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FMA
Financial and Managerial Accounting Unit 1
| Term | Definition |
|---|---|
| What is the primary purpose of accounting? | Accounting serves as the "language of business," helping people interpret financial data to make informed decisions. It is crucial for understanding concepts like investments, taxes, and money management. |
| Who are the primary users of accounting information inside a company? | Managers, CEOs, and other employees rely on managerial accounting for detailed, confidential information that supports internal decision-making. |
| Who uses accounting information outside a company? | Investors, creditors, and other stakeholders rely on financial accounting to evaluate the company’s financial health for investment decisions. |
| Why is understanding accounting important for everyone, even if they don't plan to become accountants? | Understanding accounting helps individuals make informed decisions in life, such as deciding whether to buy or lease a car, budget, invest, or pay for college. It reduces the risk of poor outcomes that can come from making decisions without financial data |
| What critical decisions are influenced by accounting information? | Accounting information influences decisions like who gets loans, which companies attract investors, and which managers earn bonuses. |
| What will you learn in this course? | This course teaches the basics of accounting, how to read financial statements, and how to use financial information to make informed business decisions. You will also explore concepts like corporations, leases, and investments. |
| How do accountants contribute to business decisions? | Accountants summarize and report business transactions, which helps businesses make well-informed decisions and presents financial data to stakeholders. |
| What is the goal of the course? | The goal is to teach students to understand accounting as a tool for making informed decisions, interpret financial statements, and appreciate the influence of accounting on business operations. |
| Why is it risky to make decisions without financial data? | Making decisions without financial data is risky because it can lead to poor outcomes, as financial data is essential for evaluating risks, costs, and benefits accurately. |
| How does accounting affect the broader business world? | Accounting shapes the business world by influencing investment decisions, credit availability, and business operations, impacting the financial success or failure of companies. |
| What is the definition of accounting? | Accounting is a system that provides quantitative financial information to aid in economic decision-making. |
| What are the key functions of an accounting system? | Analysis: Assessing business events to determine if they should be recorded. Bookkeeping: Daily recording of transactions. Evaluation: Using data to evaluate financial health and performance. |
| How did accounting begin historically? | Accounting dates back to ancient Mesopotamia, where farmers used clay tokens to track goods, long before writing existed. It's over 7,000 years old. |
| What is the decision-making process in accounting? | Identify the Issue: Define the decision to be made. Gather and Analyze Information: Collect relevant financial data. Consider Alternatives: Explore different options. Select the Best Option: Choose the most suitable course of action based on the data. |
| What role does accounting play in business decisions? | Accounting tracks business activities, helping distinguish between profitable and failing companies, and providing data necessary for informed decisions. |
| What is capital in a business context? | Capital refers to the money needed to acquire resources like buildings, machines, cash, land, trained workforce, and inventory for running a business. |
| How do businesses acquire capital? | usinesses can acquire capital by borrowing money (loans), investing personal funds, or bringing in partners or investors. |
| What do accountants do in a business? | Measure and Report: Track and communicate business activities such as sales and financial performance. Advise: Analyze data and offer guidance to help improve business operations and make informed decisions. |
| What is the importance of bookkeeping records in society? | Without bookkeeping records, society would freeze. Banks wouldn't know about accounts, businesses would lose track of inventory and payments, and colleges wouldn't have grading or graduation information. |
| What is the role of accountants in decision-making? | Accountants help gather, measure, and analyze financial data, which is essential for making informed decisions and offering advice on business operations. |
| Why is accounting known as the "language of business"? | Accounting communicates financial data in a systematic way that helps businesses make efficient and effective decisions, ensuring resources are used wisely. |
| How does accounting aid in evaluating business performance? | Accounting helps assess financial health by evaluating spending, profits, and other metrics that allow businesses to track whether they’re on target financially. |
| Accounting plays a vital role in the decision-making process. Which action is the first step in the decision-making process? | Identify the issue |
| The money that a company needs to buy its land, pay its employees, and buy its supplies is called capital. What are the potential sources of capital for a business? | Investors, creditors, and retained business earnings |
