Final Study Guide Flashcards
What would an internal auditor typically NOT perform in a large company
Prepare the primary financial statements
Following Financial activities are available:
Operating Activities $309,800
Investing Activities ($118,000)
Financing Activities ($190,000)
Ending Cash Balance $5,600
Given this information, what is the beginning cash balance?
$3800
x+309,800 - $118,000 - $190,000 = $5600
What is typically viewed as the fundamental measure of a company’s profitability?
Net Income
What are the three primary categories of an income statement
Revenues
Expenses
Gains
Losses
Income statements that do not relate to a company’s continuing operations are income from what
Income from continuing operations and extraordinary losses
When revenue and expense items are arranged to highlight important profit relationships, the resulting i come statement format is called what
Multi-Step Income Statement
Revenue should be recognized when value has been delivered to customers which is typically only after the required work has been performed and after the collection of cash is reasonably assured. What method is used to decide when to recognize expenses?
Matching Concept
Individual transactions impacting income can be analyzed using the expanded accounting equation, which is:
Assets=Liabilities + Paid-In Capital + (Revenues-Expenses-Dividends)
What is an important use of an income statement?
It requires an understanding of what underlying factors determine the level of a revenue or an expense.
Forecast income for future periods
What is the process that accountant use in adjusting raw transaction data into refine measures of a firm’s economic performance?
Accrual Accounting
A concept that states that income exists when the dollar amount of a company’s net assets increases during the year, after excluding the effects of new owner investment or payment of dividends is called
Financial Capital Maintenance
What equals sales revenues minus fixed costs
Net Profit
Why is gross profit an important number
If a company is not generating enough from the sale of a product or service to cover the costs directly associated with that product or service, that company will not be able to stay in that line of business for long
What measures the performance of the fundamental business operations conducted by a company and is computed as gross profit minus operating expense
Operating Income
What does operating income tell a business
How well a business is performing in the activities unique to that business, separate from the financing and income tax management policies that are handled at the corporate headquarters level
What is a key purpose of financial accounting
Provides interested parties with information that can be used to predict how a company will perform in the future
What is a desired income number that reflects the aspects of a company’s performance that is expected to continue into the future
Income from Continuing Operations
How is income from continuing operations computed
By subtracting interest expense, income tax expense, and other misc. items from operating income
Income from continuing operations is significant because of the two categories of items that it excludes. What are those two categories?
Income from discontinued operations and Extraordinary Gains and Losses
What is the number used to reflect an overall measure of the change in a company’s wealth during the period?
Comprehensive Income
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 accounting period, excluding effect of transactions with owners is called
Financial Capital Maintenance
Given the following information, compute income from continuing operations:
COGs $2000
Extra.O item -$170
Income taxes 350
Interest Expense 200
Operating Exp. 1500
Sales 5500
$1450
Given the following information, compute net income:
COGS $2000
Extra.O Item -170
Income Taxes 350
Interest Expense 200
Operating Exp 1500
Sales 5500
1280
(For Net Income, include the extra.O #)
The reported amount of these represent the value of goods and services provided by a company in its business operations
Revenue
The recorded amount of this represents the values of resources used in generating the reported revenue
Expenses
What would be examples of costs in a manufacturing company?
Direct Materials and Direct Labor
What would be examples of costs in a manufacturing company>
Wholesale cost paid to purchase inventory
What is created by activities undertaken in the normal course of business
Revenues and expenses
When a company makes or loses money on activities that are peripheral to its primary operations, the amount classifies as these instead of revenue or expenses
Gains and Losses
Gains and losses that result from transactions that are both unusual in nature and infrequent in occurrence are called
Extraordinary Items
When a company determines to get out of a specific line of business, what happens to the revenues and expenses from that line of business?
Revenues and expenses from that line of business are excluded from the company’s recurring revenues and expenses when preparing an income statement
Earnings per share is equal to
Net income / Total number of shares of stock outstanding
The following information was taken from the records of Tellers Corporation from the month ended Dec. 31 2012:
Ad. Expense $20,625
In. Tax Exp. $13,095
Acc. Pay $13,450
Divid. Paid $ 14,125
Retained Earnings $ 57,860
Consult. Fee Rev. $93,550
Rent Exp. $11, 728
Supp. Exp $16,917
If Teller’s has 2,100 shares of stock outstanding, earnings per share is approx. what?
