Accounting for Decision Makers - C213

Fixed costs

Fixed costs remain constant in total, regardless of activity level, at least within the relevant range of activity. Examples include property taxes, insurance, executives' salaries, plant depreciation, and rent.

inventory

a complete list of items such as property, goods in stock, or the contents of a building. is the name given to goods held for sale in the normal course of business. For example, when you walk into a Wal-Mart store, everything you see for sale, such as shoes, clothes, and garden equipment, is inventory.

long-term debt

a liability that falls due beyond one year from the date of the financial statements. Long-term notes, bonds, mortgages, and similar obligations are generally reported on the balance sheet under the collective heading of long-term debt.

cost-volume-profit (C-V-P) analysis

a management tool primarily used in the planning process. The basic objective of C-V-P analysis is determining how a company's sales impact profits.

executory contract

an exchange of promises about the future

The revenue principle states that revenue should be recognized at a point when

an exchange transaction involving goods and services has occurred and the earnings process is essentially complete.

A balance sheet contains three major categories:

assets, liabilities, and owners' equity.

Income Statement

describes a company's financial performance for a specified period of time

Reenues minus expenses equals

net income

Extraordinary Items

Gains and losses that are both unusual in nature and infrequent in occurrence; they are reported net of tax on the income statement

A number of important concepts underlie the content of all financial statements. Three important concepts—

the entity concept, the historical cost convention, and the going concern assumption—are particularly relevant to the balance sheet and are discussed here.

Techniques of earnings management

• Careful timing of transactions • Changing accounting methods or estimates with full disclosure • Changing accounting methods or estimates withOUT adequate disclosure • Non-GAAP accounting • Fictitious transactions

Which of the following does Sarbanes-Oxley NOT require management to do?

Make loans to executive officers and directors

Reporting the details of a transaction in the notes to the financial statements is called

Disclosure

Markanich Company purchased land for $90,000 in 2010. In 2013, the land is valued at $115,000. The land would appear on the company's books in 2013 at

$90,000

Grenzplankostenrechnung (GPK)

A German cost accounting system that goes a step further than ABC systems. Developed in the late 1940s and 1950s, designed to provide a consistent and accurate application of how managerial costs are calculated and assigned to a product or service.

A balance sheet is a listing of an organization's assets and of its liabilities at a certain time. The difference between assets and liabilities is called equity.

A balance sheet can be used to evaluate a company's financial position by comparing the company's resources with its obligations. Also, as discussed later, the mix of a company's assets and liabilities can be used to identify how the company has strategically structured its business to differ from that of its competitors. Assets = Liabilities + Owners' Equity.

significant accounting policies

A brief summary or description of the specific accounting practices followed by the entity.

cash budget

A cash budget is an important tool in helping management plan its cash needs.

An independent audit report is usually issued by

A certified public accountant

matching concept (or matching principle)

A concept of accounting in which expenses are matched with the revenue generated during a period by those expenses. concept typically used in practice to determine when an expense should be recognized

Corporation

A corporation is a business that is chartered (incorporated) as a separate legal entity under the laws of a particular state or country. With a proprietorship or a partnership, the owners are the business; with a corporation, the operations and obligations of the business are legally separated from the personal affairs of the owners.

Expenses generally cause

A decrease in net assets

Unrealized Gains and Losses on Derivatives

A derivative is a financial instrument, such as an option or a future, that derives its value from the movement of a price, an exchange rate, or an interest rate associated with some other item.

GAAP Oval

A diagram that represents the flexibility a manager has, within GAAP, to report one earnings number from among many possibilities based on different methods and assumptions.

regression line (line of best fit)

A line, segment, or ray drawn on a scatter plot to estimate the relationship between two sets of data. Once the regression line has been fitted through the data points, the scattergraph method does not depend any longer on the data points to estimate fixed and variable costs. Cost estimations are entirely based on points along the regression line.

Cash Times Interest Earned Ratio

A financial analysis tool that indicates the interest payment ability of an entity

Statement of Cash Flows

A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time.

Foreign Currency Translation Adjustment

A foreign currency translation adjustment arises from the change in equity of foreign subsidiaries (as measured in terms of U.S. dollars) that occurs as a result of changes in foreign currency exchange rates.

Partnerships

A partnership is a business association of two or more individuals. As in a proprietorship, the partners generally manage the business as well as own it and are personally responsible for all the obligations of the business.

Certified Public Accountant (CPA)

A person who has taken a minimum number of college-level accounting classes, has passed the dreaded CPA exam, and has met other requirements set by his or her state.

Proprietorships

A proprietorship is a business owned by one person who almost always also manages the business.

The traditional overhead cost allocation system assumes a simple relationship between overall overhead cost and

A single measure of activity

preferred stock

A special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do.

Stepped fixed costs

A step fixed cost is a cost that does not change within certain high and low thresholds of activity, but which will change when these thresholds are breached. ... For example, if sales volume declines, management could sell off a production line, thereby terminating all associated costs.

Audit Committee

A subcommittee of the board of directors that is responsible for overseeing both the internal audit function and the annual financial statement audit by independent CPAs.

Which of the following would most likely be a variable cost?

All of these are correct - direct materials , direct labor, sales commissions

Accounting

A system of providing "quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions." The key features of this definition are the following: Numbers: Accounting is quantitative. This is a strength because numbers can be easily tabulated and summarized. It is a weakness because some important business events, such as a toxic waste spill and the associated lawsuits and countersuits, cannot be easily described by one or two numbers. A financial dimension: The status and performance of a business is affected by and reflected in many dimensions—financial, personal relationships, community and environmental impact, and public image. Accounting focuses on just the financial dimension. Usefulness: The practice of accounting is supported by a long tradition of theory; U.S. accounting rules in fact have a theoretical conceptual framework, and some people actually make a living as accounting theorists. However, in spite of its theoretical beauty, accounting exists only because it is useful. Future decisions based on past information: Although accounting is the structured reporting of what has already occurred, this past information can only be useful if it impacts decisions about the future.

Operating Activities

All transactions relating to a company's delivering or producing its goods for sale and providing its services are called operating activities

The normal pattern of positive inflows or negative outflows of cash reported in the cash flow statement is as follows:

Cash from operating activities + Cash from investing activities − Cash from financing activities + or −

Which of the following is NOT one of the effects that the Securities Exchange Act of 1934 had on accountants?

Accountants must audit all 10-Q reports.

International Financial Reporting Standards (IFRS)

Accounting standards, issued by the IASB, that have been adopted by many countries outside of the United States.

Accrual Accounting

Accrual accounting is the process that accountants use in adjusting raw transaction data into refined measures of a firm's economic performance. recording in each fiscal period applicable expenses, whether paid or not, and income earned, whether collected or not.

Out-of-pocket costs

Actual cash outlays for salaries, advertising, repairs, and similar costs.

Batch-level activities

Activities that are performed each time a new production batch is started or ended. Batch-level activities are work actions that are classified within an activity-based costing accounting system, often used by production companies. ... Examples of these batch-level cost drivers can often include machine setups, maintenance, purchase orders, and quality tests.

Which method for allocating manufacturing overhead costs is usually more accurate?

Activity-based costing

C-V-P analysis is useful to managers in:

All of these are correct - Planning , controlling decisions, and evaluating decisions

Activity-based costing is most useful when there are variations in:

All of these are correct - Production Volume, Size of Products, and Complexity of Products

Which of the following statements is true regarding retained earnings?

All of the statements are true

By understanding C-V-P analysis, you will be adept at evaluating the effects on profitability of the following common changes in C-V-P variables:

Amount of fixed costs Variable cost rate Sales price Sales volume or the number of units sold Combinations of these variables

Accounts Payable

Amounts to be paid in the future for goods or services already acquired.

Accounts Receivable

Amounts to be received in the future due to the sale of goods or services, are amounts owed to a business by its credit customers and are usually collected in cash within 10 to 60 days.

A loss from the sale of a building would be reported on an indirect method statement of cash flows as

An addition to net income

Which of the following would be subtracted from net income on a statement of cash flows prepared by the indirect method?

An decrease in wages payable

external audit

An evaluation conducted by one organization, such as a CPA firm, on another.

liquidity

An important concern about any company is its liquidity, or the ability to pay its debts in the short run.

Revenues cause

An increase in net assets

When all other factors remain constant, which of the following is true?

An increase in variable costs leads to an increase in units needed to break even

Segregation of Duties

An internal control that involves separating employees' duties so that the work of one person can be used to check the work of another person.

International Accounting Standards Board (IASB)

An international accounting standard-setting body responsible for the convergence of accounting standards worldwide.was formed in 1973 to develop worldwide accounting standards.In 2001, the IASB restructured itself as an independent body with closer links to national standard-setting bodies. At that time the IASB adopted its current name and dropped its original name, the International Accounting Standards Committee (IASC).

Topic 6: Introduction to Financial Statement Analysis

Analysis of financial statement numbers can be used to diagnose existing problems and to forecast how a company will perform in the future. Financial ratios are relationships between two financial statement numbers and are often used in analyzing and describing a company's performance. Common-size financial statements allow comparison of financial statements across years and between companies and are prepared by dividing all financial statement numbers by sales for the year. The DuPont framework decomposes return on equity into its profitability, efficiency, and leverage components. Cash flow ratios are frequently overlooked because traditional analysis models are based on the balance sheet and the income statement. Analysis of financial statements can be misleading if statements are not comparable or if statements exclude significant information. In addition, analysis of historical data may distract our attention from relevant current information.

Financial Statement Analysis

Application of analytical tools to general-purpose financial statements and related data for making business decisions. Financial statement analysis often points to areas in which additional data must be gathered, including details of significant transactions, market share information, competitors' plans, and customer demand forecasts.

The idea that certain figures on an operating statement help to explain changes in figures on comparative balance sheets is referred to as

Articulation

Which of the following ratios is used to measure a firm's efficiency at using its assets?

Asset turnover

Asset Turnover

Asset turnover is computed as sales divided by assets and is interpreted as the number of dollars in sales generated by each dollar of assets.

Economic resources that are owned or controlled by an enterprise are called

Assets

Which of the following is NOT a service typically provided by large public accounting firms?

Making management decisions

Accounting Equation

Assets = Liabilities + Owner's Equity

Expanded Accounting Equation

Assets = Liabilities + Paid-in Capital + (Revenues - Expenses - Dividends)

If the total amount for Rent Expense is inadvertently posted to Prepaid Rent at the end of the year, what will be the effect on the year-end financial statements?

Assets will be overstated

Assets-to-Equity Ratio (Leverage)

Assets-to-equity ratio is computed as assets divided by equity and is interpreted as the number of dollars of assets acquired for each dollar invested by stockholders.

A company has a credit policy of net 10 and is considering changing it to net 30 to be more in line with industry standards. What is a benefit to changing the credit policy?

Attracting more customers

Internal reports are generally used by

Management

According to Sarbanes-Oxley, who are auditors required to report to and be retained by?

Audit committee

The internal audit manager reports directly to the

Audit committee

Unrealized Gains and Losses on Available-for-Sale Investment Securities

Available-for-sale investment securities are those that a company purchases and doesn't intend to own forever but also doesn't intend to immediately resell. These investment securities, along with trading securities (those purchased as part of an active buying and selling program), are reported in the balance sheet at their current market value.

Investing Activities

Cash inflows and outflows from (1) acquiring and selling productive assets such as property, plant, and equipment, (2) acquiring and selling investment securities, and (3) lending money and collecting on those loans are called investing activities.

The financial statement that reports the assets, liabilities , and stockholders' (owner's) equity at a specific date is the?

Balance Sheet

Which of the following financial statements provides a picture of the enterprise at a particular point in time?

Balance sheet

Which of the following would be reported as a cash flow from financing activities?

Cash receipts from the issuance of long-term debt

Which cash flow ratio reflects a company's ability to make its interest payments from cash generated through operations?

Cash times interest earned

Which of the following is one of the purposes of financial statement analysis?

Both diagnosis and prognosis

Which of the following types of accounts show evidence of aquired resources?

Both liabilities and owners' equity

Financial statement analysis is greatly enhanced when financial ratios are compared with

Both past values and values for other firms in the same industry

Strategic planning

Broad, long-range planning usually conducted by top management.

Strategic planning is:

Broad, long-range planning.

____ is increased and ____ is decreased when cash is collected from customers who had previously purchased a product or service on account.