| True or False: Accountants measure and communicate the results of business activities. | True |
| What are the two main types of accounting reports? | Internal Reports: Used by management for decision-making (management accounting). External Reports: Used by external parties like investors, creditors, and government agencies (financial accounting). |
| What is the primary purpose of Managerial Accounting? | To help management plan, control, and make decisions for the business, such as cost control and determining whether to produce in-house or buy from a supplier. |
| What is the main focus of Financial Accounting? | Financial accounting provides general-purpose financial statements for external users, such as investors, creditors, and government agencies, to evaluate a company's financial health. |
| Who are the key external users of financial accounting information? | Lenders (Creditors) Investors Competitors Government Agencies |
| Who are the primary internal users of accounting information? | Management Suppliers and Customers Employees |
| What is the purpose of Managerial Accounting? | To provide internal reports for decision-making, planning, and controlling business activities. |
| What type of decisions does Managerial Accounting support? | Product Costs Breakeven Analysis Budgeting Performance Evaluation Special Decisions (e.g., outsourcing or strategic direction) |
| What key reports does Financial Accounting produce? | Balance Sheet: Shows a company’s assets, liabilities, and equity. Income Statement: Shows net income over a period. Statement of Cash Flows: Reports cash flow from operations, investments, and financing. |
| What does the Balance Sheet report? | What does the Balance Sheet report? |
| What does the Balance Sheet report? | It summarizes a company’s revenues and expenses over a period, showing whether the company made a profit or a loss. |
| What does the Statement of Cash Flows show? | It reports cash inflows and outflows from operating, investing, and financing activities over a period of time. |
| What is the difference between Balance Sheet and Income Statement? | Balance Sheet: Snapshot at a specific date (e.g., December 31st). Income Statement: Covers a period of time (e.g., a month, quarter, or year). |
| How does Managerial Accounting help in decision-making? | It provides detailed financial data for decisions on pricing, budgeting, cost control, and performance evaluation for internal use. |
| How does Financial Accounting help external users? | Financial accounting provides summary financial data, enabling external users (e.g., investors, creditors) to assess a company’s profitability, creditworthiness, and financial health. |
| What is the role of Lenders (Creditors) in using financial accounting information? | Lenders use financial statements to assess the company's ability to repay loans and its overall financial stability. |
| What do Investors look for in financial accounting reports? | Investors look for current profitability, future profit potential, and the company’s assets and obligations to evaluate investment opportunities. |
| How does Managerial Accounting differ from Financial Accounting? | Managerial Accounting is for internal use, helping management make detailed day-to-day decisions. Financial Accounting is for external use, providing summarized reports to external stakeholders like investors, creditors, and regulators. |
| What are the key internal decisions supported by Managerial Accounting? | Costing products Breakeven analysis Budgeting Performance evaluation Special decisions (e.g., outsourcing or strategic changes) |
| What is the purpose of Financial Accounting for external users? | To assess the company’s financial health, profitability, and ability to meet obligations, helping external stakeholders make investment or lending decisions. |
| What key areas do Lenders focus on when using financial accounting data? | Current income and profitability Existing obligations (liabilities) Cash flow and ability to repay loans |
| Which primary area of accounting generates reports for internal users? | Management accounting |
| Which group uses financial information to evaluate whether a company will be able to repay a loan? | Lenders |
| Which of the primary financial statements reports the resources, obligations, and owner's equity of a company? | Balance sheet |
| What is the role of the IASB in regulating accounting standards? | Establish international accounting standards |
| What group of people make up the FASB? | People from a variety of business-related backgrounds |
| What is the role of the GASB in setting accounting standards? | The GASB is a private-sector organization that establishes accounting and financial reporting standards for U.S. state and local governments. |
| What is the primary role of ethics in accounting? | Ethics ensure that accountants act truthfully and responsibly, maintaining trust in the reliability of financial information. |
| Why is it important for accounting information to be reliable? | If accounting information is not reliable, its value diminishes, and users may not trust it, which undermines the effectiveness of accounting. |
| What are the two main reasons accountants should act ethically? | Accountants have moral reasons to act ethically and economic reasons because the value of financial information depends on its trustworthiness. |
