Accounting for Decision Makers Study Guide, Exams of Finance

Download Accounting for Decision Makers Study Guide and more Exams Finance in PDF only on Docsity! WGU C213Accounting for decision makers Latest study Guide with Answers Verified By Expert Top Ranked 2023 1. Prepare 2. Analyze 3. Gather 4. Make decisions 5. Implement 6. Observe. - answers Accounting steps. Inside, Internal - answers Managerial info is inside or outside the business? True. Financial accounting is only outside. Managerial accounting can be inside AND outside. - answers True or false, managerial accounting uses BOTH managerial and financial accounting? Outside, External, includes lenders and investors - answers Financial is inside or outside the business? Balance sheet, income statement, and statement of cash flows - answers The financial statement includes what 3 documents Balance Sheet - answers Point in time, Assets (resources) and liabilities (obligations) Income Statement - answers Period of time (usually 1 year), amount of profit made Statement of Cash flows - answers Period of time, where money came from, and where it went. Inflow and outflow of cash (Cash Flows). Change in money for the period. Balance sheet equation - answers Assets= liabilities + equity Revenue equation - answers Net income=Revenue - Expenses Operating, investing, and financial activities - answers The statement of cash flows includes what three activities FASB: Financial accounting standards. Private, no government involvement. It is a public process, includes individuals experienced in business and accounting (7 members). - answers The decision makers in the U.S. (accounting rules) GAAP: General accepted accounting principles - answers Developed by accounting rule makers. No Legal authority. comparability - answers We need accounting rules for... Similar to the FASB, but not 100% the same. It is international, everywhere but the U.S. - answers IASB: Internatonal Accounting Standard Board Who enforces and national policies. - answers Barriers to international convergence are? Condorsement - answers Rules set centrally, but legally adopted and enforced locally? The SEC, SOX, and PCAOB. - answers To increase government regulation, one would use: Reduce uncertainty and allows lenders and investors to target their financing and investing to the level of risk they are willing to take. - answers Financial statements Adudit - answers A financial statement that furthermore decreases uncertainty. Income Statement - answers Provides accountants the best attempt at measuring the economic performance of a company. Balance sheet - answers Mother of all financial statements. Accounting equation - answers Assets=liabilities+equity Assets (resoures) - answers Resources owned or controlled by a company that will provide probable future economic benefit. Liabilities (obligations) - answers Obligations that require the probable future sacrifice of economic benefits in the form of the transfer of assets or the providing of services. Equity - answers Investment amount in the business PLUS how much profit they have left in the business. L-A=E 1 paid in capital, 2 retained earnings, 3 treasure stock, 4 accumulated other comprehensive income. - answers Owners Equity PIC: Paid in capital - answers The amount originally paid in exchange for share of stock Retained earnings - answers CUMMULATIVE earnings that have been retained in the business Treasury stock - answers Company buys back its own shares of stock, shown as a subtraction from equity. AOCI: Accumulated other comprehensive income.Market related gains and losses that are not included on the income statement. - answers MARKET EVENTS that result in an increase or decrease in equity are: Classified balance sheet - answers Breaking items down into current and long term results (current=with in one year) Entity Concept - answers small and large businesses International Property rules - answers What allows property, plant, and equipment (PPE) to be reported at CURRENT APPRISED VALUE rather than historical cost? NO - answers Are assets recorded at liquidity prices? Revenue, expenses, and net income. - answers The income statement contains what three things? Income statement equation - answers Revenue-Expenses=Net Income Revenue (gains) - answers Amount of assets created from the sale of goods or services. Also, REVENUE CAN BE GENERATED BY SATISFYING LIABILITIES. One SOURCE of an asset. General accepted accounting principles (GAAP), and General accured auditory standards (GAAS). Certifies that the companies information is not misleading. - answers An audit certifies what two things? NO. An audit does NOT certify that a company is good or not good to invest in. It does certify that a company is following GAAP, and GAAS. - answers Does an audit ensure that a company is a good investment for a possible investor? Relevance: FAST, but not precise/certain. Reliability: Can count on it. Slow, carefully verified, precise, historically in the past, this was used most often. - answers Relevance Vs. Reliability Comparability - answers Across time for the same company and across company at same point. Subcategory is consistency. Conservatism - answers Telling bad news immediately, wait on good news till you are positive about it. Lenders encourage this. Materiality - answers size of the thing that makes a difference and could impact