Cash, Accounts Receivable

The number used to reflect an overall measure of the change in a company's wealth during the period is -

Comprehensive Income

The accuracy of the information contained in the financial statements is the responsibility of the

Management

In addition to net income, comprehensive income includes items that, in general, arise from changes in market conditions unrelated to the business operations of a company. The most common of these items are:

Changes from translating financial statements of non-U.S. subsidiaries into U.S. dollars, caused by changes in foreign currency exchange rates Changes in the value of investment securities that are not held for active trading purposes Changes in the value of certain derivative instruments

Earnings management through deceptive accounting is best exemplified by

Changing the interest rate used in accounting for leases without describing the change in the notes to the financial statements.

Securities and Exchange Commission (SEC)

Congress created the Securities and Exchange Commission (SEC) to regulate U.S. stock exchanges.The SEC is not charged with protecting investors from losing money; instead, it seeks to create a fair information environment in which investors can buy and sell stocks without fear that companies are hiding or manipulating financial data.

The notion that when doubt exists concerning two or more reporting alternatives, users should select the alternative with the least favorable impact on reported income, assets, and liabilities is referred to as

Conservatism

Indirect Labor

Conversely, wages and salaries paid to factory supervisors and management, maintenance staff, and factory security guards are treated as indirect labor. The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products.

The primary internal group that uses accounting information is

Management

Remember This:

Contribution Margin = Sales Revenue - Variable Costs Sales Revenue - Variable Costs - Fixed Costs = Target Income At breakeven, Target Income = 0 Sales Revenue = Sales Price × Number of Units Variable Costs = Variable Cost per Unit × Number of Units Variable Costs = Variable Cost Ratio × Sales Revenue

Control activities or control procedures

Control activities or control procedures are those policies and procedures, in addition to the control environment and accounting system, that management has adopted to provide reasonable assurance that the company's established objectives will be met and that financial reports are accurate

The top accountant in most large organizations is usually called the:

Controller

What is corporate governance?

Corporate Governance is the set of principles and practices that a corporation uses to regulate the relationship between the shareholders and the professional managers hired by the board of directors.

The primary disadvantages of incorporation include these:

Corporate income is taxed twice—once when it is earned by the corporation and again when it is paid out to shareholders in the form of dividends. Management of the business is separated from ownership, so the owners have to be wary in monitoring the activities of their hired managers.

The following data came from the financial statements of the Cheviot Company: Revenue $1,800,000 Assets $1,200,000 Expenses 1,200,000 Liabilities 200,000 Net income 600,000 Equity 1,000,000 Compute the asset turnover (round to two decimal places).

Correct Answer: 1.50 1,800,000 / 1,200,000

The following data came from the financial statements of the Green Company: Cash from operations $900,000 Total assets 350,000 Cash from financing activities 220,000 Cash paid for investing activities 55,000 Net income 425,000 Compute the cash flow adequacy ratio.

Correct Answer: 16.36 Cash flow adequacy: $900,000 / $55,000 = 16.36

The following data came from the financial statements of the Cheviot Company: Revenue $1,800,000 Assets $1,200,000 Expenses 1,200,000 Liabilities 200,000 Net income 600,000 Equity 1,000,000 Compute the return on sales.

Correct Answer: 33% $600,000 / $1,800,000

Selected information for Alastair Company is as follows: 2012 Current assets $450,000 Total assets 725,000 Cost of goods sold 700,000 Sales revenue 915,000 Net income 145,000 What is the percentage that would be given to cost of goods sold on a common-size income statement (round to the nearest percent)?

Correct Answer: 77 percent Sales revenue: $700,000 / $915,000 = 77%

cost drivers

Cost drivers are used to track how costs of activities are related to specific cost objects such as products or divisions. An activity cost driver is an accounting term. A cost driver affects the cost of specific business activities. In activity-based costing (ABC), an activity cost driver influences the costs of labor, maintenance, or other variable costs. A cost driver is a numerical measure used to reflect the amount of a specific overhead cost that is associated with a particular activity. In an ABC system, facility support overhead costs are treated as common costs that are not assigned to any specific product, division, or product line.

When using activity-based costing, the cost associated with producing each batch is an example of a:

Cost pool

The idea that transactions are recorded at their exchange prices at the transaction date is referred to as the

Cost principle

product costs

Costs closely associated with the products or services offered are called product costs

Which term is associated with "right" or "right-sided"?

Credit

Which of the following ratios is calculated using only balance sheet numbers?

Current ratio

Which term is associated with "left" or "left-side"?

Debit

When using common-size statements

Data may be selected for the same business as of different dates, or for two or more businesses as of the same date

Financial ratios are often used in a business context to describe various characteristics of companies. Six of the most commonly used ratios are:

Debt ratio: percentage of company funding that is borrowed Current ratio: indication of a company's ability to pay its short-term debts Return on sales: pennies in profit on each dollar of sales Asset turnover: measure of efficiency; number of sales dollars generated by each dollar of assets Return on equity: pennies in profit for each dollar invested by stockholders Price-earnings ratio: number of dollars an investor must pay to "buy" the future rights to each dollar of current earnings

Recognition

Decision to include an item in the financial statements

Current assets usually are listed on a balance sheet in

Decreasing order of liquidity

Which of the following statements is true about disagreements in the financial statements of a company?

Disagreements result when different people arrive at different conclusions based on the same set of facts.

Which of the following is an application of the principle of systematic and rational allocation?

Depreciation expense

Which of the following items would be reported on a statement of cash flows prepared by the indirect method but NOT by the direct method?

Depreciation expense

Which of the following is typically NOT a reason for managing reported earnings?

Desire for personal gain

Integration

Determination of the total impact of the new information on the financial statements

Generally accepted accounting principles are

Developed by accounting rule makers

You are thinking about taking a trip to Asia. The cost of the airplane ticket you have yet to purchase is a(n):

Differential cost

Costs that are specifically traceable to a unit of business are known as which of the following costs to that unit?

Direct

This is sometimes done in place of recognition when the effects of an event cannot be quantified with any degree of certainty.

Disclosure

disclosure

Disclosure in the notes that accompany the financial statements is the accepted way to convey information to users when the information is too uncertain to be able to be boiled down into one concrete number. An example can be found in the financial statements of Altria, maker of Marlboro cigarettes.

Which of the following would NOT be included in the operating activities section of the statement of cash flows?

Dividends paid

A company's asset mix is determined by

Dividing each asset item on the balance sheet by total assets

The Public Company Accounting Oversight Board is NOT required to

Enforce compliance with the Foreign Corrupt Practices Act

Examples of product-line activities are:

Engineering product design Storage in special warehouses Managing by a special supervisor of all activities associated with a particular product line Ordering, purchasing, and receiving materials unique to a particular product line

Which of the following accounts would NOT be considered a current asset?

Equipment

Evaluating

Evaluating involves analyzing results, providing feedback to managers and other employees, rewarding performance, and identifying problems. Evaluating is typically a process of comparing actual performance against expected inputs of costs, outputs of quality, and timelines.

Creation

Events create economic assets and liabilities

Which statement best describes the role of external auditors when auditing a large public company?

Examine the organization's accounting for a sample of business transactions to provide reasonable assurance that the financial statements are presented fairly

Analysis of revenue and expense transactions requires the use of the:

Expanded Accounting Equation

Costs that are incurred during the normal operations of a business to generate revenues are called

Expenses

Under the accural basis of accounting, expenses are reported in the accounting period when the

Expenses match the revenues or is used up

External auditors

External auditors examine an organization's financial statements to determine if they are prepared and presented in accordance with GAAP and are free from material (significant) misstatement.

The current standard-setting board for accounting in the private sector is the

Financial Accounting Standards Board (FASB)

accounting standards are set by the?

Financial Accounting Standards Board (FASB). The FASB is based in Norwalk, Connecticut; its seven full-time members are selected from a variety of backgrounds—professional accounting, business, government, and academia. FASB is not a government agency, it lacks the legal power to enforce the accounting standards it sets.

Relationships between financial statement amounts are called

Financial ratios

Which of the following statements best describes financial statement analysis?

Financial statement analysis involves relationships and trends.

Which of the following classifications refers to those activities whereby cash is obtained or repaid to owners and creditors?

Financing

The repayment of the principal on a loan should be classified as a(n)

Financing activity

What is the detailed report that companies file annually with the Securities and Exchange Commission?

Form 10-K

Which form must be filed quarterly by all publicly held corporations?

Form 10-Q

Form 10-Q

Form 10-Q. This report must be filed quarterly for all publicly held companies. It contains certain financial information and requires a CPA's involvement.

Short-term loans payable

Formal, interest-bearing loans that are expected to be paid back within one year.

To then assign overhead costs to production, the necessary steps are:

Gather the overhead cost and numerical cost driver data. Compute the amount of overhead cost per cost driver event. Use these data to assign overhead to production.

To then assign overhead costs to production, the necessary steps are:

Gather the overhead cost and numerical cost driver data. Compute the amount of overhead cost per cost driver event. Use these data to assign overhead to production.

The initials GAAP stand for

Generally Accepted Accounting Principles

Which of the following requires CPAs to provide reasonable assurance that significant fraud or misstatement is NOT present in financial statements?

Generally Accepted Auditing Standards (GAAS)

Long-term investments

Generally, (1) investments in stocks and bonds of other corporations that companies hold for more than one year; (2) long-term assets, such as land and buildings, not currently being used in the company's operations; and (3) long-term notes receivable. long-term assets are those assets that you expect to still be around next year when you prepare the balance sheet again

In general, most companies have significant noncash expenses that reduce net income and also cause the cash flow-to-net income ratio to be

Greater than 1

For greater accuracy when using activity-based costing, management accountants should:

Have a reasonable number of cost pools

leverage ratio

Leverage is borrowing that allows a company to purchase more assets than its stockholders are able to pay for through their own investment.

five steps in implementing and using an ABC system, which are:

Identify overhead cost activities. Analyze individual overhead costs in terms of those cost activities. Identify measurable cost drivers. Assign overhead. Use the ABC data to make decisions.

The first three steps in implementing an ABC system are:

Identify the key cost activities. Analyze each overhead cost in terms of these activities in order to compute the cost pools. Specify numerical cost drivers that can be used to assign the overhead costs to production.

The financial statement that reports the revenues and expenses period of time such as a year or a month is the?

Income Statement

Income from continuing operations

Income from continuing operations is computed by subtracting interest expense, income tax expense, and other miscellaneous items from operating income. Income from continuing operations is significant because of the two categories of items that it excludes: Income from Discontinued Operations and Extraordinary Gains and Losses

When a company pays for a warehouse by paying cash, the effect on the accounting equation will be to

Increase Buildings and decrease Cash

When a company buys a warehouse by using a mortgage with a local bank, the effect on the accounting equation for the company will be to

Increase Buildings and increase Mortgage Payable

When a company borrows money from a bank to be repaid in over time, the effect on the accounting equation for the company will be to

Increase Cash and increase Bank Loan Payable

When an investor pays cash into a business to become a part owner, the effect on the accounting equation for the business will be to

Increase Cash and increase Paid-in Capital

One method that a multi-product firm can employ to promote a high-contribution margin product is:

Increase advertising for the product

If a company's total fixed costs decreased by $6,000 and its contribution margin increased by $12,000, net income would:

Increase by $18,000 $6,000 + $12,000 = $18,000 increase in net income

When other factors remain constant, a decrease in sales price:

Increases the number of units needed to earn profits

Independent Auditor

Independent auditors are hired by the audit committee of the board of directors to make sure that the financial statements prepared by management fairly represent the financial performance of the company.

Indirect costs

Indirect costs—sometimes referred to as common costs or joint costs—are costs that are normally incurred for the benefit of several segments.

Indirect Materials

Indirect materials also include the materials and supplies used in nonproduction activities like maintenance and custodial processes.

supplementary information

Information included in the notes to financial statements, which includes details or amounts that present a different perspective from that adopted in the financial statements. It may be quantifiable information that is high in relevance but low in reliability and may include management's explanation of the financial information and its discussion of the significance of that information. The FASB and SEC both require supplementary information

A measure of a company's performance that is intended to summarize in one number the overall economic performance of a company in a given period is -

Net Income

Which of the following is the government agency that stipulates the rules and regulations that govern the collection of taxes in the United States?

Internal Revenue Service

Preventative Controls

Internal control activities that are designed to prevent the occurrence of errors and fraud

Internal earnings targets

Internal earnings targets are an important tool in motivating managers to increase sales efforts, control costs, and use resources more efficiently

International Accounting Standards Committee (IASC)

International Accounting Standards Board (IASB)

The organization that develops worldwide accounting standards is the

International Accounting Standards Board (IASB)

Standards established by the International Accounting Standards Board are referred to as

International Financial Reporting Standards

Which of the following generally is NOT considered to be a liability?