| How do ethics and accounting rules (like GAAP) relate to each other? | While GAAP provides guidelines, strong personal ethics are required to prevent misleading users, even when technically following the rules. |
| What happened when accountants fail to act ethically in the past? | Scandals like Enron, WorldCom, and Tyco occurred, leading to a loss of public trust in the accounting profession. |
| How do accounting decisions impact real-world businesses? | Accounting decisions influence major choices like loans, investments, and employee decisions, which can have significant effects on people's lives. |
| Why is public confidence in accounting important? | Without public trust, accounting loses its value, and scandals can damage the reputation of the profession, leading to loss of faith in financial reporting. |
| Why do accountants need to maintain high ethical standards? | Ethical standards ensure accountants' decisions are trusted and help maintain fair business practices that impact significant economic choices. |
| What role do accountants play in business decisions? | Accountants serve as the "scorekeepers" for companies, providing critical financial data that influences decisions such as granting loans, making investments, and extending credit. |
| How does the SEC enforce ethical behavior in accounting? | The SEC has the authority to impose legal penalties on accountants or businesses that mislead the public, such as providing false financial statements. |
| How does the AICPA enforce ethical standards? | The AICPA enforces ethical standards within the profession and can impose sanctions, such as revoking a CPA license, for violations. |
| Why is credibility important for accountants? | Accountants rely on their credibility to secure work and clients. Unethical behavior can damage their reputation and make it difficult to continue in the profession. |
| How do ethics help maintain unbiased and accurate financial information? | Ethical behavior ensures that financial data is trustworthy, which is essential for informed decision-making in the business world. |
| In what way do accountants have an economic incentive to act ethically? | The value of the information accountants provide is directly tied to users' confidence in its reliability, which affects the accountant's career and the trust in their work. |
| How can an accountant deceive financial statement users while still complying with GAAP? | There is flexibility in the assumptions underlying financial statement preparation, which can be manipulated to deceive users while technically following GAAP. |
| How can accounting help in personal decision-making? | It helps with important decisions such as buying or leasing a car, budgeting, investing savings, and financing education by providing accurate financial information. |
| Why is it important to understand a company’s financial health? | Understanding financial health helps in making informed career or employment decisions by evaluating whether a company is thriving or struggling. |
| How does accounting apply to various career fields? | Regardless of the field (sales, production, HR, etc.), accounting information is used for decisions like product costs, employee-related data, and overall job performance. |
| What is a competitive advantage in accounting? | Understanding and utilizing accounting information gives individuals and companies a competitive edge in decision-making. |
| What is one key tip for success in accounting? | Consistent study is essential because cramming rarely works in accounting; regular study keeps concepts fresh and improves understanding. |
| Why should you not skip accounting concepts? | Accounting concepts build on each other. Skipping lessons can create gaps in knowledge, making it harder to understand later material. |
| How can understanding the "why" behind accounting help? | Understanding the purpose of what you're learning, like why balance sheets and income statements matter, makes it easier to grasp the "how" and see the bigger picture. |
| What is the importance of getting help early in accounting? | If you're struggling with a concept, seek help early to avoid falling behind, as accounting is cumulative, and confusion can affect future lessons. |
| How can accounting help in personal finance decisions like buying a house or car? | It provides the tools to evaluate whether to buy or lease and helps make informed decisions about which house or car is best for your financial situation. |
| How does accounting help with job performance evaluation? | Accounting data like net income, assets, and ratios are often used to evaluate job performance and company success. |
| Why is accounting important for starting a business? | Accounting knowledge is essential for creating a business plan, managing finances, and making informed decisions when starting a business. |
| What are some personal uses of accounting? | Accounting helps with managing family budgets, investing for the future, and making informed decisions on major purchases like a house or car. |
| Why is accounting considered the "language of business"? | Accounting provides the vocabulary and metrics needed to evaluate and communicate financial health and performance in business. |
| What are the first three steps of the accounting cycle? | Analyzing business transactions Recording financial data Summarizing and reporting financial information |
| What do "debit" and "credit" mean in accounting? | Debit: Means "left" and is used to increase assets. Credit: Means "right" and is used to decrease assets. |
