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Intro to Accounting

Financial evaluation 6th edition, isbn 9780078136603

1. A business is an entity designed to exchange goods and or services on an arm’s length basis for the mutual benefit of parties involved.
2. Accounting is the information infrastructure of the economy. It provides the information for people to make informed decisions regarding business.
3. The finance function is responsible for managing the financial resources of the business. Human resources function is responsible for ensuring that employees are given the opportunities to succeed in a safe environment.
The marketing function is responsible for determining the wants and needs of customers.
The production and operations function is responsible for planning, organizing, directing, and controlling the operations of the business.
The accounting and information systems function is responsible for providing useful information to the other functional areas and external parties.
4. JIT stands for just-in-time. It implies that goods arrive just when they are needed.
5. A sole proprietorship has only one owner and unlimited liability.
A partnership has two or more owners, unlimited liability, and mutual agency.
A corporation has one or more owners, limited liability, and unlimited life.
6. A service firm provides services such as legal or accounting advice to clients for a fee.
A merchandising firm buys merchandise from another business and then sells this merchandise to consumers.
A manufacturing firm makes products that it then sells to other businesses.
7. In ancient times accounting was used primarily to record transactions in an illiterate society. a little history
8. In the 11th – 15th centuries accounting was used to maintain records for an on-going business, often a partnership. The double-entry accounting system was developed and the accounting equation was used to organize accounting records. a little history
9. An asset is a right to use resources with expected future benefit. Examples of assets include cash, buildings, amounts owed to the business by customers, land, and inventory.
10. A liability is an obligation to transfer resources to suppliers of money, goods, and services. Example: amounts owed by the business to the bank for interest, amounts owed by the business to employees for wages, and money owed to suppliers for inventory purchases.
11. Net assets are total assets minus total liabilities, also known as, owners’ equity.
12. Owners’ equity is the claim on the business to transfer the residual interest to the owners.
13. A partnership agreement is important because it outlines the rights and obligations of each partner as well as how profits and losses will be divided.
14. The business entity concept requires that an accounting system reflect only information about economic events that pertain to the entity. It implies that the business records are maintained separately from personal records.
15. The going concern concept assumes that absent any information to the contrary, the business entity will continue into the foreseeable future. It implies that accounting records can continue from one period to the next.
16. The fundamental accounting equation is: assets = liabilities + owners’ equity.
17. Pacioli is known as the “father of accounting” because he wrote a book on the “Method of Venice” that was one of the first printed works. He helped establish the double-entry accounting system.
18. The financial statements convey information concerning revenues and expenses, cash flows, and financial position to interested, informed external users.
19. The monetary unit concept requires that accounting events be recorded in monetary terms.
20. The periodicity concept requires that the success or failure of the business be determined at regular intervals.
21. Using cash basis accounting income is revenues received less expenses paid.
22. Limited liability means that the assets of the business are at risk if the business fails, but the owners’ personal possessions are not at risk from the business’s creditors.
23. Accrual basis income is revenue earned less expenses incurred in an effort to generate that revenue.
24. The stock market crash of 1929 led to the regulation of the securities market. The SEC was established to oversee publicly held companies and how they report to stockholders.
25. Generally accepted accounting principles (GAAP) are the set of reporting standards applicable to all companies that issue financial reports to external user.
The Financial Accounting Standards Board (FASB) is responsible for determining GAAP in the United States.
26. The FASB Concepts Statements are designed to provide broad overview of accounting and to serve as a foundation for future accounting standards.
27. The International Financial Reporting Standards are the global standards for international external reporting by public companies.
28. The product life cycle is the time span from the conception of the product until it's no longer in demand by customers. Example: large bannana seat bicycle developed for comfort. bicycles became less popular due to the smaller gel-seat. the bannana seat ceased to exist.
29. These types of “hybrid” organizational structures were developed to combine the various characteristics of sole proprietorships, partnerships, and corporations to minimize the risks for the owners.
30. The income statement is designed to show the revenues, expenses, and resulting net income for a period of time.
The statement of cash flows is designed to show the cash inflows and outflows from operating, investing, and financing activities for a period of time.
The statement of owners’ equity is designed to show the changes in owners’ equity for a period of time.
The balance sheet is designed to show the balances of the company’s assets, liabilities, and owners’ equity at the end of the period.
31. The PCAOB is responsible for developing auditing and attestation standards as well as standard for ethics and to regulate the accounting firms that audit publicly traded companies.
32. The current ratio shows the relationship between current assets and current liabilities and measures liquidity.
The debt to equity ratio shows the relationship between total debt and owners’ equity and measures solvency.
The return on sales ratio shows the relationship between net income and sales and measures profitability.
1. The four business processes are: (1) business organization and strategy—determine long-term objectives, (2) operating—profit-making activities, (3) capital resources—investing and financing activities, and (4) performance measurement and management—evaluating.
2. The three sub-processes of the operating process are: (1) marketing, sales, collection, customer service (2) conversion, and (3) purchasing, human resource, payment.
3. The balanced scorecard is a holistic approach to planning and evaluating that uses financial and nonfinancial measures in four perspectives.
4. The four perspectives of the balanced scorecard are: (1) financial, (2) internal, (3) customer, and (4) learning and growth.
5. Some measures in the financial perspective include ratios such as: (1) return on investment, (2) quick, (3) return on owners’ equity, (4) gross margin, (5) current [Chapter One], (6) return on sales [Chapter One], and (7) debt-to-equity [Chapter One].
6. Some measures in the internal perspective include time measures, quality measures, and measures of employee satisfaction.
7. Some measures in the customer perspective include customer satisfaction, growth in market shares, number of customer retained, and growth in the number of customers.
8. Some measures in the learning and growth perspective include research and development expenditures, the number of new products introduced, employee training, and information systems development.