Inventory

Additional Paid in Capital (APIC)

Invested by stockholders that exceeds the par value of the issued shares.. An equity item on the balance sheet representing the proceeds (price at which stock is initially sold) minus the par value of the stock (note: par is usually $1 per share).

Which of the following classifications refers to those activities associated with buying and selling long-term assets?

Investing

During the month, Meridian Company had the following cash transactions: Given the above information, compute cash flow from investing activities.

Investing activities: ($15,000) + $6,400 = ($8,600)

Which of the following is true of the balance sheet?

It identifies a company's assets and liabilities as of a specific date.

Which of the following is NOT true of the Financial Accounting Standards Board (FASB)?

It is a government agency

A well-designed document has several characteristics:

It is easily interpreted and understood. It has been designed with all possible uses in mind. It has been pre-numbered for easy identification and tracking. It is formatted so that it can be handled quickly and efficiently.

The ability a company has to pay its debts in the short run is its

Liquidity

Which of the following products usually consumes the highest amount of overhead costs per unit?

Low-volume unique products

Classic examples of unit-level overhead activities are:

Machine maintenance Machine depreciation Electricity and other energy costs

Providing information for planning, controlling, and evaluating is a function of:

Management accounting

Management planning

Management planning involves a process of recognizing problems or opportunities, identifying alternatives, analyzing alternatives, then choosing and implementing the best alternative(s). There are two basic types of planning:

Production Prioritizing

Management's continual evaluation of various product lines and divisions' profitability in order to analyze and identify opportunities to improve profits.

Good management accounting is motivated by:

Management's desire to improve

With regard to a particular company, which of the following groups generally has the widest variety of decisions to make?

Managers

Whether an item is big enough that proper accounting will make a difference to users of accounting information is referred to as

Materiality

Assets minus liabilities equals

stockholders' equity or owner's equity (net assets if a nonprofit)

Valuation

Measurement of the dollar amount at which an item should be recorded

Profitability Ratios

Measures of the operating success of a company for a given period of time.

Some of the reasons that managers may manipulate reported earnings are as follows:

Meet internal targets Meet external expectations Income smoothing Window dressing for an IPO or a loan

Mixed Costs

Mixed costs, like stepped costs, are variations of the basic fixed and variable cost behavior patterns. Specifically, mixed costs are costs that contain both variable and fixed components. An example is a rent that is based on a fixed fee plus a percentage of total sales. One of the important challenges in using C-V-P analysis in the planning process is the need to effectively separate mixed costs into their fixed and variable cost components.

cash

Money in the form of bills or coins. cash includes coins and currency as well as the balances in company checking and savings accounts.

Interest Revenue

Money received for interest.

Total contribution margin will increase in a two-product firm if total units sold remain the same and:

More products with the highest contribution margin are sold

Which of the following would be considered a long-term liability?

Mortgage payable

Forecast of Balance Sheet Accounts

Most forecasting exercises start with a forecast of sales. The sales forecast indicates how fast the company is expected to grow and represents the general volume of activity expected in the company.The key to a good financial statement forecast is identifying which underlying factors determine the level of a certain revenue or expense.

Which of the following is an overall measure of the performance of a business entity's activities?

Net income (or net loss)

Earnings per share is equal to

Net income divided by total number of shares of stock outstanding

Net Income

Net income is the accountant's attempt to summarize in one number the overall economic performance of a company for a given period. From the discussion above, you can see that when people make a reference to a company's "income" or "profit," they could be referring to any one of a host of numbers —gross profit, operating income, income from continuing operations, or net income.

Which of the following ratios is used to measure a firm's profitability?

Net income ÷ Sales

The statement of cash flows replaces the

None of these

Service Revenue

Normal Balance: Credit Type of Account: Revenue Financial Statement: IS

Vital information that CANNOT be captured solely by dollar amounts is reported in a firm's

Notes to financial statements

An appropriate cost driver for engineering changes is:

Number of set-ups performed

Operating Income (EBIT)

Operating income measures the performance of the fundamental business operations conducted by a company and is computed as gross profit minus operating expenses. A general rule of thumb is that all expenses are operating expenses except interest expense and income tax expense. Accordingly, another name for operating income is EBIT, or earnings before interest and taxes.

Financing Activities

Obtaining resources from owners and providing them a return on their investment, and obtaining resources from creditors and repaying those borrowings are called financing activities.

Valuation

Once it has been determined that an item should be recognized in financial statements, the question then arises about what dollar amount to assign to the item. This process is called valuation

debt ratio

One frequently used measure of leverage is the debt ratio, computed as total liabilities divided by total assets.

Efficiency Ratios

One of the four classifications of ratios designed to see how well the firm is using its assets and investments.

Recognition

One way to report financial information is to boil down all the estimates and judgments into one number and report that one number in formal financial statements. This summarization is called recognition. Recognition is the preferred method of financial reporting, when it is appropriate.

Which of the following classifications refers to those activities that are part of the day-to-day business of a company?

Operating

Those transactions and events that enter into the determination of net income are reported under which section of the statement of cash flows?

Operating activities

In the statement of cash flows, cash receipts and payments are classified according to 3 main categories:

Operating activities Investing activities Financing activities The net amount of cash provided or used by operating activities is THE key figure in a statement of cash flows. In the same way that net income is used to summarize everything in an income statement, net cash from operations is the "bottom line" of the cash flow statement. The nature of financing activities is the same no matter what industry a company is in, but operating and investing activities differ considerably across industries. For example, the operating and investing activities of a supermarket chain are quite different from those of a sand and gravel company. However, for both companies the process of borrowing money, selling stock, paying cash dividends, and repaying loans is almost the same.

According to Sarbanes-Oxley, which one of the following services is an accounting firm permitted to provide to its audit client?

Opinions about the reliability of internal controls

Period costs

Period costs are all costs incurred that are not closely associated with a specific product or service

Keeping marketable securities and cash in a fireproof vault is an example of which type of accounting procedure?

Physical control over records

physical safeguards

Physical precautions used to protect assets and records.

C-V-P analysis, while useful for several purposes, is primarily useful in:

Planning

current portion of long-term debt

Portion of long-term debt due within one year or the operating cycle, whichever is longer; reported under current liabilities. Some liabilities, such as mortgages, are payable in equal monthly installments over a specified number of years. The portion of these liabilities that is payable within 12 months from the balance sheet date

Which of the following activities would internal auditors NOT typically perform in a large company?

Prepare the primary financial statements

Which of the following ratios represents an indication of investors' expectations concerning a firm's growth potential?

Price-earnings ratio

independent checks

Procedures for continual internal verification of other controls.

In a manufacturing company, indirect labor is usually classified as a(n):

Product cost

If activity-based costing is used, receiving docks would be classified as a:

Product line activity

The particular analytical measures chosen to analyze a company may be influenced by all BUT which one of the following?

Product quality or service effectiveness

Product-line activities

Product-line activities are those overhead activities that are associated with the capability to produce different types of products.

Traditional product costing systems (e.g. job order costing and process costing) usually assume that:

Products consume overhead costs

Section 101 of the Sarbanes-Oxley Act created the Public Company Accounting Oversight Board (PCAOB).

Public Company Accounting Oversight Board (PCAOB)a private, non-profit organization, but it effectively serves as an arm of the SEC in registering, inspecting, and disciplining the auditors of all publicly traded companies. The SEC appoints the chairperson and members of the PCAOB. Like the FASB, the PCAOB is funded by registration fees paid by all publicly traded companies in the United States.

Which of the following activities would NOT be classified as an investing activity?

Purchase of inventory

Which of the following would be reported as a financing activity on a statement of cash flows?

Purchase of treasury stock

Sales mix refers to:

The relative proportions of different products that constitute total sales

The process of formally recording an item in the accounting records so that it will be reflected in the financial statements is called

Recognition

recognition

Recognition is breaking down all the estimates and judgments into one number and then reporting that one number in the financial statements.

Two characteristics of a good management accounting measure are that it:

Reflects economic reality and Motivates correct behavior.

Public Company Accounting Oversight Board (PCAOB) is required to do the following:

Register all public accounting firms that provide audits for public companies. Establish standards relating to the preparation of audit reports for public companies. Conduct inspections (reviews) of accounting firms. Conduct investigations and disciplinary proceedings and impose appropriate sanctions on public accounting firms whose performance is inadequate. Enforce compliance with the Sarbanes-Oxley Act.

Registration statements

Registration statements. These include various forms that must be filed and approved before a company can sell securities through the securities exchanges.

financial ratios

Relationships between financial statement amounts are called financial ratios

The notion that information will be more useful if it will impact a decision is referred to as

Relevance

Historical cost has long been used in accounting because it is

Reliable

Which of the following would be included on an income statement?

Rent expense

Which of the following are the two economic factors that enable us to trust an independent auditor despite the fact that the auditor was hired by the company being audited?

Reputation of auditor and risk of lawsuits

Which of the following ratios is decomposed using the DuPont framework?

Return on equity

What will increase from the sale of goods or services?

Revenues

Net Income Equation

Revenues - Expenses = Net Income

When a company determines to get out of a specific line of business

Revenues and expenses from that line of business are excluded from the company's recurring revenues and expenses when preparing an income statement.

Key factors involved in C-V-P analysis are:

Revenues from the sales prices charged for goods and services Fixed and variable costs Sales volume Mix of products Resulting profits

Sales discounts

Sales discounts are cash reductions offered to customers who purchase merchandise on account and who pay their bill early.

In a common-size balance sheet, using the percent of sales method, each item on the balance sheet is typically expressed as a percentage of

Sales revenue

Increased federal oversight of the audit process resulted from the passage of the following act of Congress -

Sarbanes-Oxley Act

Two common techniques for analyzing mixed costs are:

Scattergraph method High-low method With both methods, where the line intercepts the cost axis represents the fixed cost, and the slope of the line represents the variable cost per unit. The scattergraph method involves visually fitting a straight line (the regression line) through data points plotted on a graph. With the high-low method, the high and the low levels of activity are used to define an estimate of the total cost line.

Comparability and Consistency

Secondary qualitative characteristics that state that a company's information must be presented with the same consistent method from year to year, in order for it to be useful for analytical purposes in decision making

Which of the following organizations has specific legal authority to establish accounting standards for publicly held companies?

Securities and Exchange Commission (SEC)

The five types of control procedures are

Segregation of duties Procedures for authorizations Documents and records Physical safeguards Independent checks

Control activities fall into five categories:

Segregation of duties Proper procedures for authorizations Physical control over assets and records Adequate documents and records Independent checks on performance

The per-unit contribution margin is equal to:

Selling price per unit − Variable costs per unit

Which of the following has no inventories?

Service company

Under the accural basis of accounting, revenues are reported in the accounting period when the

Service or Goods have been delievered

The direct method of presenting a statement of cash flows

Shows the major classes of operating cash receipts and payments

non-cash investing and financing activities

Some investing and financing activities affect a company's financial position but not the company's cash flows during the period.

Another name for the income statement is

Statement of earnings

Which of the following activities would most likely NOT be considered a batch activity:

Storage in warehouse

Social Mission:

To operate the company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally, nationally & internationally.

Which of the following accounts is considered to be the most liquid?

cash

Most companies that engage in earnings management typically do NOT go beyond which of the following activities on the earnings management continuum?

Strategic matching

The statement of cash flows

Summarizes all cash inflows and outflows of an entity for a given period of time

Which of the following is NOT one of the four general types of financial statement notes?

Supplementary information required by the Internal Revenue Service

Target income

Target income is usually defined as the amount of income that will enable management to reach its objectives—paying dividends, meeting analysts' predictions, purchasing a new plant and equipment, or paying off existing loans. Target income can be expressed as either a percentage of revenues or as a fixed amount.

cost-volume-profit (C-V-P) analysis

Techniques for determining how changes in revenues, costs, and level of activity affect the profitability of an organization. A critical tool in the management process. C-V-P analysis allows a manager to answer the very important question: How much do I need to sell in order to earn a profit? Although C-V-P analysis is most useful for planning, it can also be used to assist with controlling decisions (e.g., are the costs too high for the level of sales?) and evaluating decisions (e.g., should we reward employees for holding costs down or be concerned that sales growth has slowed?).

common stock

Term used to describe the total amount paid in by stockholders for the shares they purchase.

