equity is simply whatever value is left after all ______ have been paid.
liabilities
account
record of similar transactions / a chronological list of all additions to and subtractions from a single type of asset
investment records
records if businesses keep surplus cash invested in securities
accounts receivable
shows records of credit given to customers
The purpose of an inventory budget is to
simplify the budget process
on account
term referring to merchandise purchased or sold with payment due in future, usually within 1 month
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, equipment, and securities
retained earnings
the sum of all profits and losses, less all dividends paid since the beginning of a business
Current ratio
the value of current assets divided by current liabilities
Which of the following describe a business that has financial strength?
A business' long-term assets are relatively new, long-term debt is low, and retirement plans are fully funded / A business has focused on cash, short-term investments, and its accounts receivable are current / The business has a great deal of cash and cash equivalents on its balance sheet
Identify the schedules that must be completed to create a master budget
A cash budget / A cash receipts budget
Which of the following statements regarding accounts receivable are correct?
Accounts receivable is money that customers owe a company / The key to controlling receivables is to sort them by age, so older receivables stand out / Many businesses treat receivables that are more than 90 days old as delinquent
Which of the following is implied by the going concern concept?
As a separate unit, a business may continue even if it is bought by another owner.
Which of the following are one of the six items that must be reported in the statement of cash flows?
Cash flows from operating activities / Noncash investing and financing activities / Cash flows from investing activities / Net effect of foreign exchange rates / Cash flows from financing activities / Net changes in cash balance during the period
Which of the following are common financial statements?
Income statement, statement of retained earnings, cash flow statement, balance sheet, statement of owner's equity
Which of the following are true of permanent accounts?
Permanent accounts are kept in balance at all times / Assets, liabilities, and owners' equity are examples of permanent accounts
depreciation
Regular and systematic reduction in income that transfers asset value to expense over time
Which of the following statements about the income statement are correct?
Revenues - Expenses = net income The single-step and multiple step are two formats commonly used for creating an income statement It is the primary source of information about a business' profitability
assets
Something that a business owns and that is expected to have economic value in the future
owner's equity
The difference between a business' assets and liabilities
net present value
The difference between the existing value of cash inflows and the existing value of cash outflows over a specified period of time
Financial flexibility
a business' ability to manage cash flows in such a manner that the company can respond appropriately to unexpected opportunities and needs
Which of the following is a fixed cost?
truck leases, rent, loan payments
Managerial accounting
used by managers for planning, directing, and controlling a business
Which of the following statements about cash flow statements are correct?
It reports cash inflows called receipts and outflows known as payments for a specified period of time / Business owners should create cash flow statements that are developed from the business' cash records / Operating, investing, and financing activities are the three most common activities the cash flow statement reports
cost of goods sold
an expense recognized at the time of a sale of merchandise in the amount of the price of the merchandise to a seller
Tax accounting
an accounting approach based on specific accounting requirements set by governmental agencies
variable costs
expenses that change with each unit produced
pro forma projected balance sheet
final schedules completed to create a master budget are used for this
In the context of net present value (NPV) analysis, which of the following is a true statement
only cash flows are considered to perform NPV analysis
Which of the following statements regarding the current ratio are correct?
It is calculated by dividing current assets by current liabilities / It is the most common ratio to estimate a business' liquidity / The rule of thumb for evaluating current ratio is that the minimum acceptable ratio is 2.0 (higher is preferred)