| How does the accounting system track cash? | Debit cash (left side) to show an increase in cash. Credit cash (right side) to show a decrease in cash. |
| How do debits and credits affect assets? | Debit (left) increases assets. Credit (right) decreases assets. |
| How do debits and credits affect liabilities and owner's equity? | Debit (left) decreases liabilities and owner's equity. Credit (right) increases liabilities and owner's equity. |
| How does the accounting system track liabilities and owner’s equity? | Debit (left) decreases liabilities and owner’s equity. Credit (right) increases liabilities and owner’s equity. |
| How are revenues and expenses tracked in accounting? | Tracking revenues and expenses is a more complex process, which will be explained in further detail in the course. |
| What is the purpose of the financial accounting cycle? | The purpose of the financial accounting cycle is to capture financial information from daily transactions and transform it into summary reports and financial statements. |
| How can you relate the process of collecting, analyzing, and summarizing financial information to personal expenses? | Collect: Gather receipts, bank statements, and payment records. Analyze: Identify which expenses are related to college education. Summarize: Combine those expenses into a single total. |
| What types of transactions do businesses typically handle? | Businesses handle exchange transactions, such as buying and selling goods, paying wages, and borrowing money. |
| What documents do businesses use to confirm transactions and facilitate analysis? | Business documents such as sales invoices, purchase orders, and other documents confirm transactions. |
| What are the four key steps in the accounting cycle? | Analyze transactions Record transactions Summarize transaction effects Prepare financial reports |
| How do large corporations and small businesses differ in their accounting systems? | Large corporations (e.g., Walmart, Heinz) use automated accounting systems due to the volume of transactions. Small businesses typically use accounting software for efficiency. |
| What is the purpose of analyzing transactions in the accounting cycle? | The purpose is to determine the essence of each transaction, such as whether it involved earning money or incurring an obligation. |
| Why is timely analysis of transactions important? | Timely analysis ensures accurate tracking and avoids confusion or errors as more transactions occur. |
| What system is commonly used for recording transactions in accounting? | The debit and credit system, which has been in use for over 500 years, is commonly used to record transactions. |
| What are the key points to remember when recording the effects of transactions? | Record transactions immediately after analyzing their economic essence. Design a clear and structured system (code) for efficient recording of transactions. |
| What are adjusting entries and why are they important? | Adjusting entries are made before preparing final reports to ensure that the financial data reflects the true financial position of the business. |
| What are the key financial reports prepared in the accounting cycle? | Balance Sheet: Displays assets, liabilities, and equity. Income Statement: Shows profitability over a period. Statement of Cash Flows: Tracks cash inflows and outflows. |
| What happens after preparing financial reports in the accounting cycle? | After preparing the reports, the books are closed to reset the accounts for the next period. |
| How does the accounting cycle turn transactions into actionable insights? | The accounting cycle transforms individual transactions into financial reports (balance sheet, income statement, cash flow) that help decision-makers make informed choices. |
| What is the correct summary sequence in the accounting cycle? | Analyze, Record, Summarize, Prepare |
| Business documents, such as a sales invoice, a purchase order, or a check stub, are an important part of the accounting process. From an accounting cycle standpoint, what is purpose of business documents? | To confirm that a transaction has occurred |
| What is the purpose of the financial accounting cycle? | To turn transactions into financial statements and provide useful financial information for decision makers |
| What is a transaction in accounting? | An interaction in which two parties exchange something of value |
| What is the key rule of the accounting equation? | Assets = Liabilities + Owner's Equity |
| What type of events are recorded in accounting? | Only events that can be measured in monetary terms are recorded in accounting. |
| When is a new employee hired recorded in the accounting system? | A new employee is not recorded until they are paid for their services. |
| What is the difference between external and internal transactions? | External Transactions: Involve exchanges between the company and external parties (e.g., customer purchases). Internal Transactions: Occur within the company and do not involve external parties (e.g., marketing campaigns). |
| What does the monetary measurement concept state? | Transactions must be measurable in monetary terms to be recorded in the accounting system. |
| What is an example of an external transaction? | A customer purchasing goods from a store is an external transaction that directly impacts the financial records. |