DuPont Framework

The DuPont framework (named after a system of ratio analysis developed 90 years ago at DuPont by F. Donaldson Brown) provides a systematic approach to identifying general factors causing ROE to deviate from normal. The DuPont system also provides a framework for computation of financial ratios to yield a more in-depth analysis of a company's areas of strength and weakness.

Which of the following is NOT one of the three primary financial statements?

The Statement of Retained Earnings

The control environment can be defined as

The actions, policies, and procedures that reflect the overall attitudes of top management about control.

Expenses

The amount of assets consumed from the performance of business operations and thus are the opposite of revenues. Other expenses might include salaries, utilities, rent, interest, repairs and maintenance, and various taxes; for example, Safeway's income tax expense in 2012 was $262 million.

Long-term assets (fixed assets)

The assets with a lifespan of more than a year, such as land, buildings, equipment, and expensive technology. long-term assets are those assets that you expect to still be around next year when you prepare the balance sheet again. Common categories of long-term assets are investments; property, plant, and equipment; intangible assets; and other assets.

Internal Revenue Service (IRS)

The branch of the U.S. Treasury Department in charge of collecting taxes

break-even point (BEP)

The break-even point is defined as the volume of activity at which total revenues equal total costs, or where profit is zero. The break-even point may also be thought of as the volume of activity at which the contribution margin equals the fixed costs. Sales Revenue - Variable Costs - Fixed Costs = $0 Total Fixed Costs/(Sales Price per Unit - Variable Cost per Unit) = Break-Even Sales (in units)

Cash Flow Adequacy Ratio

The cash flow adequacy ratio, computed as cash from operations divided by expenditures for fixed asset additions and acquisitions of new businesses, indicates whether a business is a cash cow.

A company's asset mix is strongly influence by

The company's industry

Contribution Margin Income Statement

The contribution margin income statement is a useful tool when analyzing the results of a previous period. This statement tells you whether your efforts for the period have been profitable or not. The resulting value is sometimes referred to as operating income or net income.

Contribution Margin Ratio

The contribution margin ratio is the difference between a company's sales and variable costs, expressed as a percentage. This ratio shows the amount of money available to cover fixed costs.

retained earnings

The cumulative amount of a corporation's profits that have been reinvested on behalf of the stockholders. An amount earned by a corporation and not yet distributed to stockholders.

Financing mix is a measure of

The degree to which a company finances assets using liabilities or owners' equity

Unearned Revenue

The liability created by receiving revenue in advance. Remember, unearned revenue is not revenue at all but a liability to be reported in the balance sheet.

There are several reasons why it is useful for financial statement users to know how a statement of cash flows is prepared.

The majority of cash flow statements are prepared using what is called the "indirect method." Without a detailed understanding of how this type of statement is prepared, you are severely limited in your ability to understand and interpret the numbers. An understanding of the intricacies of the statement of cash flows allows one to see how individual transactions can affect all of the financial statements. Thus, when we analyze the statement of cash flows, we are also looking at the income statement and the balance sheet. Small companies frequently prepare only balance sheets and income statements, so external users of financial statements, such as banks and potential investors, are required to construct cash flow statements using partial information.

Which of the following is an example of a significant accounting policy that would be explained in the notes to the financial statements?

The method used to estimate depreciation on a piece of equipment

current ratio

The most commonly used measure of liquidity is the current ratio, which is a comparison of current assets (cash, receivables, and inventory) with current liabilities.

Comprehensive income

The number used to reflect an overall measure of the change in a company's wealth during the period. Remember that the comprehensive income items do not appear on the income statement and are explicitly excluded from the computation of net income.

Stockholders' Equity

The owners' claim to assets. Owner's equity might also be called shareholder's equity.

Stockholders' Equity

The owners' claim to assets. the difference between assets and liabilities

Financing Mix

The percentage of total financing (liabilities plus equity) in each individual category.

Income Smoothing

The practice of carefully timing the recognition of revenues and expenses to even out the amount of reported earnings from one year to the next is called income smoothing

Transaction Analysis

The process of determining how an economic event impacts the financial statements is called transaction analysis. the process of identifying the specific effects of economic events on the accounting equation.

margin

The profitability of each dollar in sales is sometimes called a company's margin

Accumulated Other Comprehensive Income

The source of these increased assets

Which of the following statements is NOT true?

The statement of cash flows includes transactions that are not already reflected in the balance sheet and income statement.

physical capital maintenance

This concept, termed physical capital maintenance, states that income is earned only when one experiences an increase in actual physical resources.

statement of cash flows

This document reports the amount of cash collected and paid out by a company in the following three types of activities: operating, investing, and financing.

income statement

This document reports the amount of net income earned by a company during a period, with annual and quarterly income statements being the most common.

Financing activities

Those activities whereby cash is obtained from, or repaid to, owners and creditors

credit period

Time period that can pass before a customer's payment is due. When a company grants credit, it specifies the credit period, which determines when the cash will be collected.

Which of the following items is NOT a key factor involved in cost-volume-profit (C-V-P) analysis?

Time value of money

The ratio that indicates if a borrowing company will be able to meet its required interest payments is the

Times interest earned ratio

Product Mission:

To make, distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome, natural ingredients and promoting business practices that respect the Earth and the Environment.

Most companies have the following five concerns in mind when they are designing internal controls:

To provide accurate accounting records and financial statements containing reliable data for business decisions. To safeguard assets and records. Most companies think of their assets as including their financial assets (such as cash or property), their employees, their confidential information, and their reputation and image. To effectively and efficiently run their operations, without duplication of effort or waste. To follow management policies. To comply with the Foreign Corrupt Practices and Sarbanes-Oxley acts, which require companies to maintain proper record-keeping systems and controls.

Relevance and Reliability

Two primary qualities that make accounting information useful for DECISION MAKING purposes.

Treasury Stock

Treasury stock is shown as a subtraction in the stockholders' equity section of the balance sheet. When a company buys back its own shares, accountants call the repurchased shares treasury stock.

A borrower benefits from providing financial information regarding income and expenses in the form of a lower interest rate on the loan because of reduced uncertainty for the lender with regard to repayment.

True

One reason for a company's preparing and providing financial statements is to reduce uncertainty for an investor regarding the firm's future financial performance.

True

The International Accounting Standards Board (IASB) is charged with developing worldwide accounting practices?

True

Recording the payment of an account payable twice will result in the

Understatement of total assets and total liabilities

The four general categories of ABC activities are:

Unit Batch Product line Facility support

If activity-based costing is used, assembly would be classified as a:

Unit-level activity

Unit-level activities

Unit‐level activities occur every time a service is performed or a product is made. The costs of direct materials, direct labor, and machine maintenance are examples of unit‐level activities. Batch‐level activities are costs incurred every time a group (batch) of units is produced or a series of steps is performed.

The process of determining the dollar value to assign to an item that is to be recognized in the financial statements is called

Valuation

cost of goods

When a business sells goods to customers, the cost of the goods sold is recorded as an expense called cost of goods sold, or cost of sales.

Treasury Stock

When a company buys back its own shares

As William is preparing the end of year financial statements, he realizes that the earnings are not quite up to par for the large loan application that is being currently processed. He decides to stretch the assumptions just enough to be able to meet the requirements for the loan application. This is an example of

Window dressing

Balance Sheet Format

a "snapshot" of an organization's financial position at a given moment

Financial Accounting

accounting information and analyses prepared for people outside the organization

Generally, recognition criteria are met and revenues are recognized

at the point of sale.

internal auditors

auditors employed by a company to audit for the company's board of directors and management. an independent group of experts in controls, accounting, and operations. This group monitors operating results and financial records, evaluates internal controls, assists with increasing the efficiency and effectiveness of operations, and even detects fraud.

Opportunity costs

benefits lost or forfeited as a result of selecting one alternative course of action over another. For example, choosing to go to a movie instead of working two hours at $8 per hour has an opportunity cost of $16

Resources owned by a company, such as cash, accounts receivable, vehicles, are reported on the balance sheet and are referred to as

cost

The four elements used within Grenzplankostenrechnung (GPK) are:

cost type accounting, cost center accounting, product cost accounting, and contribution margin accounting.

Revenue

is the amount of assets created through the performance of business operations. hink of revenue as another way for a company to acquire assets—in the same way that assets can be acquired by borrowing or by owners' investment, assets can also be acquired by providing a product or service that customers are willing to pay for. (Retailers/manufacturers)

Bookkeeping

is the preservation of a systematic, quantitative record of an activity

Capital Lease Obligations

leases of property, plant, and equipment financially strutted so that they are economically the same as debt-financed purchases -on the long-term liability section of the balance sheet.

Liabilities often have the word _________in their account title

payable

Sales Revenue

primary source of revenue for a merchandising company

Direct Method

reporting the information contained in the last column of the adjustment worksheet

Fixed Asset Turnover

sales divided by average fixed assets and is interpreted as the number of dollars in sales generated by each dollar of fixed assets. By the way, fixed assets is just an alternative label for property, plant, and equipment.

Most forecasting exercises begin with a forecast of

sales.

strategic matching

savvy transaction timing -making sure that certain transactions are completed quickly or delayed so they are recognized in the most advantageous quarter

notes to financial statements

summary reports can't possibly tell financial statement users everything they want to know about a company, so additional information is provided in the notes to financial statements. Financial statement notes are of the following four general types: A summary of significant accounting policies Additional information about the summary totals found in the statements Disclosure of important information not recognized in the statements Supplementary information required by the Financial Accounting Standards Board (FASB) or the Securities and Exchange Commission (SEC)

Management Accounting

the area of accounting concerned with preparing data for use by managers within the organization

Average Collection Period (ACP)

the average length of time required to convert the firm's receivables into cash, that is, to collect cash following a sale

Net Income

the difference between total revenue and total expenses when total revenue is greater

Return on Investment (ROI)

the direct financial impact of a firm's expenditure of a resource, such as time or money

Under the general rule of revenue recognition, revenue is recognized when

the earnings process is complete, and a valid promise of payment has been received.

When analyzing financial statements, diagnosis is

the identification of where a business has problems

Institute of Management Accountants (IMA)

the leading professional organization in North America devoted exclusively to management accounting. the IMA notes that its members are ethically required to Be competent in their profession Not disclose confidential information Act with both actual and apparent integrity in all situations Maintain objectivity when communicating information to decision makers

Managerial accounting

the name given to accounting systems designed for internal users

organizational structure

the vertical and horizontal configuration of departments, authority, and jobs within a company

cost behavior

the way in which a cost reacts to changes in the level of activity

The two basic cost behavior patterns

variable and fixed - Other cost behavior patterns, such as mixed costs, are variations of these two. As more doughnuts are sold, the total cost of doughnut ingredients increases. This is a variable cost. On the other hand, the cost of property taxes does not increase as more doughnuts are sold. This is a fixed cost. However, there are costs that have both variable and fixed components.

A company that has a per-unit contribution margin of $140 and fixed costs of $126,000 will break even when it sells:

900 units Break-even in units: $126,000 / $140 = 900

Earnings Per Share (EPS)

A measure of the net income earned on each share of common stock; computed as net income minus preferred dividends divided by the average number of common shares outstanding during the year.

indirect method

A method for creating a statement of cash flows a company may use during any given reporting period. The indirect method uses accrual accounting information to present the cash flows from the operations section of the cash flow statement.

To ensure that external auditors remain independent, Sarbanes-Oxley requires the following:

Accounting firms that audit public companies are prohibited from providing several nonaudit services to their clients, including bookkeeping or other services related to the accounting records or financial statements; financial information systems design and implementation; appraisal or valuation services; actuarial services; internal audit outsourcing services; management functions or human resources; broker or dealer, investment adviser or investment banking services; legal services and expert services unrelated to the audit; any other service that the Board determines is impermissible. Audit partners on engagements be rotated off the audit every five years Auditors report to and be retained by the audit committee rather than the CFO or other members of the company's management

The Nature and Purpose of Financial Accounting

Accounting is the recording of the day-to-day financial activities of a company and the organization of that information into summary reports used to evaluate the company's financial status. The focus of financial accounting is the three primary financial statements: the balance sheet, the income statement, and the statement of cash flows. Among the users of financial accounting information are lenders, investors, company management, suppliers, customers, employees, competitors, government agencies, politicians, and the press. The practice of accounting involves adherence to the established accounting rules as well as the use of judgment. U.S. accounting rules are established by the FASB. In addition to the FASB, other important accounting-related organizations are the SEC, the AICPA, the PCAOB, the IRS, and the IASB. Three factors have combined to make right now a time of significant change in accounting. The three factors are the rapid advance in information technology, the international integration of worldwide business, and the increased scrutiny associated with the large corporate accounting scandals.