14.85
Net income: 93,500 - 20,625 - 13,095 - 11,728 - 16,917 = 31,185
EPS = 31,185/2100 shares = $14.85
A system of providing “quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions”
Accounting
The flip side of accounts receivable; when one company sells on credit, creating itself an account receivable, the company on the other side of the transaction is buying on credit, creating this
Accounts payable
Amounts owed to a business by its credit customers and are usually collected in cash within 10-60 days
Accounts Receivable
The grouped together and reported changes which companies experience increases and decreases in equity each year because of the movement of market prices or exchange rates
Accumulated Other Comprehensive Income
A method of attributing overhead costs to products based on measurable factors that relate to activities that create overhead costs
Activity Based Costing (ABC)
Invested by stockholders that exceeds the par value of the issued shares
Additional Paid-In Capital
The professional organization of certified public accountants in the United States
American Institue of Certified Public Accountants (AICPA)
Probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events
Asset
The proportion of total assets in each asset category, is determined to a large degree by the industry in which the company operates
Asset Mix
Sales divided by assets and is interpreted as the number of dollars in sales generated by each dollar of assets
Asset Turnover
The firm’s economic resources
Assets
Members of a company’s board of directors who are responsible for dealing with the external and internal auditors
Audit Committee
Shows the average number of days that elapse between sale and cash collection
Average Collection Period
A listing of an organization’s assets and of its liabilities at a certain time
Balance Sheet
Activities that take place in order to support a batch or production run, regardless of the size of the batch
Bath-level Activities
The preservation of a systematic, quantitative record of an activity
Bookkeeping
The amount of sales at which total costs of the number of units sold equal to total revenues; the point at which there is no profit or loss
Break-Even Point
What type of income statement emphasizes the presentation of gross profit and operating income
Multi-Step Income Statement
What type of income statement merely groups all of the revenues and all the expenses, and reports the overall difference as net income
Single-Step Income Statement
The concept typically used in practice to determine when an expense should be recognized is the
Matching Concept
In summary, the three methods used to determine when to recognize an expense are
Direct Matching, as with COGs
Systematic Allocation as with depreciation
Immediate recognition as with advertising
Costs that can be reasonably associated with specific revenues but not with specific products should be
Expensed in the period in which the related revenue is recognized
What are examples of acceptable basis for the recognition of expenses?
Systematic and rationale recognition
Direct Matching
Immediate Recognition
The revenue principle states that revenue should be recognized at a point when?
An exchange transaction involving goods and services has occurred and the earnings process is essentially complete
What is an example of an application of the principle of systematic and rational allocation
Depreciation Expense
An example of direct matching of an expense with revenues would be
Direct labor costs incurred to product inventory sold during a period
Analysis of revenue and expense transactions requires the use of what type of equation?
Expanded accounting equation
Thus far, the only national government to adopt the accrual basis for its official accounting system is
New Zealand
Cash is _____________ and Accounts receivable is ____________________ when cash is collected from customers who had previously purchased a product or service on account
Increased; decreased
Most forecasting exercises begin with a forecast of
sales
Cash flows are partitioned into what three categories
Operating
Investing
Financing
What are the primary investing activities in the statement of Cash flows
Purchase and sale of land, buildings, and equipment
Financing activities in the statement of cash flows involve the receipt of
Cash from and the repayment of cash to owners and creditors
What are the activities in the operating statement of cash flows?
Those entered into the calculation of net income
Summarizes a company’s cash flows for a period of time
Statement of Cash Flows
Significant noncash financing and investing transactions are reported where?
In a narrative or in a separate schedule
Those transactions and events that enter into the determination of net income are reported under which section of the statement of cash flows
Operating Expenses
What is short-term. highly liquid investments such as treasury bills, commercial paper, and money market funds?
Cash Equivalents
Normal business activities such as collecting cash from customers, paying cash for inventory purchases, paying employees, paying rent, etc. which happen every day in a business are called
Operating Activities
Investing in the activities associated with the productive capacity of the business, like buying equipment, land, buildings, etc
Investing Activities
Obtaining the capital of financing to make things happen, like borrowing money or paying dividends, is considered
Financing Activities
The number used to reflect an overall measure of the change in a company’s wealth during the period is
Comprehensive Income
The proper order on an income statement for the various measures of income is:
Gross Profit
Operating Income
Income from Continuing Operations
Net Income
Comprehensive Income
When a company determines to get out of a specific line of business
Revenues and expenses from that line of business are excluded from the company’s recurring revenues and expenses when preparing an income statement
Selling a product is considered a what
Revenue generating activity
For a gain or loss to be classified as extraordinary, it must be what?
