Chapter 8: What to Know

Scenario 8.1. Melissa is examining the major financial statements of a company that she has invested in. Although the company's stock has been increasing in value, she believes they may be having issues with liquidity. Refer to Scenario 8.1. After evaluating the company's immediate costs, Melissa has decided to examine the company's ability to sell off property to help generate quick cash. To find this information, Melissa should look at the company's ________.

assets

What is ACCOUNTING?

A system for recognizing, organizing, analyzing, and reporting information about the financial transactions that affect an organization.

Huy is putting together the financial statements for his company's upcoming annual meeting. The sales numbers over the last year were below expectations, but the company is planning to protect profits by cutting costs. Since the company has signed long-term contracts with the companies from whom they buy raw materials, they have to find other ways to cut costs. Which key users of accounting information are most likely to be concerned by this information?

Employees

What are ASSETS?

Resources owned by a firm. Cash, accounts receivable, and inventory

What are EXPENSES?

Resources that are used up as the result of business operations.

What is NET INCOME?

The difference between the revenue a firm earns and the expenses it incurs in a given time period.

Scenario 8.2. Madina is a management accountant for a tech startup in San Francisco. Her company recently went public, so her colleagues are anxious to stay on top of the company's performance. Refer to Scenario 8.2. The chief financial officer wants a current view of the company's assets now that the company has issued stock. Madina has been asked to see how the company has structured its debt in terms of liabilities versus equity. Madina refers to the company's _________ to quickly demonstrate the debt structure.

accounting equation

Carmen has been asked to make recommendations on how her company can reduce costs associated with her company's office building, which is separate from their manufacturing facilities. She has considered making a recommendation on how the company heats and cools the building. This would be considered a(n) __________.

indirect cost

Darla's boss has asked her to review the IT department's financial statements. Her boss is concerned that the chief information officer is engaging in wasteful spending practices, and she's hoping that Darla can help her confirm or refute her suspicions by combing through these statements. Darla is most likely a(n) _________.

internal auditor

Merle's boss is worried about stockholders' reaction to their company's recent performance. He has asked Merle to add extraneous information in the financial statements to help disguise the bad numbers. Merle knows that this would be a violation of the generally accepted accounting principles (GAAP) requirement that financial statements be _________, so he has escalated the issue to the company's chief financial officer.

relevant

What is a BALANCE SHEET?

A financial statement that reports the financial position of a firm by identifying and reporting the value of the firm's assets, liabilities, and owners' equity.

Therese is an independent auditor who was hired to write an auditor's report for the shareholders of an entertainment-focused holding company. During her review, she found major discrepancies in how the company reported earnings versus what she could confirm by interviewing employees and reviewing transactions. What kind of opinion should Therese issue?

An adverse opinion

Shobha was contracted to perform an audit for a company that builds and manages senior living care facilities. She has reviewed the company's financial statements and delivered a qualified opinion in her report to shareholders, despite objections from management. What kind of document did Shobha present to shareholders?

An independent auditor's report

Terry works as an independent auditor. He recently reviewed the financial statements for a long-haul trucking company. In his auditor's report, he indicated that there were no issues with the statements that he reviewed. What kind of opinion has Terry issued?

An unqualified opinion

What is the ACCOUNTING EQUATION?

Assets = Liabilities + Owner's Equity Assets - Liabilities = Owner's Equity

Sandra is independently working on a document that provides potential revenue opportunities for her company. She has compiled a list of resources that the company will need if they do decide to pursue any of the proposed opportunities, and she plans to present this to the company's leadership for their input and direction. She hopes that leadership will recognize her initiative and ask her to lead one of the projects she is proposing. Which company process is Sandra engaging in?

Budgeting

What are LIABILITIES?

Claims that outsiders have against a firm's assets. Accounts payable, loan payments, and wages payable

What are REVENUES?

Increases in a firm's assets that result from the sale of goods, provision of services, or other activities intended to earn income.

Liliana's favorite part of her job is getting to work across departments to evaluate their various business needs for the coming years. She enjoys the process of planning and then compiling all of the different inputs into a central document that provides a holistic view of the company's goals and what resources they will need to achieve those goals. What document is Liliana most likely creating?

The company's master budget

What is are STATEMENTS OF CASH FLOWS

The financial statement that identifies a firm's sources and uses of cash in a given accounting period. Shows the cash flowing in and out of a business through its operating, investing, and financing activities.

What is an INCOME STATEMENT?

