Chapter 1 - Introduction

Question 1

Accounting is…

Answer 1

Concerned with providing both financial and non-financial information that will help decision-makers to make good decisions. It is the process of identifying, measuring and communicating economic information.

Question 2

Who are the users of accounting information?

Answer 2

Stakeholders, managers, employees, creditors and the government

Question 3

What is the difference between management accounting and financial accounting?

Answer 3

Financial:

• Legal requirements(produce annual financial accounts)
• Focuses on the business as a whole
• Must conform with legal requirements(accounting principles)
• Must be verifiable and objective
• Reports on the past
• Published annually and less detailed semi-annually
• External

Management:

• Has no requirements
• Focuses on the small parts of the business(profit, products, services etc..)
• No required principles to follow
• Focuses on the future events
• Reports may be prepared at daily, weekly or monthly intervals
• Concerned within the organization(internal)

Question 4

Product-life-cycle is…

Answer 4

A sequence of stages from introduction to growth, maturity and decline.

Question 5

Explain the decision-making, planning and control process

Answer 5

There are 6 stages, whereas the first 4 stages represent the decision-making or planning process. The final two stages represent the control process, which is where we measure and correcting actual performance.

Question 6

Why is maximization something a firm should go for?

Answer 6

1. It is more likely to for an organzation to survive in the future.
2. Cannot be realised in practice, but can learn how to increase profits.
3. Allow shareholders to know how much it is costing them in order for the firm to pursuit a goal

Question 7

What has changed in the business environment the last decade?

Answer 7

Technology, deregulation, globalization, customer demands and orientation, environmental and ethical issues, focus on value

Question 8

What are some priorities in order for customers to be satisfied?

Answer 8

1. The cost
2. The quality
3. The time (speed in service response, on-time delivery)
4. Keep on improving

Question 9

What are some functions of management accounting?

Answer 9

• To allocate costs between costs of goods sold and inventories for both internal og external profit reporting
• Provide relevant information to help managers make better decisions
• provide information for planning, control, performance measurement and continous improvements

Question 10

Define benchmarking

Answer 10

Measuring other organizations for its services, products or activities in order to improve.

Question 11

Assets and its equation

Answer 11

Refers to anything a company owns. They are the economic resources it uses to increase sales, reduce costs or otherwise generate value for owners. It can be anything that is of value.

Assets = liabilities + equity

Question 12

Direct costs

Answer 12

Can be directly traced to the product. Ex: material and labor costs

Question 13

Indirect costs

Answer 13

Can’t be directly traced to the product; instead they are necessary to keep your business in operation. It is considered the «real cost» in business. Ex: utilities, office equipment rental, advertising etc…

Question 14

Fixed costs

Answer 14

An expense or cost that does not change with an increase or decrease in the number of goods or services produced or sold. Ex: taxes

Question 15

Variable costs

Answer 15

Costs that change with the level of production. Ex: material used in production

Question 16

Breakeven point

Answer 16

Is where the level of sales in profit is zero. (Total revenue = total costs)

Formula: sales - variable cost - fixed cost

Question 17

Just-in-time processing

Answer 17

A system where producing the right products as they are needed. To avoid waste.

Question 18

Marginal revenue

Answer 18

Marginal revenue is the amount of revenue one could gain from selling one additional unit.

We produce products as long as the revenue from selling an additional product is more than the additional cost.

Question 19

Why is marginal cost = marginal revenue?

Answer 19

We keep selling additional products with higher expense than the additional cost and will continue to do so until the additional unit will sell for the exact amount it costs to make.

Question 20

Define equity

Answer 20

Equity is the difference between the value of the assets and the value of the liabilities of something owned.

Equity = assets - liabilities

Question 21

What is the main goal of management accounting?

Answer 21

The main goal is to provide internal groups with timely and relevant decision information.

Question 22

What is liability?

Answer 22

It is defined as a company’s legal financial debts or obligations that arise during the course of business operations.

Question 23

Define fixed assets

Answer 23

It is an asset that is not consumed or sold during the normal course of business such as land, buildings, equipment osv.. It is asset that will not be used up or consumed or sold in the current accounting year.

Question 24

Long term liability vs current liability

Answer 24

Long term liability is one the company is expected to pay over the course of more than one year.

Current liability is one the company expects to pay in the short term. Ex: salaries, taxes

Question 25

Retained earnings

Answer 25

Are the profits that a company has earned to date that have not been distributed to its stockholders but often reinvested in the company to use for projects such as research and development.