decisions. Important to auditors. If an item is material, it equals or exceeds 2% of the sales, or 5% of owners equity, or 10% of net income. Never - answers Does materiality replace accounting judgment? Articulation - answers Details. All three financial statements are not isolated but rather an integrated set of reports on a companies financial status. Statement of cash flows. - answers What contains detailed explanation of why the balance sheet cash amount changed form beginning to end of the year? Income statement, combined with amount of dividends declared during the year. - answers This explains the change of retained earnings shown on the balance sheet. The accounting adjustments applied to the raw cash flow date. - answers cash from operations on the statement of cash flows is transformed into net income through? Diagnos existing problems and to foreceast how a company will perform it he future. - answers Analysis of financial statement of numbers can be used to do what? Financial ratios - answers This ratio is the relationships between two financial statement numbers and is often used in analyzing and describing a companies performance Common size financial statement (subcategory of financial ratios) - answers This allows comparison of financial statements across years and between companies. They are prepared by dividing all financial staement numbers by the sales for the year. The Dupont Framework - answers Decomposes return on equity into profitability, efficiency, and leverage components. Cash flow ratios - answers Frequently overlooked bc of traditional analysis models are based on the balance sheet and the income statement. Financial statement analysis - answers The examination of RELATIONSHIPS among financial statements numbers over time for the same company and compared to other companies in the same industry. External users use this for investing decisions. Equation for common size financial statements - answers Dividing all financial statement numbers by the total sales for the year. Liquidity - answers ability of a company to pay it's debt in the short run Ratio Framework, 1st step. - answers Dupont framework-used to examine financially statements of any company Assets-to-equity ratio - answers The number of dollars of assets acquired for each dollar invested by stockholders. LEVERAGE. Assets/equity Profitability, efficiency, and leverage - answers 3 ways to improve low return on equity Profitability ratios - answers Common size income statement Efficiency ratios - answers Average collection period, days of sales inventory, fixed asset turnover are: Leverage ratio - answers Debt ratios, debt to equity ratios times interest earned. Average collection period - answers Average number of days that elapse between the sale and cash collection. AVERAGE ACCOUNTS RECEIVABLE/ AVERAGE DAY OF SALES. Add all up and divide by 2. Number of days sale in inventory - answers The average number of days of sales that can be made, using only the supply of inventory at hand Fixed Asset Turnover - answers Number of dollars in sales generated by each dollar of assets. Sales/Avg fixed assets. Whole sale numbers. (Land, trucks, equipment, plant). Leverage ratios - answers The higher leverage increases return on equity through: more Money borrowing, more assets, more sales, more net income Debt ratio - answers The % of total funds, both borrowed and invested, that a company acquires through borrowing. No, they are two different things, they are not to be compared. - answers Should you compare debt to debt ratio and debt to equity ratio? Debt to equity ratio - answers The number of dollars of borrowing for each dollar of equity investment. Total liabilities/stockholders equity. Time interest earned - answers indication of a companies ability to meet interest payments Cash flow to net income - answers reflects the extent to which accrual accounting assumptions and adjustments have been included in computing net income. Cash flow from operations/net income Indicates how well a companies cash flow from operations does at covering the company acquisition and fixed asset additions. - answers Cashflow adequacy ratio Indicates a companies ability to meet its interest payments and its cash flow from operations. Cash from from operations and cash paid for interest and taxes/ cash paid for interest and taxes. - answers Cash times interest earned Inapproproate to compare two companies - answers Lack of compatibility in accounting numbers make it... The total of assets in each asset category and is largely determined by the industry in which the company operates. - answers A companys asset mix the result of management decisions - answers Financing Mix Expected to be used, sold, or replaced with in one year. Ex: Cash, accounts receivable, inventory, prepaid expenses, investment securities. - answers Current assets Credit arrangement, OLD sales technology. It is an asset. The amount collected. - answers Accounts receivable Fair value - answers Price that would be received from selling an asset in an orderly transaction. Dividing each asset item on the balance sheet by the total assets. - answers Asset mix is determined by the companies industry - answers A companies asset mix is highly influenced by: The degree to which a company finances assets using liabilities or owners equity - answers Financing mix measures Income