Small Business Management Chapter 12

cash flow statement

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

going concern

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

The accounts of assets, liabilities, and owners' equity, excluding accounts for revenues and expenses, are called _____.

permanent accounts

Which of the following is an example of a variable cost?

product shipping, sales commissions, raw materials

Which of the following methodologies help reduce the trouble of selecting from among investment options?

net present value analysis / differential revenues and expenses

inventory budget

combines a purchases budget and a cost of goods sold budget

If a firm owner's equity in the firm is $100,000 and he or she has liabilities that amount to $22,000, then according the accounting equation, his or her assets would be worth _____.

$122,000

Which of the following tasks should an accounting system easily and efficiently accomplish?

Aiding in the development of a cash budget / Enabling an exhaustive context-sensitive help function

investment

An asset that is acquired for the purpose of either generating future incomes and cash flows or appreciating in value to provide an increase in future wealth

Which of the following are assumptions that underlie basic accounting concepts

An operating business will continue to remain in business / A business is separate from its owners

Which of the following statements regarding variances is correct?

Budgets will always at least have a small variance / A business owner should examine the variance to determine the significance between the budget and actual spending / An owners may be able to determine where the business is not meeting its goals by studying the variances report / Small variances should be ignored

outsourcing

Contracting with people or companies outside a business to do work for that business

Which of the following assets and liabilities are excluded from the balance sheet?

Employee loyalty and morale / Value of licenses

Which of the following are limitations of the balance sheet?

Estimated amounts listed in the sheet can be significantly wrong / The values are listed as historical values

Which of the following statements about the balance sheet are correct?

It is a statement of what a business owns, owes, and the value that the owners have invested in it. It contains a business' assets, liabilities, and equity. This statement is called a balance sheet because of accounting equation must balance.

Which of the following are true of cost-volume-profit analysis?

It is a way to plan operations that help achieve a certain profit goal / One of its specific applications is break-even analysis

Identify true statements about the Modified Accelerated Cost Recovery System (MACRS)

It is set by the Internal Revenue Service (IRS) / It allows taxpayers to depreciate more of a cost earlier in the life of a capital expense

Which of the following statements about the business entity concept are correct?

It makes it possible to separate business and personal transactions. It underlies the legal forms of establishing businesses such as corporations, limited partnerships, and limited liability companies. It is implicit in all business regulation.

Which of the following statements about the balance sheet are correct?

It presents a snapshot of a business' financial holdings and liabilities at the close of business on a specified date / It is also called the statement of financial position / It provides information on current and long-term assets and liabilties

Which of the following is one of the five primary criteria for a small business' record-keeping system?

It should be understandable to the manager / Its data must be secure / It should be simple to use / It must assure that the details are accurate / Its reports must be timely

In the context of the labor budget, which of the following steps are included in predicting labor costs when they vary with the output amount?

Multiplying the labor cost per unit with the number of units produced Estimating the amount of labor required to produce each unit

Which of the following statements regarding variance are correct?

One reason variances occur is because prices are different than previously estimated / Another reason for a variance to occur is due to a difference in quantity than estimated / Variances measure the effect of changes in prices and the quantity used or produced

pro forma financial statements

Planning documents for future business activities that are formatted to look like the common financial statements of the income statement, balance sheet, and statement of cash flows

Which of the following statements about budgeting are correct?

The budget becomes the basis for controlling activities and the use of resources / It becomes a standard against which a business' performance can be measured / It is a quantitative expression of the use of resources necessary to achieve a business' strategic goals / The first step of budgeting is making a forecast of future sales

Which of the following statements describing a business that is financially flexible are correct?

The business is able to sell nonoperating assets / The business has the ability to increase efficiency and lower operation costs / The business has the ability to obtain loans or sell additional stock

profit planning

The process of creating a set of interconnected budgets that combine into a master budget that can be used for assessing and controlling the business processes

business entity concept

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

expense

a decrease in owners' equity caused by consuming a business' product or service

budget

a financial plan for the future based on a single level of operations

liquidity

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

income statement

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

financial strength

ability of a business to survive adverse financial events

In the context of accounting functions, _____ records to track what a business owes and to make timely payments in order to capture prompt pay discounts and help maintain a good credit rating for a business.

accounts payable

operating activities

activities involved in producing and selling goods and services

financing activities

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

Which of the following formulas is used in a purchases budget to produce most of the schedules of a master budget?