9. An internal control system must: (1) promote operational efficiency, (2) ensure the accuracy of accounting information, and (3) encourage management and employee compliance with applicable laws and regulations.
10. The five procedures employed in an internal control system are: (1) requiring proper authorization, (2) separation of duties, (3) maintaining adequate documentation, (4) physically controlling assets and information, and (5) providing independent checks on performance.
11. Internal controls are important to safeguard assets and information.
12. If a company operates in a relatively certain environment with a mechanistic structure, it will tend to use an efficiency strategy.
If a company operates in a relatively uncertain environment with an organic structure, it will tend to use a flexibility strategy.
13. The three phases of the management cycle are: (1) planning, (2) performing, and (3) evaluating. Planning leads to performing. Then plans are compared to performance during the evaluating phase so that planning can be done for the next period.
14. A lockbox system is where the business established bank accounts at various locations across the area where customers live in order to receive customer payments more promptly.
15. Internal control over cash is critical because ownership is difficult, if not impossible, to prove.
16. A bank reconciliation is a comparison of the bank’s records to the business’s records to adjust the recorded cash amount and reflect any differences.
17. The bank statement is the bank’s report on the activity in a customer’s account. It shows the deposits made and the checks written as well as any charges levied by the bank or amounts added to the customer’s account by the bank.
18. The bank balance is adjusted for: (1) outstanding checks, (2) deposits in transit, and (3) errors made by the bank.
19. The company balance is adjusted for (1) interest earned, (2) service charges, (3) nonsufficient funds checks, and (4) errors.
20. Strategic planning is long term in nature while operating planning is short term.
1. There are five primary activities in the revenue process: (1) determine marketing and distribution channels, (2) receive and accept orders, (3) deliver goods/services, (4) receive payment from customers, and (5) provide customer support. The types of decisions made include: (1) how can we market and distribute
2. There are four primary activities in the expenditure process: (1) determine the need for goods/services, (2) select suppliers and order goods/services, (3) receive goods/services, and (4) pay suppliers of goods/services. The types of decisions made include: (1) what goods are needed, (2) who should we order from, (
3. There are four primary activities in the conversion process: (1) schedule production, (2) obtain raw materials, (3) use labor and other manufacturing resources to make products, and (4) store finished goods until sold. The types of decisions made include: (1) what needs to be made, (2) what materials are required,
4. FOB destination means that title passes at the customer’s location while
FOB shipping point means that title passes at the seller’s location. This is important for two reasons: (1) it establishes who owns the goods while in transit and (2) it determines when a sale can be recognized (when title passes).
5. When a bankcard is used, the sale is treated as a cash sale and the amount recorded is the amount of the sale less the fee charged by the bank.
When a company-issued card is used, the sale is treated as a credit sale since the company assumes the risk of nonpayment.
6. Automation has increased the costs of manufacturing overhead, but it has made the manufacturing process more flexible.
7. A sales return and a purchase return are the same activity from two different points of view. This activity arises when the buyer returns merchandise to the seller.
A sales discount and a purchase discounts are the same also, but from two different points of view. A discount is offered to encourage the buyer to pay its bills promptly and is a reduction off the full invoice price.
a sales allowance and a purchase allowance are the same, but from two different points of view. An allowance is a reduction in the invoice price because the customer is not satisfied with the product/service.
8. Activity analysis is important so that .
9. For a merchandising company, activity could be defined as the dollar amount of sales.
A fixed cost is constant regardless of the level of sales in dollars (rent).
A variable cost varies proportionately with the level of sales in dollars (commissions).
A mixed cost varies , but not proportionately with the level of sales in dollars (utilities).
10. For a service company, activity could be defined as the number of hours worked. A fixed revenue is constant regardless of how many hours are worked (clients on fixed contracts).
A variable revenue varies in direct proportion to the number of hours worked (clients billed by the hour). A mixed revenue varies, but not proportionately to, the number of hours worked (clients charged a fee plus additional amounts per hour worked).
11. A manufacturing company might define activity as the number of production runs during the period.
A fixed cost is constant regardless of how many production runs are used (insurance).
A variable cost varies in direct proportion to the number of productions runs (setup costs).
A mixed cost varies, but not in direct proportion to the number of production runs (utilities).
12. Number of orders placed —ordering costs.
Number of units produced —raw materials.
Number of tests performed —testing supplies.
Number of square feet —maintenance costs.
13. The relevant range is the range of normal activity for the company. We can assume that the fixed, variable, and mixed relationships remain constant within this range.
14. An activity driver is a measure of resource consumption or provision. It is a measure of activity.
15. Y = total cost; a = fixed costs; b = variable costs; and X = activity driver.
16. Y = total revenue; a = fixed revenues; b = variable revenues; and X = activity driver.
17. To use the high/low method determine highest/lowest of activity, the costs/revenues. change in costs/revenues divided by the change in activity to the variable cost/revenue per “unit” of activity. take total costs/revenues,the fixed costs/revenues equation: Y = a + b * activity.
18. The advantage of the high/low method is ease of use.
The disadvantage of the high/low method is that it only uses two data points and, therefore, the resulting formula for the line may not represent all the data.
19. Independent variable = X = activity; Dependent variable = Y = total cost/revenue; T statistic measures the significance of the slope (independent variable); and R square measures the significance of the X and Y relationship.
20. The closer R square is to 1 the stronger the X and Y relationship is.
An R square of 0.9 is very good.
21. The regression output indicates the fixed cost/revenue (intercept coefficient) as well as the variable cost/revenue (coefficient of X).
22. The disadvantage of linear regression is that a computer or hand-held calculator must be used. The advantages are (1) results in the best line for the data used and (2) gives statistics to evaluate the strength of the relationship.
Created by: Alivallo