from continuing operations - answers The best measure of a companies sustainability Expenses (losses) and Revenues (gains) - answers Primary categories of income statement items when value has been delivered to a customer, which is typically only after the required work has been performed and after the collection of cash is reasonably assured - answers Revenue should be recognized when: Increase in dollar amount of equity (excluding effects of new investments or investment withdraws). Ex: bought for 200,000, sold for 220,000-gain of 20,000. - answers Financial capital maintenance Increase in physical resources, productive capacity (excluding effects of new investments or investment withdrawals). The previous example, that 20,000 had to be used to buy the next house, so therefore, no income. - answers Physical capital maintenance Gross profit, operating income, income from continuing operations, net income, comprehensive income. - answers Practical measure of income Sales-Cost of goods sold=GP - answers Gross Profit (where the income statement starts) Gross profit-operating expenses/all expenses EXCEPT interest/income tax=operating income - answers Operating income It is the "pie" eaten by lenders (interest), Government (income tax), and owners (net income). - answers Operating income Operating EBIT income (interest expenses +/- miscellaneous revenues, expenses, gains, losses (income tax expenses). - answers Income from continuing operations The value of the goods or services provided TO CUSTOMERS as part of normal business operations. *The amnt generated through normal operations. SALES, SERVICES, INTEREST, and other revenues. - answers Revenues Value of resources consumed in generating revenues. The amount of assets consumed through normal operations - answers Expenses PROBABLE future economic benefit - answers Assets POSSIBLE future economic benefit - answers Expenses Bad debt expense - answers Sell on credit to increase sales, cost of selling on credit is not paying. Keeps 3 books. 1. Financial reporting, 2. income tax reporting, 3. Internal managerial accounting system. - answers Income tax expenses Decrease in the recorded amount of an asset bc it has declined in value. - answers Impairment losses Impairment losses and estimated severance costs. - answers Restructuring charge Reports cash inflow and outflow during the period with an emphasis on the amount of cash GENERATED BY OPERATIONS - answers Purpose of statement of cash flows More retained earnings - answers More revenue= Less retained earnings - answers More expenses= Less retained earnings - answers More dividends= The amount of assets consumed or liabilities created through doing business. Expenses = decrease $ - answers Expenses Amount of cash generated or liabilities satisfied through doing business. Revenues = increase $ - answers Revenues an operating cost. Ex: Collection on account, paid for investors, paid investor on debt, paid miscellaneous expense, paid income tax...these are operating, NOT financial as one would assume - answers By definition, anything that is an expense is... Six steps. 1. Compute change in cash balance. 2. Convert income statement form accrual to cash. 3. Analyze changes in long term assets, INVESTING. 4. Analyze phage in debt and equity, FINANCING. 5. Reconcile to the computed change cash, then prepare a Formal statement of cash flows. 6. Disclose non cash items. - answers Deductive reasoning is a how many step process? what are the steps? Yes, because it is a non cash item - answers If you deduct $(500.00) due to depreciation of an item o the income statement, do you add that $500.00 back? Increase in cash - answers Decrease in accounts receivable=increase or decrease in cash? Increase in cash - answers Decrease in investing= increase or decrease in cash? Decrease in cash - answers decrease in accounts payable= increase or decrease in cash Increase in cash, because you kept your cash, you didn't pay your interest. - answers Increase in interest payable=increase or decrease in cash Increase in cash, bc you didn't pay, you kept your cash - answers Increase in income tax payable=decrease or increase in cash? Start with net income and show the adjustments - answers Cash flow indirect method= Show the line by line cash flows - answers Cash flow direct method= SUBTRACT (uses cash) - answers If current assets are up you ADD (preserves cash) - answers If current assets are down you ADD - answers If current liabilities are up you Subtract - answers if current liabilities are down you You subtract, this uses cash - answers If inventory goes up... You add, saves cash - answers If accounts payable goes up... Increase in net income and decrease in dividends - answers What causes retained earnings to change Beginning retained earnings + net income - dividends= ending retained earnings - answers Retained earnings equation Cash paid for interest and cash paid for interest in taxes - answers What requires a disclosure? "Break even analysis" - answers Cost Volume profit analysis (CVP) Costs that increase the more you make sell - answers Variable costs Costs that stay the same the more you make or sell - answers Fixed costs Incurred INSIDE the production facility, ex: rent, product to make the inventory, direct labor, manufacturing overhead. - answers Product cost (material) Incurred OUTSIDE the productive facility, ex:marketing cost, CEO payroll, interest. - answers Period cost Direct and indirect costs, differential and sunk costs, out of pocket and opportunity cost - answers Decision making includes what kind of costs Provides/establishes professional standards for accountants INSIDE a company. Requires CMA certification - answers Institute of management accountants (IMA) It is also a competitive tool just like good management accounting - answers Product costing Focused on overhead only (not materials or labor), trying to find better ways to assign overhead - answers Activity based costing (ABC) 1. Identify overhead cost. 2. Analyze individual overhead costs in terms of cost activities COST POOLS. 