1.7 Review of Key Points

Accounting is the recording of the day-to-day financial activities of a company and the organization of that information into summary reports used to evaluate the company's financial status. The focus of financial accounting is the three primary financial statements: the balance sheet, the income statement, and the statement of cash flows. Among the users of financial accounting information are lenders, investors, company management, suppliers, customers, employees, competitors, government agencies, politicians, and the press. The practice of accounting involves adherence to the established accounting rules as well as the use of judgment. U.S. accounting rules are established by the FASB. In addition to the FASB, other important accounting-related organizations are the SEC, the AICPA, the PCAOB, the IRS, and the IASB. Three factors have combined to make right now a time of significant change in accounting. The three factors are the rapid advance in information technology, the international integration of worldwide business, and the increased scrutiny associated with the large corporate accounting scandals.

activity-based costing (ABC)

Activity-based costing is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each Therefore this model assigns more indirect costs into direct costs compared to conventional costing. Companies that better understand their costs have an advantage over their competitors. When using an activity-based costing (ABC) system, a company identifies specific business activities that create overhead costs and then assigns overhead to products or divisions based on the level of those activities. The ultimate purpose of an ABC system is to help a company make better decisions.

Assume that direct labor and direct materials are the major cost components of a product and that the small amount of overhead cost can easily be associated with products using a simple overhead allocation basis such as direct labor hours. Which one of the following statements is the most correct?

Activity-based costing is probably too expensive to justify using it in this situation.

Which one of these is NOT one of the benchmarking problems that arises when analyzing financial statements?

All of these are benchmarking problems

Which of the following are valid control procedures?

All of these are correct

Which one of the following is NOT an ethical guideline that the Institute of Management Accountants (IMA) requires its members to follow?

All of these are correct

Which of the following is an incentive that influences auditors to remain independent and to provide fair and reliable financial information?

All of these are correct - Auditors have a reputation to protect , External auditors are taking a large legal risk if they allow their independence and integrity to be compromised , Management would be taking a large legal risk if they interfere with the auditors.

The Sarbanes-Oxley Act establishes

All of these are correct - Constraints on company management , Independent oversight of auditors , Constraints on auditors

Disclosure

Another way to report financial information is to convey the details in a narrative note without ever including anything in the financial statements themselves. This is called disclosure. Convey the details in a narrative note without ever including anything in the financial statements themselves.

Overview of the Financial Statements

By increasing the information available about a company, financial statements make it easier for a company to attract investors, lenders, and other parties interested in the company's financial status. The balance sheet reports a company's financial position at a specified point in time and lists the company's resources (assets), obligations (liabilities), and net ownership interest (owners' equity). The income statement describes a company's financial performance for a period of time. A company's expenses are subtracted from its revenues in computing net income. The statement of cash flows details how a company obtained and spent cash during a certain period of time. All of a company's cash transactions are categorized as either operating, investing, or financing activities. The notes to financial statements provide information on the accounting assumptions used in preparing the statements and also provide supplemental information not included in the statements themselves. Notes are an integral part of financial statements. An audit performed by accountants from outside a company increases the reliance that users can place on the information in the company's financial statements. A key trade-off in the preparation of useful accounting information is between relevance and reliability. Other concepts underlying the practice of accounting are comparability, conservatism, materiality, and articulation.

Determining the best use of financial resources is an aspect of:

Capital budgeting

If a corporation has total assets of $350,000, total liabilities of $150,000, and retained earnings of $100,000, what is the amount of capital stock?

Capital stock: $350,000 - $150,000 - $100,000 = $100,000 $100,000

Earnings management can take the form of:

Careful timing of transactions Changing accounting methods or estimates with full disclosure Changing accounting methods or estimates WITHOUT adequate disclosure Non-GAAP accounting Fictitious transactions Because of the possible abuses associated with earnings management, it is important that accountants be persons of high personal integrity.

______ is/are not considered to be an expense of doing business.

Cash dividends

cash equivalents

Cash equivalents are short-term, highly liquid investments such as Treasury bills, commercial paper, and money market funds. These investments are readily convertible to known amounts of cash and are so near their maturity that there is little risk of change in values from fluctuating interest rates.

Which cash flow ratio reflects a company's ability to finance its capital expansion through cash from operations?

Cash flow adequacy

The total amount invested to acquire an ownership interest in a corporation is called

Common Stock and Preferred Stock

Which of the following below generally is the most useful in analyzing companies of different sizes?

Common-sized financial statements

The idea that information becomes more useful when it can be related to a benchmark or a standard is referred to as

Comparability

C-V-P Equation

Contribution margin calculations are very useful when analyzing cost-volume-profit relationships in the management planning process. Doing C-V-P analysis using contribution margin calculations is a straightforward process, though it does require some simple algebra. The assumptions of the CVP model yield the following linear equations for total costs and total revenue (sales): Total costs = fixed costs + (unit variable cost × number of units) Total revenue = sales price × number of unit. (Sales Price × Units) - (Variable Cost × Units) - Fixed Costs = Profit Sales Revenue - (Variable Cost Ratio × Sales Revenue) - Fixed Costs = Profit

Controlling

Controlling involves a process of tracking actual performance

The following information was taken from the records of Merle Corporation for the period ending December 31, 2012: Advertising expense $1,200 Equipment 800 Accounts receivable 1,500 Notes payable 6,000 Retained earnings 8,420 Utilities expense 1,385 Revenues 4,620 Dividends 975 Interest receivable 125 Rent expense 655 Assuming that 3,450 shares of stock are outstanding, earnings per share is approximately

Correct Answer: $0.40 Net income: $4,620 - $1,200 - $1,385 - $655 = $1,380 Earnings per share: $1,380 / 3,450 shares = $0.40

Bird's Eye View manufactures three different sizes of bird cages: small (for finches and canaries), medium (for cockatiels and small parrots), and large (for cockatoos and other large parrots). The company has recently implemented an activity-based costing system. Bird's Eye View has identified five different production activities as well as the best cost driver for each activity. Each activity and driver is listed below, along with the budgeted amount that is associated with each activity for next year. Budgeted Activity Cost Driver Costs Materials handling Labor hours $ 55,000 Automated processing Machine hours 40,000 Plastic parts insertion Number of parts 6,000 Inspections Labor hours 29,000 Packaging Orders shipped 31,000 Total indirect manufacturing cost $161,000 The following information relates to each size of bird cage and next year's anticipated manufacturing operations: Large Medium Small Units to be produced 350 400 600 Orders to be shipped 180 200 250 Number of parts per unit 8 6 4 Machine hours per unit 4 2 1 Labor hours per unit 2 2 2 What is Bird's Eye View cost per cost driver for parts insertion for next year (rounded)?

Correct Answer: $0.79 per part Total number of parts: (350 x 8) + (400 x 6) + (600 x 4) = 7,600 Cost per part: $6,000 / 7,600 = $0.79 (rounded)

Winthrop Merchandising is preparing its budget for 2011 (its first year of operation). Sales for the year are budgeted at $1,500,000; 20% are cash sales and 80% are credit sales. The company expects to collect 60% of all credit sales in 2011. Budgeted expenses are $1,200,000. These expenditures include $37,500 for depreciation and $745,500 for variable manufacturing overhead. Given the information above, total cash outflows for 2011 would be:

Correct Answer: $1,162,500 Cash outflow: $1,200,000 - $37,500 = $1,162,500

Given the following information, compute comprehensive income -Extraordinary Loss -80 Income Taxes 150 Interest Expense 100 Operating Income 1,500 Unrealized Gain not included in Net Income 120

Correct Answer: $1,290 $1,500 - $150 - $100 - $80 +120 = $1,290

Given the following information, compute income from continuing operations - Cost of Goods Sold $2,000 Extraordinary Item -170 Income Taxes 350 Interest Expense 200 Operating Expenses 1,500 Sales 5,500

Correct Answer: $1,450 $5,500 - $2,000 - $1,500 - $350 - $200 = $1,450

For 2011, Raster Graphics forecasts cash receipts of $405,000 and cash disbursements of $430,000. If the beginning cash balance is $35,000 and the desired ending balance is $21,000, how much must Raster borrow during the year?

Correct Answer: $11,000 Financing needed: $35,000 + $405,000 - $430,000 - $21,000 = (11,000)

Cheroke Company had an accounts receivable balance of $16,000 at December 31, 2013. Projected sales for the first three months of 2014 are: January $120,000 February 130,000 March 100,000 All sales are credit sales. Cheroke Company usually collects 40% of its sales during the month of sale, 50% in the month following the sale, and 10% in the second month following the sale. Given the information above, cash collections during March should be:

Correct Answer: $117,000 Cash collections: ($120,000 x 10%) + ($130,000 x 50%) + ($100,000 x 40%) = $117,000

If total costs are $27,000 and $36,000 for activity levels of 5,000 and 8,000, respectively, how much are fixed costs?

Correct Answer: $12,000 Variable costs: ($36,000 - $27,000) / (8,000 - 5,000) = $3 Fixed costs: $27,000 - (5,000 x $3) = $12,000

Kimball Co. wishes to forecast it cash disbursements relating to inventory for the month of March. Estimated purchases of inventory in January, February, and March are $100,000, 120,000, and $150,000, respectively. Kimball typical pays for 40 percent of its inventory purchased in the month of purchase, 50 percent in the month following purchase, and the remaining 10% in the second month following the purchase. Given this information, forecasted cash paid for inventory in March is:

Correct Answer: $130,000 Forecasted cash paid in March = $10,000 + $60,000 + $60,000 = $130,000From January purchases = $100,000 x .10 = $10,000From February purchases = $120,000 x .50 = $60,000From March purchases = $150,000 x .40 = $60,000

The following information was taken from the records of Tellers Corporation for the month ended December 31, 2012: Advertising expense $20,625 Income tax expense 13,095 Accounts payable 13,450 Dividends paid 14,125 Retained earnings (12/1/12) 57,860 Consulting fees revenue 93,550 Rent expense 11,728 Supplies expense 16,917 If Tellers has 2,100 shares of stock outstanding, earnings per share is approximately

Correct Answer: $14.85 Net income: $93,550 - $20,625 - $13,095 - $11,728 - $16,917 = $31,185 Earnings per share: $31,185 / 2,100 shares = $14.85

Burke Corporation had accounts receivable of $44,400 on April 1 and $33,600 on April 30. How much cash was collected from accounts receivable during April if Burke's April sales on account totaled $134,400?

Correct Answer: $145,200 Cash collected from accounts receivable: $134,400 + $44,400 - $33,600 = $145,200

Hee Jung Company had the following information available: Collections on accounts receivable $53,200 Payments for equipment purchase $23,200 Payments for wages and salaries $18,000 Receipt of interest revenue $ 2,500 Payments to principal amount on loan $12,800 Payments for inventory $22,200 Using this information, compute Hee Jung's cash provided by (paid for) operating activities.

Correct Answer: $15,500 Operating activities: $53,200 - $18,000 + $2,500 - $22,200 = $15,500

The Dormir Company uses an activity-based costing system to account for its process of manufacturing camping tents. Each tent has $140 of direct materials, includes 15 parts, and requires 3 hours of machine time. Information on conversion costs, manufacturing activities, and cost drivers is listed below. Cost Per Manufacturing Activity Cost Driver Unit Material handling Number of parts $ 3.00 Sewing Machine hours 20.00 Assembling Number of parts 1.00 Testing Number of finished units 8.00 The cost of assembling per tent is:

Correct Answer: $15.00 Cost of assembling per tent: 15 x $1.00 = $15

The following information appeared on the 2012 income statement of Kane Company: Depreciation expense $25,000 Patent depreciation expense 10,000 Loss on sale of machinery 6,000 Gain on sale of securities 3,000 Net income 120,000 Based on this information, what is Kane's net cash provided by operations? The company uses the indirect method.