The financial statement that reports the revenues, expenses, and net income that resulted from a firm's operations over an accounting period.

What is the FINANCIAL ACCOUNTING STANDARDS BOARD?

The private board that establishes the generally accepted accounting principles used in the practice of financial accounting.

What is the SARBANES-OAKLEY ACT OF 2002?

This law banned business relationships that might create conflicts of interest between CPA firms and the companies they audit.

Scenario 8.2. Madina is a management accountant for a tech startup in San Francisco. Her company recently went public, so her colleagues are anxious to stay on top of the company's performance. Refer to Scenario 8.2. Madina's boss has asked her to confirm the total claims that owners have against the company. To find this information, Madina looks at the company's ________.

balance sheet

Ramón studied business and accounting as an undergraduate and then went on to work for an accounting firm for three years. He recently left his job to attend a one-year master's program in accounting, and he wants to earn a professional license to assure his future employer and clients that he takes the profession seriously. Ramón is most likely pursuing a career as a(n) _________.

certified public accountant (CPA)

Abel is preparing his firm's accounting statements for the year, and he notices that someone has changed some of the terminology. Although some terms are interchangeable, like "sales" and "revenues," he is concerned that these changes may be a violation of the generally accepted accounting principles (GAAP) requirement that financial statements be ____________.

consistent

Marwa works as an accountant for a mortgage company. Her company is planning to add another wing onto their building, so Marwa anticipates that she will soon be asked to provide the company's latest financial statements to __________, who will evaluate the company's ability to repay a loan.

creditors

Wilhelm is the project manager for a software company. He has been asked to track all costs that are related to the company's newest product release, including the salaries of anyone working on that specific product. Wilhelm is tracking the _______________.

direct costs

Scenario 8.1. Melissa is examining the major financial statements of a company that she has invested in. Although the company's stock has been increasing in value, she believes they may be having issues with liquidity. Refer to Scenario 8.1. Melissa is concerned that the company has too many immediate costs related to their core operations. Melissa is thinking about the company's ___________.

expenses

Allegra was hired to work for a large consulting firm right out of college, and she has only been with the company for six months. She is responsible for compiling, organizing, and analyzing accounting information for the company's stockholders. She spends most of her time meeting with various business-unit managers to discuss how they should present their numbers to the public. Allegra could best be described as a ________.

financial accountant

Graham manages a manufacturing facility. He is in charge of negotiating contracts for the building's rent, ensuring that the building and equipment are properly insured, and ensuring that the company is paying the correct taxes. Graham is most concerned about _____________.

fixed costs

Scenario 8.2. Madina is a management accountant for a tech startup in San Francisco. Her company recently went public, so her colleagues are anxious to stay on top of the company's performance. Refer to Scenario 8.2. The director of sales has asked Madina to show her the first quarter results for the sales team. Madina needs to determine how much money the team spent on travel versus how much revenue the team brought into the company. Madina refers to the company's _________ for this information.

income statement

Austin has a meeting with the chief marketing officer (CMO) of his company this afternoon. Austin knows that he should come to the meeting prepared to talk through the company's financial statements and what the numbers mean for the marketing department. Austin has also offered to walk the CMO through the department's budget and provide recommendations on how to optimize spending over the next year. Austin is most likely a(n) _________.

management accountant

Clio uses her accounting knowledge to help her colleagues understand the company's financial position and budgeting process. She even acts as an internal consultant, making recommendations about the best way to proceed based on the numbers she reports. Clio is acting as a __________.

managerial accountant

Scenario 8.1. Melissa is examining the major financial statements of a company that she has invested in. Although the company's stock has been increasing in value, she believes they may be having issues with liquidity. Refer to Scenario 8.1. Melissa wants to understand how the company's sales performance and their operational efficiency balance each other out. She should refer to the company's _________ to understand this relationship.

net income

Jimmy works as a management accountant for an industrial landscaping business. He has been helping his colleagues determine the total amount of money they'll need to fulfill the anticipated number of contracts over the next three years. Jimmy has looked at trends in the cost of supplies and calculated the potential revenues from each anticipated contract. The final result of Jimmy's work is part of the company's _________.

operating budget

Joshua works for a company that manufactures electronic parts for cars. He has been asked to report the various costs involved in his company's operations. He spends a lot of his time calculating the amount of money it takes to produce each electronic control module (ECM). The amount changes depending on how much volume the company does each year. For this reason, Joshua reports ECMs as a(n) _____________.

variable cost