3. Identify measurable cost drivers (numerical # such as gallons). 4. Assign overhead. 5. Use the ABC date to make decisions - answers 5 steps in the activity based costing (ABC) ACTIVITIES consume overhead costs - answers ABC system assumes that: PRODUCTS consume overhead costs - answers Traditional product costing systems assume that: Operating, producing, servicing, keeping factory open - answers Things that cause overhead cost= Is an activity that affects a particular cost. It is a numerical measure that reflects the amount of an overhead cost caused by a particular activity. - answers Cost Driver: cost drivers - answers A More accurate allocation of manufacturing overhead and product costing can take place when costs are assigned on the basis of: No cost driver should be selected, the cost should be treated as common cost - answers If a cost activity has no production related cost drivers = Motivates correct behavior and reflects economic reality - answers Good management accounting ABC= It would consume the highest amount of overhead cost per unit - answers A low volume unique product would consume low or high overhead costs? How much is needed to be sold to break even - answers Cost Volume Profit Analysis (C-V-P) most fundamental question is? Controlling decisions, evaluating decisions, and planning - answers CVP is useful to managers in PLANNING - answers CVP is primarily useful in: Mixed and variable costs, sales, revenue, and the # of product sold - answers C-V-P key factors contribution margin - answers Change in sales mix can affect profit because not all products have the same... contribution margin ratios - answers Managers should put greater emphasis on the sales of a product with higher... Increase advertising of the product - answers A multi product firm can do what to promote a high contribution margin of a product? the more money a company looses - answers The higher the operating leverage... Decreases fixed cost and increases variable costs - answers conservative cost structure= Fixed and variable costs - answers Operating leverage= Have larger losses below the breakeven point - answers A Company with high operating leverage will A measure of rise - answers Operating leverage is= Accounts receivable - answers Money owed to the company for goods and services (this will be a subtraction -, b/c people owe it to you, but you do not have it). Accounts payable - answers Money the company owes to pay its creditors. (this will be an addition +, b/c you owe this amount, but still have it) asset (capital equipment). - answers When a company purchases equipment, it exchanges one asset (cash) for another... Means that the company is running its operations efficiently and responsibly managing its investing and financing activities. Also may reflect that the management is getting lazy about investing in the company. - answers Cash flow statement shows a net increase in cash: May be concurrent with a major investment in the companies future growth. May indicate problems with the companies operating, investing or financing activities. - answers Cash flow statement shows a net decrease in cash: They go in the equity section of the balance sheet. IT IS WHAT YOU OWN. - answers What section do retained earnings go on the balance sheet? Revenue and expenses. Revenue=sales (cash coming in through operations). Expenses=Cash spent to generate sales. Revenue- Expenses=Profit. - answers Income statement are transactions regarding? Owners equity section on balance sheet - answers What section does profit (rev-expenses=profit) go in on the balance sheet? Sales, cost of sales, gross profit (sales-cost of sales), expenses, profit. - answers Income statement structure= Retained earnings, paid in capital, preferred stock, common stock - answers Shareholders equity= Dividends (money given to share holders-distributions of equity into hands of shareholders) - answers What reduces retained earnings? Companies raise money through the sale of debt (bonds or acquiring bank loans) and equity (stock). Companies pay off debt and distribute dividends to shareholders which decreases cash. - answers The financing activities in statement of cash flows (includes investing, operating, and financing) what are some ways that increase cash? What decreases cash? Indirect method. The Direct method is organized into the 3 activities. (operating, investing, financing). Both methods start and end with the Costs tha can be influenced by a mangers decisions and actions - answers Controllable costs: Dividing a total cost into parts and assigning the parts to designated cost object. - answers Cost Allocation: Yes, indirect costs (overhead) are lumped together. ex: direct labor, direct materials. - answers Does traditional costing include both direct and indirect components? Activity cost pools. - answers Activity Based Costing ABC utilizes direct costs like traditional costing, but breaks down the overhead costs into pieces called: YES, used as a planning tool for a manufacturing facility or a product line. it begins on a unit basis, and when volume is applied, describes profitability potential. - answers Is C-V-P a planning tool? Total fixed cost = Contribution margin. When the contribution margin is lower than fixed cost you're loosing money. When the contribution margin is higher than fixed cost you're making money. When contribution margin is the same as the fixed cost you break even-which is the goal of CVP. - answers in C-V-P break even point is when what equals what? The difference between total sales an variable costs; the portion of sales revenue available to cover fixed costs and provide profit. - answers Contribution Margin: The extent to which fixed costs replace variable costs as part of a companies cost structure; the higher the proportion of fixed costs to variable costs, the faster income increases or decreases with change in sales volume. - answers Operating Leverage: Range of activity over which the definitions of fixed and variable costs are valid - answers Relevant range: Accounts payable, accounts receivable, and inventory - answers Typical cash budgeting accounts that are allocated: Determining the best use of financial resources is an aspect of: - answers Capital Budgeting Providing information for planning, controlling, and evaluating is a function of: - answers Manegement Accounting The process of making decisions about future operations is called: - answers Planning The aspect of management accounting that deals with such issues as what additional major resources (e.g., plant and equipment) are needed to meet a company's long-run goals is called: - answers Capital Budgeting Short-run planning involves which one of the following processes? - answers Preparing operational budgets The only kind of costs that do NOT involve any outlay of cash are: - answers Opportunity costs When calculating manufacturing overhead you add: - answers Indirect materials, indirect labor, factory utilities bill, depreciation of equipment, and taxes. You do not add direct materials or labor, delivery expenses or advertising costs. Future costs that change as a result of a decision are - answers Differential costs What is NOT reported on a financial statement? - answers Opportunity costs Costs that are directly traceable to a unit of business or segment being analyzed are called: - answers Direct costs A cost that doesn't change based on changes in the level of sales or production. Examples are building rent and executive salaries. - answers Fixed costs The cost of the primary raw materials used in production. In producing french fries, the direct materials cost is the cost of the potatoes. - answers Direct materials The cost of the wages of the workers who are assembling the direct materials into the finished product. In producing an automobile, the direct labor cost is the compensation cost of the auto workers on the assembly line. - answers Direct labor: All factory costs that are not direct materials or direct labor. Examples are factory supervisor salaries, factory building depreciation, and miscellaneous indirect materials such as glue or screws. - answers Manufacturing overhead: The costs that are created by a particular product or segment that is being analyzed. If a product or segment is dropped, the direct costs created by that product or segment will disappear. - answers Direct costs: The costs that are assigned to a particular product or segment but that are not actually caused by that product or segment. If a product or segment is dropped, the indirect costs assigned to that product or segment will remain - answers Indirect costs: A future cost that can be changed by a decision made now. An example is monthly rent for an apartment. - answers Differenital costs: A past cost that cannot be changed by any decision made now. An example would be last month's paid rent. - answers Sunk Costs: Costs that involve the outlay of cash or the use of some other asset (like equipment). - answers Out of pocket costs: The benefits not received because of actions NOT taken. For example, the opportunity cost of going to a basketball game is the increased points that you could have received on the next day's accounting exam if you had spent that time studying. - answers Opportunity costs: Guidance on ethical professional practice to help professionals involved in management accounting processes. - answers The Institute of Management Accountants (IMA) provides: 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. - answers Accounting is: The three primary financial statements: the balance sheet, the income statement, and the statement of cash flows. - answers The focus on accounting is: lenders, investors, company management, suppliers, customers, employees, competitors, government agencies, politicians, and the press. - answers Among the users of financial accounting information are FASB - answers The practice of accounting involves adherence to duplicate the system throughout the United States. established accounting rules as well as the use of judgment. U.S. accounting