Both Unusual and Infrequent
True/False
With multiple-step income statement all revenues are grouped together, all expenses are grouped together, and net income is computed as the difference between the two.
FALSE
This is not an acceptable basis for the recognition of the expenses
Cash Disbursement
List of example of expenses of doing business
Wages and buying landscape supplies
If a company anticipates a 40% increase in sales volume, then it is most likely that the company will need about a 40% increase in
Accounts Payable
Most forecasting exercises begin with a forecast of
Sales
This summarizes all cash inflows and outflows of an entity for a given period of time
The statement of cash flows
What are some purposes for the statement of cash flows
Measures the profitability of an entity
Provides investors with information about the investing and financing activities of an entity
Highlights changes in managerial strategy regarding investments and finances
What would be added to net income on a statement of cash flows prepared using the indirect method
A decrease in accounts receivable
A loss from the sale of a building would be reported on an indirect method statement of cash flows as
An addition to net income
The indirect method of preparing a statement of cash flows does all of the following
Results in the same net cash flow from operating activities as the direct method
Is the method most often used in practice
Involves adjusting the net income figure for any noncash experience
This would be subtracted from net income on a statement of cash flows prepared by the indirect method
A gain from the sale of equipment
The direct and indirect methods will usually show different amounts of cash flows from
Operating Activities
The method that begins with net income or net loss and adjusts that number for items that did not affect cash is called
Indirect method
The approach of to preparing a statement of cash flows that adjusts net income to cash flows from operations is the
Indirect Method
What would be added to net income on a statement of cash flows prepared using the indirect method
A decrease in accounts receivables
The direct method of presenting a statement of cash flows does this
Shows the major classes of operating cash receipts and payments
This statement best describes financial statement analysis
Financial statement analysis involves relationships and trends
What is the purposes of financial statement analysis
Diagnosis and Prognosis
Relationships between financial statement amounts are called
Financial Ratios
External users of financial statements use financial statement analysis for
Investing Decisions
Financial statement analysis is greatly enhanced when financial ratios are compared with
Past values and values for other firms in the same industry
The identification of where a business has problems is the
Diagnosis
The prediction of how a business will perform in the future is the
Prognosis
Which ratio is calculated using only balance sheet numbers?
Current Ratio
Which ratio is calculated using only income statement numbers
Return on Sales
Which ratio is calculated using numbers from both the income statement and the balance sheet
Return on Equity
What ratio is used to measure a firm’s liquidity
Current ratio
Which of the following ratios is a comparison of a financial statement number to a market value number?
Price Earnings Ratio
Which of the following ratios represents the proportion of borrowed funds used to acquire the company’s assets
Debt Ratio
Which of the following ratios is used to measure a firm’s efficiency at using its assets
Asset Turnover
Which transaction could increase a firm’s current ratio?
Payment of Accounts Payable
Which is most useful in analyzing companies of different sizes
Common-sized Financial statements
In a common-size balance sheet, using the percentage of sales method, each item on the balance sheet is typically expressed as a percentage of
Sales Revenue
A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the financial analyst to do?
Compare the mix of revenue and expenses
Determine efficient use of resources within a company over time or between companies within a given industry without respect to relative size
When analyzing a company’s debt ratio, if the ratio has a value that is equal to 1, the company has
No Stockholder’s Equity
The ratio that indicates if a borrowing company will be able to meet its required interest payments is the
Times Interest Earned Ratio
The return on equity ratio under the DuPont framework is computed as
Net income/Equity
Which asset is used to measure a firm’s efficiency
Sales/Assets
Which cash flow ratio reflects a company’s ability to finance its capital expansion through cash from operations
Cash Flow Adequacy
Which cash flow ratio reflects a company’s ability to make its interest payments from cash generated through operations
Cash x Interest Earned
The particular analytical measures chosen to analyze a company will not be influenced by what
Product quality or service effectiveness
These are benchmarking problems when analyzing financial statements
Reported financial statement numbers may actually be a measurement of different things
Companies that are being compared to conglomorates
Not all companies use the same accounting practices
A company has a policy of net 10 and is considering changing it to net 30 to be more in line with industry standards. What is a benefit to changing the credit policy?
Attracting more customers
If a company does not record accrued wages expense at the end of the year, how does this affect the year-end financial statements?
Overstates Owner Equity
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?