Correct Answer: $158,000 Net cash provided by operations: $120,000 + $25,000 + $10,000 + $6,000 - $3,000 = $158,000

BigView Monitors manufactures three different sizes of computer monitors: 15-inch, 17-inch, and 20-inch. The company has recently implemented an activity-based costing system. BigView has identified five different production activities as well as the best cost driver for each activity. Each activity and driver is listed below, along with the budgeted amount that is associated with each activity for next year. Budgeted Activity Cost Driver Costs Parts handling Number of parts $ 90,000 Parts insertion Number of parts 990,000 Automated processing Machine hours 336,000 Testing Labor hours 68,000 Packaging Orders shipped 68,000 Total indirect manufacturing cost $1,552,000 The following information relates to each size of monitor and next year's anticipated manufacturing operations: 20-inch 17-inch 15-inch Units to be produced 2,000 3,000 5,000 Orders to be shipped 200 500 800 Number of parts per unit 30 20 10 Machine hours per unit 4 2 1 Labor hours per unit 2 2 2 What is BigView's cost per cost driver for automated processing for next year (rounded)?

Correct Answer: $17.68 per machine hour Total machine hours: (4 x 2,000) + (2 x 3,000) + 5,000 = 19,000 hrs. Cost per machine hour: $336,000 / 19,000 = $17.68 (rounded)

Winthrop Merchandising is preparing its budget for 2011 (its first year of operation). Sales for the year are budgeted at $1,500,000; 20% are cash sales and 80% are credit sales. The company expects to collect 60% of all credit sales in 2011. Budgeted expenses are $1,200,000. These expenditures include $37,500 for depreciation and $745,500 for variable manufacturing overhead. If the desired ending cash balance is $45,000, how much must Winthrop borrow during the year?

Correct Answer: $187,500 Cash available: (1,500,000 x 20%) + (1,500,000 x 80% x 60%) = $1,020,000 Total cash needed: $1,200,000 - $37,500 + $45,000 = $1,207,500 Total cash borrowed: $1,020,000 - $1,207,500 = ($187,500)

Yuka Company had a beginning cash balance of $1,875. In addition, Yuka Company reported the following items from its cash flow statement: Operating activities $6,450 Investing activities ($4,735) Financing activities ($1,200) Given this information, Yuka Company's ending cash balance is

Correct Answer: $2,390 Ending cash balance: $1,875 + $6,450 - $4,735 - $1,200 = $2,390

If fixed costs are $40,000 and total costs are $200,000 at an activity level of 8,000 units, variable costs are approximately:

Correct Answer: $20 per unit Variable costs: ($200,000 - $40,000) / 8,000 = $20 per unit

Johnston Co. sells three products with the following sales and variable cost rates: Product 1 $12,000 61% Product 2 $19,000 45% Product 3 $ 8,000 70% Assume that Johnston's total fixed costs are $9,000. Using the current sales mix, what is Johnston's break-even point?

Correct Answer: $20,000

Avondale Inc. had the following cash transactions during 2012: Sales receipts $2,000,000 Inventory payments 1,500,000 Interest payments 20,000 Wage payments 120,000 Dividend receipts 10,000 Interest receipts 6,000 Equipment purchased 150,000 Stock of Canton Company purchased 50,000 Stock issued 300,000 Repaid a note (nonoperating) 100,000 What was Avondale's total net increase in cash for the year provided by (used in) financing activities?

Correct Answer: $200,000 Cash provided by financing activities: $300,000 - $100,000 = $200,000

The following information was taken from the records of McDyce Corporation for the year ended December 31, 2013: Dividends paid $ 12,800 Service revenue 90,500 Accounts payable 139,750 Capital stock 378,750 Total expenses 67,000 Retained earnings (1/1/13) 43,400 The net income at December 31, 2013 was

Correct Answer: $23,500 Net income: $90,500 - $67,000 = $23,500

The Dormir Company uses an activity-based costing system to account for its process of manufacturing camping tents. Each tent has $100 of direct materials, $40 of direct labor, includes 15 parts, and requires 3 hours of machine time. Information on conversion costs, manufacturing activities, and cost drivers is listed below. Cost Per Manufacturing Activity Cost Driver Unit Material handling Number of parts $ 3.00 Sewing Machine hours 20.00 Assembling Number of parts 1.00 Testing Number of finished units 8.00 The total manufacturing cost per tent is:

Correct Answer: $268 Total manufacturing cost: $100 + 40 + (15 x $3) + (3 x $20) + (15 x $1) + 8 = $268

The following financial information is available for the year 2012: Operating activities $ 309,800 Investing activities ($118,000) Financing activities ($190,000) Ending cash balance $ 5,600 Given this information, what is the beginning cash balance?

Correct Answer: $3,800 Beginning cash balance: x + $309,800 - $118,000 - $190,000 = $5,600 x = $3,800

BigView Monitors manufactures three different sizes of computer monitors: 15-inch, 17-inch, and 20-inch. The company has recently implemented an activity-based costing system. BigView has identified five different production activities as well as the best cost driver for each activity. Each activity and driver is listed below, along with the budgeted amount that is associated with each activity for next year. Budgeted Activity Cost Driver Costs Parts handling Number of parts $ 90,000 Parts insertion Number of parts 990,000 Automated processing Machine hours 336,000 Testing Labor hours 68,000 Packaging Orders shipped 68,000 Total indirect manufacturing cost $1,552,000 The following information relates to each size of monitor and next year's anticipated manufacturing operations: 20-inch 17-inch 15-inch Units to be produced 2,000 3,000 5,000 Orders to be shipped 200 500 800 Number of parts per unit 30 20 10 Machine hours per unit 4 2 1 Labor hours per unit 2 2 2 What is BigView's cost per cost driver for testing for next year (rounded)?

Correct Answer: $3.40 per labor hour Total labor hours: (2,000 x 2) + (3,000 x 2) + (5,000 x 2) = 20,000 Cost per labor hour: $68,000 / 20,000 = $3.40 (rounded)

The following information is available for Dakota Company: Product 1 Product 2 Sales $1,400,000 $1,800,000 Direct materials (200,000) (400,000) Direct labor (600,000) (600,000) Manufacturing overhead* (500,000) (500,000) Gross margin $ 100,000 $ 300,000 *allocated based on direct labor hours Dakota Company has decided to allocate its manufacturing overhead cost using activity-based costing. Manufacturing overhead will be allocated based on batch-level and product line manufacturing as follows: Total Manufacturing Overhead Costs Product 1 Product 2 Batch-level manufacturing overhead $600,000 20 batches 60 batches Product line manufacturing overhead $400,000 10 lines 40 lines What is Dakota Company's gross margin for Product 2 using activity based costing?

Correct Answer: $30,000 Batch-level cost per batch: $600,000 / 80 batches = $7,500 Product line cost per product line: $400,000 / 50 lines = $8,000 Manufacturing overhead for Product 2: ($7,500 x 60) + ($8,000 x 40) = $770,000 Gross margin for Product 2: $1,800,000 - $400,000 - $600,000 - $770,000 = $30,000

LeMinton Company expects the following credit sales for the first five months of the year: January, $25,000; February, $40,000; March, $30,000; April, $36,000, May $40,000. Experience has shown that payment for the credit sales is received as follows: 60% in the month of sale, 25% in the first month after sale, 12% in the second month after sale, and the remainder is uncollectible. How much cash can LeMinton Company expect to collect in March as a result of credit sales?

Correct Answer: $31,000 Cash collected in March: ($25,000 x 12%) + ($40,000 x 25%) + ($30,000 x 60%) = $31,000

The following cost data are available for Malta Marketing: Total Manufacturing Direct Month Overhead Cost Labor Hours July $64,000 8,400 August 57,000 6,800 September 48,000 4,000 October 77,000 12,000 November 90,000 18,000 December 82,000 15,000 Given the data above and using the high-low method of analysis, total fixed costs are approximately:

Correct Answer: $36,000 Variable costs: ($90,000 - $48,000) / (18,000 - 4,000) = $3 Fixed costs: $90,000 - (18,000 x $3) = $36,000

The following information is available for Dakota Company: Product 1 Product 2 Sales $1,400,000 $1,800,000 Direct materials (200,000) (400,000) Direct labor (600,000) (600,000) Manufacturing overhead* (500,000) (500,000) Gross margin $ 100,000 $ 300,000 *allocated based on direct labor hours Dakota Company has decided to allocate its manufacturing overhead cost using activity-based costing. Manufacturing overhead will be allocated based on batch-level and product line manufacturing as follows: Total Manufacturing Overhead Costs Product 1 Product 2 Batch-level manufacturing overhead $600,000 20 batches 60 batches Product line manufacturing overhead $400,000 10 lines 40 lines What is Dakota Company's gross margin for Product 1 using activity based costing?

Correct Answer: $370,000 Batch-level cost per batch: $600,000 / 80 batches = $7,500 Product line cost per product line: $400,000 / 50 lines = $8,000 Manufacturing overhead for Product 1: ($7,500 x 20) + ($8,000 x 10) = $230,000 Gross margin for Product 1: $1,400,000 - $200,000 - $600,000 - $230,000 = $370,000

Avondale Inc. had the following cash transactions during 2012: Sales receipts $2,000,000 Inventory payments 1,500,000 Interest payments 20,000 Wage payments 120,000 Dividend receipts 10,000 Interest receipts 6,000 Equipment purchased 150,000 Stock of Canton Company purchased 50,000 Stock issued 300,000 Repaid a note (nonoperating) 100,000 What was Avondale's net cash provided by (used in) operating activities?

Correct Answer: $376,000 Cash provided by operating activities: $2,000,000 - $1,500,000 - $20,000 - $120,000 + $10,000 + $6,000 = $376,000

Selected information for Alastair Company is as follows: 2012 Current assets $450,000 Total assets 725,000 Cost of goods sold 700,000 Sales revenue 915,000 Net income 145,000 What is the percentage that would be given to current assets on a common-size balance sheet using the percent of sales method (round to the nearest percent)?

Correct Answer: 49 percent Sales revenue: $450,000 / $915,000 = 49%

Stella Signs sells two different products. Following are the monthly revenues and costs: Sales Variable Revenue Costs Product A $116,000 $ 40,600 Product B $189,000 $103,950 Determine the total contribution margin ratio at the current sales mix.

Correct Answer: 53% 1 - [($40,600 + $103,950)/($116,000 + $189,000)] = 53% or [($116,000 + $189,000) - ($40,600 + $103,950)]/($116,000 + $189,000) = 53%

Which of the following is the formula used to calculate the slope of the regression line on a scattergraph?

Correct Answer: Change in cost ÷ change in activity

The relevant range refers to the activity range over which:

Correct Answer: Fixed and variable cost relationships remain the same

Refer to the figure below. A charge for electricity that is based on a flat rate plus a variable cost after a certain number of kilowatt-hours are used follows which of the following cost behavior patterns?

Correct Answer: Graph C

When using the scattergraph method to analyze mixed costs, the regression line should be visually fit to:

Correct Answer: Minimize the average distance between all the data points and the regression line

Which of the following is NOT a cost behavior pattern?

Correct Answer: Relevant costs

Within the relevant range some fixed costs may actually be:

Correct Answer: Stepped costs

Cheroke Company had an accounts receivable balance of $16,000 at December 31, 2013. Projected sales for the first three months of 2014 are: January $120,000 February 130,000 March 100,000 All sales are credit sales. Cheroke Company usually collects 40% of its sales during the month of sale, 50% in the month following the sale, and 10% in the second month following the sale. Given the information above, cash collections during February should be:

Correct Answer: The answer cannot be determined

Cheroke Company had an accounts receivable balance of $60,000 at December 31, 2013. Projected sales for the first three months of 2014 are: January $120,000 February 130,000 March 100,000 All sales are credit sales. Cheroke Company usually collects 40% of its sales during the month of sale, 50% in the month following the sale, and 10% in the second month following the sale. Given the information above, cash collections during January should be:

Correct Answer: The answer cannot be determined

Which of the following types of costs always change in total in proportion to changes in the level of activity of a firm?

Correct Answer: Variable costs

A more accurate allocation of manufacturing overhead and product costing can take place when costs are assigned on the basis of:

Cost drivers

With activity-based costing, overhead costs are assigned using:

Cost drivers

Restructuring Charges

Costs related to reorganizing and downsizing the company to make the company more efficient. These costs are presented in the income statement as a single line item in determining operating income. The controversy over restructuring charges stems from the fact that companies have exercised considerable discretion in determining the amount and timing of a restructuring charge.

Which of the following is NOT a fixed cost?

Direct labor

Direct labor

Direct labor consists of the wages that are paid to those who physically work on the direct materials to transform them into a finished product.

three methods used to determine when to recognize an expense are:

Direct matching, as with cost of goods sold Systematic allocation, as with depreciation Immediate recognition, as with advertising

Direct materials

Direct materials are materials that become part of the product and are traceable to it.