rules are established by the: SEC, the AICPA, the PCAOB, the IRS, and the IASB. - answers In addition to the FASB, other important accounting-related organizations are the 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. - answers Three factors have combined to make right now a time of significant change in accounting. A system for providing quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions. - answers Definition of accounting: True or false? The International Accounting Standards Board (IASB) is charged with developing worldwide accounting practices? - answers TRUE Increased federal oversight of the audit process resulted from the passage of the following act of Congress: - answers SOX For a corporation, owners' equity is called: - answers Stockholders equity Stockholders can invest in a corporation in two ways. First, they can directly invest cash or other assets as paid-in capital. Second, they can allow the corporation to keep a portion of the profits for reinvestment in the business; these profits are called? - answers Retained Earnings Revenues are the amount of assets generated in the normal course of business; expenses are the amount of assets consumed in doing business. An income statement also reports gains and losses that result from activities outside a company's normal business operations. An additional number reported in the income statement is? - answers Earnings per share, which is the amount of net income divided by the number of shares of stock outstanding. Financial statement notes are of four general types: - answers a summary of accounting policies, additional information about summary totals in the statements, disclosure of important information not in the statements, and supplemental disclosure required by the FASB or SEC Relevant information is information that is: - answers provided on a timely basis and can be used to assess the past and to project the future for decision making. Makes financial statement information more useful because it allows a company's financial statements to be analyzed in light of the company's own performance in prior years or other companies' performance. - answers Comparability: Is the practice of recognizing all losses but not recognizing gains until they are certain. As a practical matter, accounting conservatism is a counterbalance to the naturally optimistic estimates made by management. - answers Conservatism: Refers to the concept that weighs whether a certain dollar amount is large enough to make a difference to anyone. For small amounts, convenient accounting often is preferred over elaborate, theoretically correct treatment. - answers Materiality: Is the idea that the three primary financial statements are interrelated - answers Articulation: Analysis of financial statement numbers can be used to diagnose existing problems and - answers To forecast how a company will perform in the future. Common-size financial statements allows - answers 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 - answers decomposes return on equity into its profitability, efficiency, and leverage components. Cash flow ratios are frequently overlooked because - answers traditional analysis models are based on the balance sheet and the income statement. Analysis of financial statements can be misleading if statements are not - answers comparable or if statements exclude significant information. In addition, analysis of historical data may distract one's attention from relevant current information. External users of financial statements use financial statement analysis for - answers investing decisions Assets-to-equity ratio. It is the number of dollars of assets a company is able to acquire using each dollar invested by stockholders. - answers Leverage A company's asset mix is: - answers 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. The total amount invested to acquire an ownership interest in a corporation is called - answers Common stock and preferred stock Which of the following types of accounts show how resources came into a firm? - answers Liabilities and owners equity What is generally considered to be a liability? - answers Notes payable Long term asset: - answers Land. Short term: Accounts receivable, accounts payable, inventory Current assets are: - answers Accounts receivable, inventory, cash. NOT Equipment Current assets usually are listed on a balance sheet in - answers Decreasing order if liquidity This is sometimes done in place of recognition when the effects of an event cannot be quantified with any degree of certainty. - answers Disclosure The process of valuation involves computing numbers that are both - answers Relevant and reliable The process of determining the dollar value to assign to an item that is to be recognized in the financial statements is called - answers Valuation Reporting the details of a transaction in the notes to the financial statements is called - answers Disclosure The process of formally recording an item in the accounting records so that it will be reflected in the financial statements is called - answers Recognition The process of formally recording an item in the accounting records so that it will be reflected in the financial statements is called - answers Increase in building and decrease in cash 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 - answers Increase in cash