Assets will be overstated
Recording the payment of an account payable twice will result in
The Understatement of total assets and total liabilities
Failure to record the used portion of supplies on hand during the month has this effect on the financial statements prepared at the end of the month
Overstates Assets
If two different accountants were to estimate the percentage of customers who will not pay their accounts, they could arrive at different estimates. These differing estimates would affect the financial statements. Such differences in assessing estimates are due to
Disagreement in Judgement
Fraudulent accounting is the result of
Intentional errors in the accounting records
If a company does not record accrued wages expense at the end of the year, how does this affect the year-end financial statements
Overstates owner’s equity
What are the five basic categories of internal control
Control Environment
Risk Assessment
Control ACtivities
Information and Communication
Monitoring
What requires that every company’s annual report contain an internal control report
Sarbanes-Oxley Act
The purpose of the audit committee within an organization is to
Be responsible for the external and internal auditors
What are valid control procedures
Segregation of Duties
Adequate documents and records
Independent checks on performance
Internal controls are not designed to help and protect whom
Tax collectors
Every year, Doug is required to take one full week of vacation time is an example of
Independent check on performance
Independent checks on performance is not considered what
a preventative control
If an external auditor suspects wrongdoing in financial statements, the concerns should be addressed to
The audit committee
What is the correct order of the earnings management contiuum
Strategic matching
Change in methods or estimates with full disclosure or estimates with little or no disclosures
Non-GAAP accounting
Fictitious transactions
Earnings management through aggressive accounting is best exemplified by
Changing the useful life of a depreciable asset and fully disclosing it in the notes
A desire for personal gain is not typically a reason for
Managing Reported Earnings
Earnings management through deceptive accounting is best exemplified by
Changing the interest rate used in accounting for leases without describing the changes in the notes to the financial statements
There is not a clear definition as to
which of these are ethical and which are not in the earnings management continuum
Recording as an asset expenditures that have no future economic benefit is an example of
Non-GAAP Accounting
Both the deceptive concealment of transactions and the creation of fictitious transactions is
Fraud
Most companies that engage in earnings management typically do not go beyond this
Strategic Matching
As William is preparing the end of year financial statements, he has been asked to review the accrual judgments and estimates to see if the originally calculated net loss can be changed to net profit. This is an example of
Meeting External Expectations
The Sarbanes Oxley Act establishes what
Constraints on auditors
Independent oversight of auditors
Constraints on company management
According to Sarbanes-Oxley, accounting firms are permitted to provide this to its audit client
Opinions about the reliability of internal controls
According to Sarbanes-Oxley, who are auditors required to report to and be retained by?
Audit Committee
The Public Company Accounting Oversight Board is NOT required to
Enforce compliance with the Foreign Corrupt Practices Act
The Public Company Accounting Oversight Board does what
Conducts inspections of accounting firms
What does Sarbanes-Oxley not require management to do
Make loans to executive officers and directors
This requires CPAs to provide reasonable assurance that significant fraud or misstatement is not present in financial statements
Generally Accepted Auditing Standards
This best describes the role of external auditors when auditing a large public company
Examine the organization’s accounting for a sample of business transactions to provide reasonable assurance that the financial statements are presented fairly
What is the most common professional designation for external auditors
Certified Public Accountant
When does the Securities and Exchange Commission (SEC) typically require a company to submit a registration statement to the SEC for approval?