What is the first step a business professional should take when confronted with a situation that may involve an ethical conflict?

Discuss the problem with the immediate supervisor.

Which one of the following errors causes net income to be understated?

Failure to record revenue earned but not billed

With a multiple-step income statement all revenues are grouped together, all expenses are grouped together, and net income is computed as the difference between the two.

False

With the current state of information technology, investors outside a company are now allowed access to a company's internal database of financial information and do their own customized analysis of a firm's performance.

False - While the technology may be available, companies are still not allowing outsiders access to their internal accounting records.

Form 10-K

Form 10-K. This report must be filed annually for all publicly held companies. The report contains extensive financial information, including audited financial statements by independent CPAs. The 10-K also requires additional disclosure beyond that typically provided in the audited financial statements, like the executive compensation of top management and the details of property, plant, and equipment transactions.

Using independent reviewers, such as auditors, is an example of which type of accounting procedure?

Independent checks on performance

The primary advantages of incorporation include the following:

Investment funds can be accumulated from many different individuals, allowing development of larger and more efficient (sometimes) companies. Individual owners can buy and sell their ownership shares without getting the permission of the other owners. The liability of the owners is limited, meaning that if the business fails, the worst that can happen to the owners is that they lose their investment—their other personal assets are not at risk.

The emphasis in financial accounting is on which of the following external user groups?

Investors and creditors

Which of the following is NOT a purpose of the statement of cash flows?

It measures the profitability of an entity.

Which of the following is an example of a proper procedure of authorization?

John, a clerk, is authorized to perform transactions as large as $5,000 but must maintain authorization from Andrea to perform larger transactions.

An enterprise's obligations to pay cash or other economic resources to others are called

Liabilities

Unearned revenue is what type of account?

Liabilities

Which of the following is NOT an external user of financial information?

Management

Operational Budgeting

Managerial planning decisions regarding current and immediate future (a year or less) operations that are characterized by regularity and frequency.

Activity-based costing differs from traditional product costing in the allocation of:

Manufacturing overhead costs

Manufacturing overhead

Manufacturing overhead includes all other costs incurred in the manufacturing process not specifically identified as direct materials or direct labor. Both indirect materials and indirect labor are included in manufacturing overhead

Topic 4: The Income Statement

Net income is typically viewed as the fundamental measure of a company's profitability, but there are also a variety of other measures of "income." The best measure of sustainable profitability is income from continuing operations. The primary categories of income statement items are revenues, expenses, gains, and losses. Income statement items that do not relate to a company's continuing operations are income from discontinued operations and extraordinary items. Income statements are prepared in a variety of formats. One useful format is the multiple-step income statement. Revenue should be recognized when value has been delivered to customers which is typically only after the required work has been performed and after the collection of cash is reasonably assured. The matching concept has traditionally been used to decide when to recognize expenses. Individual transactions impacting income can be analyzed using the expanded accounting equation which is: Assets = Liabilities + Paid-in Capital + (Revenues − Expenses − Dividends) An important use of an income statement is to forecast income in future periods. Good forecasting requires an understanding of what underlying factors determine the level of a revenue or an expense.

Thus far, the only national government to adopt the accrual basis for its official accounting system is ______.

New Zealand

If a cost activity does NOT have any production-related cost driver that matches up with changes in the amount of overhead cost associated with the activity then:

No cost driver should be selected; the costs should be treated as common costs

Examples of facility support activities are:

Property taxes Factory insurance Security Landscaping General accounting General factory administration

In completing an audit of a company's financial statements, auditors

Provide some assurance that the financial statements are not misleading

The Sarbanes-Oxley Act has the following major provisions:

Public Company Accounting Oversight Board. Established to oversee the certification of auditors Constraints on auditors. Stricter rules to ensure that external auditors maintain their independence Constraints on management. Provisions to make corporate CEOs and CFOs personally responsible for reliable financial statements

Which of the following is NOT a fundamental characteristic of management accounting as compared to financial accounting?

Results in only financial data

Return on assets

Return on assets is computed as net income divided by total assets and is the number of pennies of net income generated by each dollar of assets. The return on assets is impacted by both the profitability of each dollar of sales and the efficiency of using assets to generate sales.

Which of the following ratios is calculated using only income statement numbers?

Return on sales

Return on Sales (ROS)

Return on sales is computed as net income divided by sales and is interpreted as the number of pennies in profit generated from each dollar of sales.

For each of the three ROE components—profitability, efficiency, and leverage—there is one ratio that summarizes a company's performance in that area. These ratios are as follows:

Return on sales is computed as net income divided by sales and is interpreted as the number of pennies in profit generated from each dollar of sales. Asset turnover is computed as sales divided by assets and is interpreted as the number of dollars in sales generated by each dollar of assets. Assets-to-equity ratio is computed as assets divided by equity and is interpreted as the number of dollars of assets acquired for each dollar invested by stockholders.

In a common-size income statement, each item on the statement is expressed as a percentage of

Revenue

Which of the following types of accounts are NOT found on the balance sheet?

Revenues

Which of the following is NOT a reason for problems occurring in the financial statements?

Safeguards

Securities and Exchange Commission (SEC)

Securities and Exchange Commission (SEC) is responsible for ensuring that investors, creditors, and other financial statement users are provided with reliable information upon which to make investment decisions. The Securities Act of 1933 requires most companies planning to issue new debt or stock securities to the public to submit a registration statement to the SEC for approval. The Securities and Exchange Commission (SEC) is an agency of the federal government. The SEC's purpose is to assist investors in public companies by regulating stock and bond markets and by requiring certain disclosures. The SEC has statutory authority to establish accounting principles, but it basically accepts pronouncements of the FASB and AICPA as authoritative. Common reports required by the SEC are registration statements and Forms 10-K and 10-Q. The SEC can suspend trading and even de-list securities.

Going Concern Assumption (Continuity Assumption)

States that businesses are assumed to continue to operate into the foreseeable future.

Six-Step Process for Preparing a Statement of Cash Flows

Step 1. Compute the change in the cash balance during the period. Step 2. Convert the income statement from an accrual basis to a cash basis. Analyze the long-term assets to identify the cash flow effects of investing activities. Analyze the short-term and long-term debt and the stockholders' equity accounts to determine the cash flow effects of any financing transactions. Make sure that the total net cash flow from operating, investing, and financing activities is equal to the net increase or decrease in cash as computed in Step 1. Then, prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities. Disclose any significant investing or financing transactions that did not involve cash.

Contribution Margin

The amount remaining from sales revenues after all variable expenses have been deducted. Contribution margin is a product's price minus all associated variable costs, resulting in the incremental profit earned for each unit sold. The total contribution margin generated by an entity represents the total earnings available to pay for fixed expenses and to generate a profit. Contribution margin is equal to sales revenue less variable costs. It is the amount of revenue that remains to cover fixed costs and provide a profit for an organization. For example, the contribution margin from the sale of one order of French fries by a fast-food restaurant is the selling price less the variables costs (potatoes, salt, container, cooking oil, wages of the cook) of producing the fries. Any contribution margin generated by the sale of French fries can be used to pay the fixed costs of the fast-food outlet, like monthly rent, insurance, the supervisor's salary, and so forth. Contribution margin is one of the most important management accounting concepts you will learn because many operating decisions are made on the basis of how contribution margin will be affected. A company may decide, for example, to advertise one product more than others because that product has a higher contribution margin.

A company's internal control structure can be divided into five basic categories:

The control environment Risk assessment Control activities Information and communication Monitoring

The three basic internal control structure categories are

The control environment The accounting systems The control procedures

turnover

The degree to which assets are used to generate sales is called turnover

Which of the following is an example of additional information about summary totals that would be explained in the notes to the financial statements?

The description of all the individual items that comprise notes payable

net loss

The difference between total revenue and total expenses when total expenses are greater

differential costs

The differential costs of a decision—sometimes called avoidable costs, incremental costs, or relevant costs—are the future costs that change as a result of that decision.

Which of the following is an example of a disclosure of information NOT recognized that would be explained in the notes to the financial statements?

The disclosure of the uncertain, potential outcome of a lawsuit

Per-unit Contribution Margin

The excess of the sales price of one unit over its variable costs.One of the best ways to track the performance of specific products is to calculate the per-unit contribution margin. This metric essentially shows you how much money you'll earn on each sale, once the cost of producing that item (its associated variable costs) has been subtracted.

Preparation

The financial statements themselves are prepared

Public Company Accounting Oversight Board (PCAOB)

The group charged with determining auditing standards and reviewing the performance of auditing firms.

Entity Concept

The idea that personal financial activity is kept separate from business financial activity

Deferred Income Tax Liability

The income tax expected to be paid in future years on income that has already been reported in the income statement but which, because of the tax law, has not yet been taxed.

accountants use the following two criteria to determine when revenue should be recognized:

The promised work must be done before revenue is recognized. Cash collection should be reasonably assured before revenue is recognized.

Asset Mix

The proportion of total assets in each asset category, is determined to a large degree by the industry in which the company operates.

Relevant Range

The range of activity within which assumptions about variable and fixed cost behavior are valid. The relevant range concept is particularly difficult to apply when using C-V-P analysis in companies in very high growth situations, such as high-tech start-ups. If a company's sales are increasing by 60% each quarter, for example, it is unlikely to remain in the same "relevant range" from quarter to quarter; so careful analysis of variable and fixed costs must be repeated on a regular basis.

The Scattergraph, or Visual-Fit, Method

The scattergraph (or scatter graph) method is a visual technique used in accounting for separating the fixed and variable elements of a semi-variable expense (also called a mixed cost) in order to estimate and budget for future costs. Essentially, this method involves simply looking at a graph of mixed cost points over time and learning how to "see" a trend of fixed and variable cost components. the scattergraph method is a classic "quick and dirty" management accounting technique

Topic 5: The Statement of Cash Flows

The statement of cash flows provides information that is not readily apparent by looking at just the balance sheet and the income statement. Operating cash flow is particularly useful in selected cases when net income does not give an accurate reflection of a company's performance. Cash flows are partitioned into three categories—operating, investing and financing. In normal circumstances, a company has positive cash from operations and negative cash from investing activities. Whether cash from financing activities is positive or negative typically depends on how fast a company is growing. Preparing a statement of cash flows is a simple process if one has access to the record of a company's detailed cash transactions. One simply scans the list of cash transactions and sorts them into operating, investing, and financing items. When detailed cash flow information is not available, a statement of cash flows can be prepared using knowledge of how the three primary financial statements articulate. Operating cash flow can be reported using either the direct or the indirect method. Knowledge of how the three primary financial statements tie together allows one to forecast how interactions among management decisions might affect a company's future financial position.

Statement of Cash Flows

The statement of cash flows, as its name implies, summarizes a company's cash flows for a period of time. It provides answers to such questions as, "Where did our money come from?" and "Where did our money go?" The statement of cash flows explains how a company's cash was generated during the period and how that cash was used. It is important to note that the statement of cash flows does not include any transactions or accounts that are not already reflected in the balance sheet or the income statement. Rather, the statement of cash flows simply provides information relating to the cash flow effects of those transactions.Note that the heading to this section says that earnings fail only "sometimes." In most cases, net income is the single best measure of a firm's economic performance.

In non-U.S. Balance sheets, you will often see each of the following EXCEPT:

The stockholders' equity section will be listed first on the balance sheet

financial statements

The three primary financial information documents: the balance sheet, income statement, and statement of cash flows.

times interest earned ratio

The times interest earned calculation is made by dividing income, before any charges for interest or income tax, by the interest expense for the period.

Which of the following groups on the earnings management continuum are always considered ethical?

There is not a clear definition as to which of these are ethical and which are not

Economic Mission:

To operate the Company on a sustainable financial basis of profitable growth, increasing value for our stakeholders & expanding opportunities for development and career growth for our employees.

Debt to Equity Ratio

Total Debt/Total Equity the level of a company's leverage is by the debt-to-equity ratio, which is computed as total liabilities divided by total equity and is interpreted as the number of dollars of borrowing for each dollar of equity investment.

With a single-step income statement all revenues are grouped together, all expenses are grouped together, and net income is computed as the difference between the two.

True

Accounting entries involve a minimum of how many accounts?