and increase in paid in capital When a company rents a warehouse by paying for the first six month's rent in advance, the effect on the accounting equation on the day of payment would be to - answers Increase in prepaid rend and decrease in 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 - answers Increase in buildings and increase in mortgage payable When a company purchases equipment on credit, the effect on the accounting equation will be to - answers Increase equipment and increase liability A company's asset mix is strongly influence by - answers the companies industry Financing mix is a measure of: - answers The degree to which a company finances assets using liabilities or owners' equity The concept that income is defined as the excess of net assets at the end of an accounting period over the net assets at the beginning of the The statement of cash flows provides information that is not readily apparent by looking at just... - answers he 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 — - answers 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. When detailed cash flow information is not available, a statement of cash flows can be prepared using: - answers knowledge of how the three primary financial statements articulate. Operating cash flow can be reported using either the direct or the indirect method. Purposes of the statement of cash flows? - answers It highlights changes in managerial strategy regarding investments and finances. It provides investors with information about the investing and financing activities of an entity. It provides information about an entity's cash receipts and payments over a period of time. It does NOT measure profitability. Significant noncash financing transactions - answers Should not be disclosed in the body of a statement of cash flows but should appear elsewhere Those transactions and events that enter into the determination of net income are reported under which section of the statement of cash flows? - answers Operatig activities What would be reported as a financing activity on a statement of cash flows? - answers Purchase of treasury stock What would be reported as an investing activity on a statement of cash flows? - answers Extending loans to other entities, Sale of a building, Collection of a long-term note receivable. Amounts borrowed would NOT be reported as an investing activity. Calculating operating activities: - answers Add Accounts receivable, payments for salary/wages, interest revenue, subtract payments for inventory. Which of the following would be deducted from net income on a statement of cash flows prepared using the indirect method? - answers A gain from the sale of equipment Operating. - answers For purposes of preparing a cash flow statement, operating activities are those activities that enter into the calculation of net income. Net cash provided by operating activities is the "bottom line" of the cash flow statement. The primary investing activities are the purchase and sale of land, buildings, and equipment. - answers investing Financing. Financing activities involve the receipt of cash from, and the repayment of cash to, owners and creditors. - answers Financing the purchase of long-term assets in exchange for the issuance of debt or stock. - answers Non-cash investing and financing transactions include If a company does NOT record accrued wages expense at the end of the year, how does this affect the year-end financial statements? - answers Overstates owners equity Which one of the following errors causes net income to be overstated? - answers Failure to record depreciation expense 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? - answers Revenues will be correctly stated Earnings management through deceptive accounting is best exemplified by - answers Changing the interest rate used in accounting for leases without describing the change in the notes to the financial statements. items of the earnings management continuum is in the correct order - answers strategic matching, change in methods or estimates with full disclosure, change in methods or estimates with little or no disclosures, non-GAAP accounting, fictitious transactions Recording as an asset expenditures that have no future economic benefit is an example o - answers Non GAAP accounting Fraud is - answers Both the deceptive concealment of transactions and the creation of fictitious transactions Constraints on auditors Constraints on company management Independent oversight of auditors - answers SOX PCAOB - answers Conduct inspections of accounting firms, Register all public accounting firms that provide audits for public companies, Establish standards relating to the preparation of audit reports for public companies. Does NOT Enforce compliance with the Foreign Corrupt Practices Act. According to Sarbanes-Oxley, which services is an accounting firm permitted to provide to its audit client? - answers Opinions about the reliability of internal controls What does Sarbanes-Oxley NOT require management to do? - answers Make loans to executive officers and directors What does Sarbanes-Oxley require management to do? - answers Develop and enforce an officer code of ethics, Support a much stronger board and audit committee in each public company, Prepare a statement to accompany the audit report The Public Company Accounting Oversight Board - answers