| What happens when an owner invests cash into the business? | Assets (cash) increase by $50,000. Owner's equity increases by $50,000. The accounting equation remains balanced. |
| What is the impact of a company borrowing money from a bank? | Assets (cash) increase by $25,000. Liabilities (notes payable) increase by $25,000. The accounting equation remains balanced. |
| How does purchasing inventory on credit affect the accounting equation? | Assets (inventory) increase by $14,000. Liabilities (accounts payable) increase by $14,000. The accounting equation remains balanced. |
| What are examples of accounts used to categorize transactions? | Asset accounts: Cash, inventory, equipment Liability accounts: Notes payable, accounts payable Equity accounts: Owner's equity |
| How do revenues and expenses affect owners' equity? | Revenues increase owners’ equity. Expenses decrease owners’ equity. |
| What happens when a company makes a sale? | Cash (asset) increases by $2 (revenue). Inventory (asset) decreases by $1 (expense). Net profit = $1 ($2 revenue - $1 expense). |
| How do dividends affect owners' equity? | Dividends reduce owners' equity by distributing net income to owners. |
| What is a complex transaction example? | Buying a building for cash and agreeing to pay $10,000 yearly for the next 10 years. |
| How is a complex transaction broken down in accounting? | Cash payment for the building is recorded as an asset. Promise to pay $10,000 each year is recorded as a liability. Donation of shares is recorded as an equity change. |
| What happens when a business starts with a $50,000 investment? | Cash increases by $50,000 (asset). Owner's Equity increases by $50,000. The accounting equation remains balanced. |
| How does borrowing $25,000 from a bank impact the accounting equation? | Cash increases by $25,000 (asset). Loan payable (liability) increases by $25,000. The accounting equation remains balanced. |
| What happens when a company buys inventory on credit? | Inventory increases by $14,000 (asset). Accounts payable increases by $14,000 (liability). The accounting equation remains balanced. |
| What is the result of purchasing equipment for cash? | Equipment increases by $15,000 (asset). Cash decreases by $15,000 (asset). The accounting equation remains balanced. |
| What is the importance of the accounting equation? | The accounting equation helps maintain balance and clarity in financial reporting, ensuring that every transaction is accurately recorded and financial statements remain balanced. |
| In the context of the financial accounting cycle, what is the definition of an account? | A specific accounting record that provides an efficient way to categorize similar types of transactions |
| What is an arm’s-length transaction? | An exchange between two independent parties |
| Which event represents a transaction recorded as part of the financial accounting cycle? | The sale of a product for cash or on account |
| A company sells a product to a customer on account. Which part(s) of the accounting equation does this particular transaction change? | Both assets and owners’ equity |
| What is an example of an internal transaction? | An employee is transferred from one department to another. |
| Which account is an example of a liability? | Accounts payable |
| Which of the primary financial statements reports the amount of cash collected and paid out by a company? | Statement of cash flows |
| What is the name for the authoritative set of accounting standards in the United States? | GAAP |
| Which statement is a correct description of the IASB? | It establishes international accounting standards. |
| Which action is part of the financial accounting cycle? | Summarizing financial information in financial statements |
| What is owners’ equity? | The remaining claim to the assets of a business after liabilities have been deducted |
| Most businesses have a systematic method for analyzing transactions and collecting and recording transaction-related information. This transformation process is which part of accounting? | The accounting cycle |
| Which event is an example of collecting, analyzing, and summarizing accounting information? | Gathering checkbook information |
| Which account is an example of a liability? | Accounts payable |
| Which of the primary financial statements reports the amount of cash collected and paid out by a company? | Statement of cash flows |
| What is the name for the authoritative set of accounting standards in the United States? | GAAP |
| Which statement is a correct description of the IASB? | It establishes international accounting standards. |
| Which action is part of the financial accounting cycle? | Summarizing financial information in financial statements |
| What is owners’ equity? | The remaining claim to the assets of a business after liabilities have been deducted |
| Most businesses have a systematic method for analyzing transactions and collecting and recording transaction-related information. This transformation process is which part of accounting? | The accounting cycle |
| Which event is an example of collecting, analyzing, and summarizing accounting information? | Gathering checkbook information |
| Which accounting transaction should be recorded in the books and the records of a company? | Purchasing new equipment for the company |
| Which event is a transaction? | Purchasing an item on the internet from an online store |
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heavenlypure
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