Two

Topic 3: The Balance Sheet

Understanding of a business increases as one associates the individual asset, liability, and equity accounts with the underlying business activities that give rise to them. Companies usually provide balance sheets for at least two years, with the statements shown in comparative, side-by-side format. The first item in a U.S. balance sheet is usually cash; companies located in non-U.S. countries often list long-term assets first. With respect to the balance sheet, accountants must use judgment regarding recognition (which items are listed in the balance sheet and which aren't) and valuation (what dollar amounts to associate with the listed items). Individual transactions impacting balance sheets can be analyzed by remembering that the accounting equation (Assets = Liabilities + Owners' Equity) is always maintained. A company's asset mix is the proportion of total assets in each asset category and is largely determined by the industry in which the company operates. Financing mix is the result of management decisions.

Which of the following is NOT a situation when it would be important to analyze cash flow information because net income is NOT giving an accurate portrayal of the economic performance of the company?

When a company has a negative operating cash flow

gain or a loss

When a company makes or loses money on activities that are peripheral to its primary operations, the amount is classified as a gain or a loss instead of as a revenue or an expense.

pro forma financial statements

When forecasting the future, a cash flow statement is an excellent tool to analyze whether the operating, investing, and financing plans are consistent and workable. To do this, one constructs a pro forma, or projected, cash flow statement. A pro forma cash flow statement is a prediction of what the actual cash flow statement will look like in future years if the operating, investing, and financing plans are implemented

When does the Securities and Exchange Commission (SEC) typically require a company to submit a registration statement to the SEC for approval?

When the company issues new debt or stock securities to the public

paid-in capital

When the owners of a corporation invest cash or other assets in the business, they receive shares of stock in exchange. The value of the assets given in exchange for these shares

cash budget

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

High-Low Method

a method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity levels. Once you have selected the high and low activity levels to use in the high-low method, don't use any other activity levels or costs than these two data points to calculate the fixed costs.

Conservatism

a pervasive factor in accounting, can be summarized as follows: When in doubt, recognize all losses but don't recognize any gains. This convention developed in the early stages of financial reporting, when bankers and lenders were the main users of financial reports, especially balance sheets.

Generally Accepted Accounting Principles (GAAP)

a set of accounting standards that is used in the preparation of financial statements

Balance Sheet

a statement of financial position, the balance sheet shows the financial resources the company owns or controls and the claims on those resources. In a general way, a balance sheet provides insight into a company's financial strength by allowing a comparison of the company's resources with its obligations.

par value

a value assigned to a share of stock and printed on the stock certificate. For large U.S. corporations, the most common par value is $0.01. Only 15 percent of large U.S. corporations have shares with par values greater than one dollar.

If a company anticipates a 40% increase in sales volume, then it is most likely that the company will need about a 40% increase in

accounts payable.

bad debt

accounts receivable that cannot be collected by the provider or a collection agency.

Control Environment

actions, policies, and procedures that reflect the overall attitudes of top management, the directors, and the owners about control and its importance to the company.

Operating Activities

activities involved in producing and selling goods and services and thus comprise the day-to-day business of a company. Cash receipts from selling goods or from providing services are the primary operating cash inflow.

single-step income statement

all revenues are grouped together, all expenses are grouped together, and net income is computed as the difference between total revenues and total expenses.

Accumulated Other Comprehensive Income (AOCI)

amount of other comprehensive income (nonowner changes in equity other than net income) accumulated over the current and prior periods.

multiple-step income statement

an income statement that reports multiple levels of income (or profitability) a multiple-step income statement, the revenue and expense items are arranged to highlight important profit relationships and income numbers such as gross profit and operating income.

intangible assets

are assets that have no physical or tangible characteristics. They are agreements, contracts, or rights that provide economic benefits to a company by permitting the use of a certain production process, trade name, or similar item. Examples of items included in this category are patents, trademarks, copyrights, franchises, and goodwill.. long-term assets (e.g., patents, trademarks, copyrights) that have no real physical form but do have value

current assets/current liabilities

are cash, accounts receivable, and inventory. Assets and liabilities are generally classified as current (or short-term) items and non-current (or long-term) items.

Sunk costs

are past costs that cannot be changed as the result of a future decision.

Prepaid expenses (prepayments)

are payments in advance for business expenses. Two common examples are insurance and rent.

Articulation

articulation means that the three primary financial statements are not isolated lists of numbers but are an integrated set of reports on a company's financial status. The statement of cash flows contains the detailed explanation for why the balance sheet cash amount changed from beginning of year to end of year. The income statement, combined with the amount of dividends declared during the year, explains the change in retained earnings shown on the balance sheet. Cash from operations on the statement of cash flows is transformed into net income through the accounting adjustments applied to the raw cash flow data.

Historical Cost Convention

assets and liabilities initially are recorded in the accounting system at their original, or historical, costs. They are not adjusted for subsequent changes in value.

Property, plant, and equipment (PP&E)

assets with relatively long useful lives that are currently used in operating the business. For example, buildings, factories, automobiles, etc.

number of days' sales in inventories

calculated by dividing average inventory by average daily cost of goods sold and is interpreted as the average number of days of sales that can be made using only the supply of inventory on hand.

cash flow-to-net income ratio

cash flow-to-net income ratio reflects the extent to which accrual accounting assumptions and adjustments have been included in computing net income.In general, the cash flow-to-net income ratio will have a value greater than one because of significant non-cash expenses (such as depreciation) that reduce reported net income but have no impact on cash flow.

Detective Controls

catch problems that are occurring before the problems become large

investment securities

certificates that describe the rights and privileges that investors receive when they loan or give assets or services to investees. Investment securities are usually composed of publicly traded stocks and bonds.

variable cost rate

change in cost divided by the change in activity (sometimes described as "rise over run").

The listing of all of the accounts available for use in a company's accouting systsem is known as the

chart of the accounts

common-size financial statements

common-size financial statements, with all amounts for a given year being shown as a percentage of that denominator for the year.

fixed costs

costs that do not vary with production or sales level

variable costs

costs that vary with the quantity of output produced , change in direct proportion to changes in some particular activity level, such as production or sales volumes.

variable costs

costs that vary with the quantity of output produced - Total variable costs change in direct proportion to changes in activity level. Examples are costs of direct materials, which vary proportionately with the number of units produced, and sales commissions, which vary proportionately with the sales volume.

What will usually cause the liability account Accounts Payable to increase?

credit

When a company pays a bill, the account Cash will be

credited

Enteries to revenues accounts such as Service Revenues are usually

credits

Working Capital

current assets - current liabilities

What will usually cause an asset account to increase?

debit

When cash is recieved, the account Cash will be

debited

Entries to expenses such as Rent Expense are usually

debits

Three common leverage ratios—

debt ratio, debt-to-equity ratio, and times interest earned

Current Liabilities

debts of the business that must be paid within the next accounting period. obligations expected to be paid within one year, the most common being accounts payable. Other current liabilities arise in the normal course of business as taxes, wages, and other expenses remain temporarily unpaid. In addition, current liabilities also include short-term loans and the portion of long-term loans expected to be repaid in the coming year.

Sarbanes-Oxley Act of 2002

established requirements for proper financial record keeping for public companies and penalties of as much as 25 years in prison for noncompliance

Costs that can be reasonably associated with specific revenues but NOT with specific products should be

expensed in the period in which the related revenue is recognized.

We must be careful not to base a decision solely on an analysis of financial statement numbers because

financial statements don't contain all the relevant information; financial statements sometimes can't be properly compared among companies because of differences in classification, industry mix, and accounting methods; most sets of financial statements will not reveal a smoking gun that, if fixed, will solve all of a company's problems; and focusing on historical financial statement data may cause us to overlook important current information.

The label "CPA" has two different uses

for individuals who are CPAs and for CPA firms.CPA firms are also hired to perform independent audits of a company's financial statements. The important role of an independent audit in ensuring the reliability of financial statements is discussed in our "Overview of the Financial Statements."not all CPAs work as accountants; they work in law firms or for the CIA and as business consultants, corporate managers, and even accounting professors.

Revenue Recognition

formal recording and reporting of revenues at the appropriate time

gross profit

gross profit is the difference between the selling price of the product and the cost of the product.

The proper order on an income statement for the various measures of income is -

gross profit, operating income, income from continuing operations, net income, comprehensive income

When a company purchases equipment on credit, the effect on the accounting equation will be to

increase Equipment and increase a liability

Gains and Losses

increases or decreases in equity from peripheral or incidental transactions of an entity

VISUAL-FIT METHOD

is a cost estimation method where an analyst examines a cost by plotting points on a graph (called a scatter diagram) and places a line through the points to yield a cost function.

Obligations (amount owed) are reported on the balance sheet and are refferred to as

liabilities

When revenue and expense items are arranged to highlight important profit relationships, the resulting income statement format is called a -

multiple-step income statement

bookkeeping costs

must have billing system to process transactions, and have system to approve people for credit

individual cash flow items are classified according to three main activities:

operating, investing, and financing.

Facility support activities

overhead activities that must be in place before any of the other production activities can take place. Facility support activities are necessary for development and production to take place. These costs are administrative in nature and include building depreciation, property taxes, plant security, insurance, accounting, outside landscape and maintenance, and plant management's and support staff's salaries.

Three Management Functions

planning, controlling, and evaluating

internal control structure

policies and procedures established to provide reasonable assurance that specific entity objectives will be achieved

carrying costs

refer to the costs of maintaining inventory in a supplier's warehouse (rent, utilities, insurance, taxes, employee costs, etc.)

Generally Accepted Auditing Standards (GAAS)

refers to AICPA auditing standards developed and issued in the form of Statements on Auditing Standards (SASs) and codified in AU-C sections in the Codification of Auditing Standards

Materiality

refers to the question of whether an item is large enough to make any difference to anyone. An item is material if accounting for it incorrectly could impact a decision.

balance sheet

reports the resources of a company (the assets), the company's obligations (the liabilities), and the owners' equity, which represents how much money has been invested in the company by its owners.

retained earnings

represent the portion of stockholders' equity (resulting from cumulative profitable operations) that has not been paid to the owners as dividends.

Assets

represent the resources of the firm. Assets are the firm's economic resources, formally defined as "probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events."

Liabilities

represents a firms obligations. Liabilities are the economic obligations of a company and comprise primarily the money or services that the company owes its creditors. Liabilities are formally defined as "probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events."

Time Period Concept

requires accountants to exercise judgment in unraveling the income effects of business deals that are only partially completed by the end of the reporting period.

Other Assets

resources that do not fit well into one of the other asset classifications or are small enough that they do not warrant separate reporting. Long-term assets that are not suitable for reporting under any of the previous classifications

Discontinued Operations

result from the disposal of a major component of the business and are reported net of income tax effects

return on equity

the overall measure of the performance of a company

earnings management

the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income

Owner's Equity

the portion of the assets that the owners of the organization can really call their own because it's the amount that would be left if all the liabilities were paid off. Owner's equity might also be called shareholder's equity. Owners' equity in a business enterprise is "the residual interest in the assets of an entity that remains after deducting its liabilities."

Capital Budgeting

the process of planning and managing a firm's long-term investments

American Institute of Certified Public Accountants (AICPA)

the professional organizations of certified public accountants in the United States. Like other professional organizations (e.g., the American Medical Association and the American Bar Association), the AICPA provides continuing educational service to its members and also acts as a political voice to lobby on behalf of its membership. The AICPA is responsible for preparing and grading the CPA examination in addition to maintaining the integrity of the accounting profession through its Code of Professional Conduct.

Investing Activities

the purchase and sale of land, buildings, and equipment. Investing activities also include buying and selling stocks of other companies.

Price to Earnings Ratio (P/E)

the ratio of the market value of equity to the firm's earnings, or its share price to its earnings per share. Note that the PE ratio is different from the other ratios in that it is not the ratio of two financial statement numbers. Instead, PE ratio is a comparison of a financial statement number to a market value number.

Which of the following is NOT a reason for the integration of worldwide accounting standards?

the theoretical necessity of a common set of accounting standards

Accumulated Depreciation

the total amount of depreciation expense that has been recorded since the purchase of a plant asset. reflects the wear and tear, or depreciation, of these items since they were originally purchased.

The two basic cost behavior patterns are:

variable → variable in total, fixed per unit fixed → fixed in total, variable per unit Stepped costs increase with the level of activity but in steps instead of smoothly. Mixed costs have both a fixed and a variable component.

financial accounting

which is the name given to accounting information provided for and used by external users.

Reasons for earnings management

• Pressure to meet internal earnings targets • Pressure to meet external expectations • Smoothing income • Preparing to apply for a loan or to offer stock to the public