Chapter 11

Question 1

Accounting

Answer 1

A comprehensive system for collecting, analyzing, and communicating financial information

Question 2

Bookkeeping

Answer 2

Recording accounting transactions

Question 3

Accounting Information System (AIS)

Answer 3

Organized procedure for identifying, measuring, recording, and retaining financial information

Question 4

What do business managers use accounting for?

Answer 4

To set goals, develop plans, set budgets, and evaluate future prospects.

Question 5

What do employees and unions use accounting for?

Answer 5

To get paid and to plan for and receive benefits such as health care, insurance, vacation time, and retirement pay.

Question 6

What do Investors and creditors use accounting for?

Answer 6

To estimate returns to shareholders and to determine a company’s growth prospects and whether it is a good credit risk before investing or lending.

Question 7

What do tax authorities use accounting for

Answer 7

To plan for tax inflows, determine the tax liabilities of individuals and businesses, and ensure that correct amounts are paid on time.

Question 8

What do government regulatory agencies use accounting for?

Answer 8

Rely on accounting information to fulfil their duties.

Question 9

Financial Accounting

Answer 9

Keeps external parties informed about the firm’s financial condition

Question 10

Managerial Accounting

Answer 10

Directed at internal parties (managers) or Provides information to facilitate planning, forecasting, and decision-making within the firm

Question 11

Chartered Accountants (CA)

Answer 11

An individual who has met certain experiences and education requirements and has passed a licensing examination; acts as an outside accountant for other firms

Question 12

Certified General Accountants (CGA)

Answer 12

An individual who has completed an education program and passed a national exam; works in privately industry or a CGA firm

Question 13

Certified Management Accountants (CMA)

Answer 13

An individual who has completed a university degree, passed a national examination, and completed a strategic leadership program; works in industry and focuses on internal management accounting

Question 14

What are CAs, CGAs, and CMAs all classified as now?

Answer 14

CPAs

Question 15

Private accountants

Answer 15

Hired as salaried employees; Duties cover day-to-day accounting needs. Small business may have just one and Large business may have area specialists (i.e. budgeting, taxation, accounts payable etc.)

Question 16

The Accounting Cycle

Answer 16

1. Analyze transaction documents
2. Records transactions in a journal
3. Transfer entries from the journal to a ledger
4. Do a trial balance
5. Prepare financial statements
6. Analyze the financial statements

Question 17

International Accounting Standards Board (IASB)

Answer 17

Members in over 80 countries; Goal is to eliminate differences in financial reporting from country to country; IASB statements include an income statement, balance sheet and a statement of cash flows

Question 18

International Financial Reporting Standards (IFRS)

Answer 18

Used by publicly accountable enterprises and private government enterprises

Question 19

Accounting Standard For Private Enterprises (ASPE)

Answer 19

Standard accounting rules that can be used by private businesses in Canada in preparing financial reports

Question 20

Asset

Answer 20

Anything of economic value owned
by a firm or individual (Liabilities + Owners’ Equity)

Question 21

Liability

Answer 21

Any debt owed by a firm or an
individual

Question 22

Owners’ Equity

Answer 22

Any positive difference between a firm’s assets and liabilities

Question 23

Double-Entry Bookkeeping System

Answer 23

All transactions are entered in two ways, showing how they impact assets and liabilities. The accounting equation is always kept in balance

Question 24

Balance Sheets

Answer 24

Provide detailed information about the accounting equation factors (assets, liabilities, owner’s equity). Show a firm’s financial condition at one point in time

Question 25

Accounts receivable

Answer 25

Amounts owed to the firm by customers

Question 26

Inventory

Answer 26

Cost of merchandise acquired for sale but not yet sold

Question 27

Prepaid expenses

Answer 27

Supplies on hand and rent (other bills) paid for coming period

Question 28

Fixed Assets

Answer 28

Have a long-term use or value (Land, Buildings, and Machinery)

Question 29

Depreciation

Answer 29

Distributing the cost of a major asset over its lifetime, deducted yearly

Question 30

Finance involves four key responsibilities

Answer 30

Determine a firm’s long-term investments, Obtain funds to pay for those investments, Conduct the firm’s everyday financial activities, and Help manage the risks that a firm takes

Question 31

Intangible Assets

Answer 31

Non-physical assets with economic value (difficult to calculate) - Patents, Trademarks, Franchise fees, and Copyrights

Question 32

Goodwill

Answer 32

The amount paid for an existing business beyond the value of its other assets

Question 33

Current liabilities

Answer 33

Debts owed by the firm that must be repaid within one year (i.e., accounts payable)

Question 34

Long-term liabilities

Answer 34

Debts owed by the firm and due in more than one year

Question 35

Owners’ equity

Answer 35

Owners’ holdings in the firm

Question 36

Income Statement

Answer 36

Sometimes called a profit-and-loss statement; Description of revenues and expenses that shows the firm’s annual profit or loss (revenues – expenses = profit (or loss))

Question 37

Cash flow from operations

Answer 37

Cash flows from buying and selling of goods and services

Question 38

Revenue Recognition

Answer 38

The formal recording and reporting of revenues in financial statements once the earnings cycle is completed

Question 39

Matching

Answer 39

Expenses will be matched with revenues to show net income for an accounting period

Question 40

Budget

Answer 40

A detailed financial plan of estimated receipts and expenditures for a future period (An internal financial statement (usually 1 year), Requires input from other departments, Compares actual vs. budget to signal problems)

Question 41

Solvency Ratios

Answer 41

Short term and long term, estimate of risk

Question 42

Profitability Ratios

Answer 42

Measure potential earnings

Question 43

Activity Ratios

Answer 43

Reflect management's use of assets

Question 44

Short Term Solvency ratios

Answer 44

Current ratio (current assets/current liabilities)

Question 45

Long Term Solvency Ratios

Answer 45

Debt to equity ratio (debt/owner’s equity); Leverage

Question 46

Return on Equity (profitability ratio)

Answer 46

Net income/total owner’s equity

Question 47

Return on Sales (profitability ratio)

Answer 47

Net income/sales revenue

Question 48

Earnings per Share (profitability ratio)

Answer 48

Net income/number of common shares outstanding

Question 49

Inventory turnover ratio (activity ratio)

Answer 49

Cost of goods sold/average inventory; Measures the average number of times inventory is sold and restocked during the year