amount to be bought = amount to be used + desired ending amount - beginning amount

revenue

an increase in owner's equity caused by selling a product or service

Generally accepted accounting principles (GAAP)

are standardized rules for accounting procedures set out by the Financial Accounting Standards Board, and used in all audits, and submissions of accounting reports to the government

external factors

aspects of the world outside a business that could change the business' costs

internal factors

aspects within a business that could change the business' costs

An easy and effective accounting system helps a firm maintain an internal "_____" that records all entries and modifications to the accounting system to allow errors to be identified and corrected.

audit trail

fixed asset

automatically calculates and adds depreciation

inventory

calculates appropriate stocking and reorder levels

the accounting equation

demonstrates that the claims of creditors and owners in total cannot be greater than the asset value of a business

purchases budget

depicts the number of units that are expected to be acquired during a budget period

When a seller sells merchandise on account, it means that the buyer _____.

is allowed to take the merchandise and has vowed to pay for the merchandise in the future

liabilities

legal obligations to give up things of value in the future

Owners' equity is simply whatever value is left after all ______ have been paid.

liabilities

account

record of similar transactions / a chronological list of all additions to and subtractions from a single type of asset

investment records

records if businesses keep surplus cash invested in securities

accounts receivable

shows records of credit given to customers

The purpose of an inventory budget is to

simplify the budget process

on account

term referring to merchandise purchased or sold with payment due in future, usually within 1 month

variance analysis

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

investing activities

the purchase and sale of land, equipment, and securities

retained earnings

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

Current ratio

the value of current assets divided by current liabilities

Which of the following describe a business that has financial strength?

A business' long-term assets are relatively new, long-term debt is low, and retirement plans are fully funded / A business has focused on cash, short-term investments, and its accounts receivable are current / The business has a great deal of cash and cash equivalents on its balance sheet

Identify the schedules that must be completed to create a master budget

A cash budget / A cash receipts budget

Which of the following statements regarding accounts receivable are correct?

Accounts receivable is money that customers owe a company / The key to controlling receivables is to sort them by age, so older receivables stand out / Many businesses treat receivables that are more than 90 days old as delinquent

Which of the following is implied by the going concern concept?

As a separate unit, a business may continue even if it is bought by another owner.

Which of the following are one of the six items that must be reported in the statement of cash flows?

Cash flows from operating activities / Noncash investing and financing activities / Cash flows from investing activities / Net effect of foreign exchange rates / Cash flows from financing activities / Net changes in cash balance during the period

Which of the following are common financial statements?

Income statement, statement of retained earnings, cash flow statement, balance sheet, statement of owner's equity

Which of the following are true of permanent accounts?

Permanent accounts are kept in balance at all times / Assets, liabilities, and owners' equity are examples of permanent accounts

depreciation

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

Which of the following statements about the income statement are correct?

Revenues - Expenses = net income The single-step and multiple step are two formats commonly used for creating an income statement It is the primary source of information about a business' profitability

assets

Something that a business owns and that is expected to have economic value in the future

owner's equity

The difference between a business' assets and liabilities

net present value

The difference between the existing value of cash inflows and the existing value of cash outflows over a specified period of time

Financial flexibility

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

Which of the following is a fixed cost?

truck leases, rent, loan payments

Managerial accounting

used by managers for planning, directing, and controlling a business

Which of the following statements about cash flow statements are correct?

It reports cash inflows called receipts and outflows known as payments for a specified period of time / Business owners should create cash flow statements that are developed from the business' cash records / Operating, investing, and financing activities are the three most common activities the cash flow statement reports

cost of goods sold

an expense recognized at the time of a sale of merchandise in the amount of the price of the merchandise to a seller

Tax accounting

an accounting approach based on specific accounting requirements set by governmental agencies

variable costs

expenses that change with each unit produced

pro forma projected balance sheet

final schedules completed to create a master budget are used for this

In the context of net present value (NPV) analysis, which of the following is a true statement

only cash flows are considered to perform NPV analysis

Which of the following statements regarding the current ratio are correct?

It is calculated by dividing current assets by current liabilities / It is the most common ratio to estimate a business' liquidity / The rule of thumb for evaluating current ratio is that the minimum acceptable ratio is 2.0 (higher is preferred)