Conducts inspections of accounting firms Which audit processes is used primarily by external auditors and not by internal auditors? - answers confirmation. Internal auditors use: interviewing, sampling, and observation What activities would internal auditors NOT typically perform in a large company? - answers Prepare the primary financial statements. It would typically perform: Detect fraud, Assist with increasing the efficiency of operations, Evaluate internal controls. What are incentives that influences auditors to remain independent and to provide fair and reliable financial information? - answers Auditors have a reputation to protect. Management would be taking a large legal risk if they interfere with the auditors. External auditors are taking a large legal risk if they allow their independence and integrity to be compromised Which statement best describes the role of external auditors when auditing a large public company? - answers Examine the organization's accounting for a sample of business transactions to provide reasonable assurance that the financial statements are presented fairly When does the Securities and Exchange Commission (SEC) typically require a company to submit a registration statement to the SEC for approval? - answers When the company issues new debt or stock securities to the public The effects that the Securities Exchange Act of 1934 had on accountants? - answers Accountants must audit all 10-K reports, Accountants' work is subject to approval by the SEC. Unintentional mistakes that can enter the accounting system at the transaction and journal entry stage or when journal entries are posted to accounts. - answers Errors • Loans to company executives are prohibited. • Audit committees must be strengthened. Internal auditors - answers • Evaluate internal controls • Monitor operating results • Ensure compliance with laws and company policy • Detect fraud External auditors - answers Gather evidence to be able to certify the fairness of the financial statements through: • Interviews • Observation • Sampling • Confirmation • Analytical procedures The SEC adds credibility to financial statements by Requiring independent audits - answers Requiring independent audits Reviewing financial statements itself Sanctioning firms that violate its standards Good management accounting is motivated by: - answers Management desire to improve Management accounting - answers Unique competitive tool, Both financial and non financial data, Data usually kept secret within the company,Used for internal planning, control, and evaluation Financial accounting - answers Uniform across companies (generally accepted accounting principles), Restricted to financial data, data is made public,Used primarily by investors and creditors in deciding whether to provide capital to the company. The allocation of which of the following can cause the greatest errors when computing product costs? - answers Manufacturing overhead ABC assume that: - answers Activities that consume overhead cost Traditional product costing systems (e.g. job order costing and process costing) usually assume that: - answers Products consume overhead costs. 5 steps of ABC system - answers Identify overhead cost activities, analyze individual overhead costs in terms of those cost activities, identify measurable cost drivers, assign overhead, and use the cost data to make decisions Machine depreciation. - answers A unit-level item associated with the overhead cost activity "operating the ice cream production process." Building depreciation. - answers A facility support item associated with the overhead cost activity "keeping the factory open." Building insurance. - answers Building insurance. A facility support item associated with the overhead cost activity "keeping the factory open. Security guards. - answers Security guards. A facility support item associated with the overhead cost activity "keeping the factory open." Unit— - answers activities that take place each time a unit of product is produced. Examples:• Machine maintenance • Machine depreciation • Electricity and other energy cost Batch - answers activities that take place in order to support a batch or production run, regardless of the size of the batch. Examples:• Inspections • Machine setups 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. To then assign overhead costs to production, the necessary steps are: - answers 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 If the fixed costs relative to a specific product increase while the variable costs and sales price remain constant, the break-even point will: - answers Increase A company's break-even point would change if there were an increase in: - answers Total fixed costs due to a plant addition Total contribution margin will increase in a two-product firm if total units sold remain the same and: - answers More products with the highest contribution margin are sold Operating leverage is - answers a measure of risk Operating leverage deals primarily with the relationship between: - answers Fixed costs and variable costs Maintaining low fixed costs and high variable costs rather than high fixed costs and low variable costs: - answers Conservative cost structure As compared to a company with a low operating leverage, a company with a high operating leverage will: - answers Have a larger loss below the breakeven point