When the company issues new debt or stock securities to the public
What is the detailed report that companies file annually with the Securities and Exchange Commission
Form 10 K
Which form must be filed quarterly by all publically held corporations
10 Q
Intentional misreprestations in the financial statements is known as
Fraud
Differences in opinion about what numbers should be reported in the financial statements based on different estimates
Disagreements in judgements
Unintentional mistakes that can enter the accounting system at the transaction and journal entry stage or when journal entries are posted to accounts
Errors
The three basic internal control structure categories are
The Control Environment
The Accounting Systems
The Control Procedures
The five types of control procedures are
Segregation of duties
Procedures for authorization
Documents and records
Physical Safeguards
Independent Checks
Who registers all public accounting firms
Public Company Accounting Oversight Role
The PCAOB does what
Registers all public accounting firms
Establish auditing standards
Inspect public accounting firms
What are the constraints on an auditor’s roles
Prohibited from providing non audit services to audit clients
Audit partners must rotate every five years
Auditors must report to the audit committee of the board of directors
What are the constraints on management in the auditing process
CEO and CFO must personally certify the reliability of the financial statements
Companies must have a code of ethics
Loans to company executives are prohibited
Audit committees must be strengthened
Role of Internal Auditors
Evaluate internal controls
Monitor operating results
Ensure compliance with laws and company policies
Detect fraud
Role of External Auditors
Gather evidence to be able to certify the fairness of the financial statements through interviews, observations, sampling, confirmation, analytical procedures
External audits are required of most public companies by the SEC
External audits must be performed by CPAs who are licensed by the individual states in which they practice
Unique competitive tool
Both financial and nonfinancial data
Usually kept secret within the company
Used for internal planning, control, and evaluation
Management Accounting
Uniform across companies (GAAP)
Restricted to financial data
Data often made public
USed primarily by investors and creditors in deciding whether to provide capital to the company
Financial Accounting
The process of making decisions about future operations is called
Planning
The systematic planning for long-term investments in operating assets
Capital Budgeting
The primary internal users of accounting information are
Managers
Who generally has the widest variety of decisions to make
Managers
The control of operations does not involve
analyzing results
Identifying problems and opportunities is a product of which process
Evaluating
Long-run planning involves which process
Capital Budgeting
Broad, long-range planning is
Strategic Planning
Management accounting is established by whom
Individual companies
Which management function implements management plans and identifies how plans compare with actual performance
Controlling
The first step in management planning is
Defining the Problem
What is usually conducted by executive level management
Strategic Planning
A cost that doesn’t change based on changes in the level of sales or production
Fixed Cost
A cost that changes directly with changes in the level of sales or production
Variable cost
A cost incurred as part of the production process
Product Cost
A cost incurred outside the faculty or production facility
Period Cost
A cost that is created by a particular product or segment that is being analyzed
Direct Cost
A cost that is assigned to a particular product or segment bu that is not actually caused by that product or segment
Indirect Cost
A past cost that cannot be changed by any decision made now
Sunk Cost
A future cost that can be changed by a decision made now
Differential cost
The benefits not received because of actions not taken
Opportunity Cost
Cost that involves the outlay of case or the use of some other asset
Out of Pocket Cost
All factory costs that are not direct materials or direct labor (e.g. supervisor salaries, factory building depreciation, etc)
Manufacturing overhead
The cost of the wages of the workers who are assembling the direct materials into the finished product
Direct Labor
The cost of the primary raw materials used in production
Direct materials
What are the ethical guidelines of the Institute of Management Accountants?
Not disclose confidential information
Maintain objectivity when communicating information to decision makers
Act with both actual and apparent integrity in all situations
The top accountant in most large organizations is usually called the
Controller
The first step a business professional should take when confronted with a situation that may involve an ethical conflict is
Contact immediate supervisor
Activity-based costing is most useful when there are variations in
Production volume
Size of Products
Complexity of products
Which method for allocating manufacturing overhead costs is usually more accurate
Activity based costing
Activity based costing differs from traditional product costing in the allocation of
Manufacturing overhead costs
The allocation of which of the following can cause the greatest errors when computing product costs
Manufacturing Overhead
Tracing overhead costs to activities involves dividing overhead costs into
Cost Pools
If activity-based costing is used, property taxes would be classified as a
Facility support activity
Storage in warehouse would not be considered a
Batch activity
For greater accuracy when using the ABC method, management accountants should
Have a reasonable number of cost pools
If ABC costing is used, assembly would be classified as
Unit-level activity
When using ABC method, the cost associated with producing each batch is an example of
Cost pool
An activity that affects a particular cost is a
Cost driver
Machine setups is an example of a
cost driver
With ABC method, overhead costs are assigned using
Cost drivers
The traditional overhead cost allocation system assumes a simple relationship between overall over head and
a single measure of activiy
The five steps in implementing and using an ABC system are
Identify overhead cost activities
Analyze individual overhead costs in terms of those cost activities
Identify measurable cost drivers
Assign Overhead
Use the ABC data to make decisions
Activities that take place each time a unit is produced
Unit level
Activities that take place in order to support a batch or production run, regardless of the size of the batch
Batch level
Activities that take place in order to support a product line regardless of the number of batches or individual units actually produced
Product Line
Activities necessary to have a production facility in place
Facility support
Two characteristics of a good management accounting measure are that it
Reflects economic reality
Motivates correct behavior
Number of units sold
Selling Price per Unit
Mix of items sold
Sales Revenue
Number of units sold
Variable cost per unit
Mix of items sold
Variable cost
Management choice of the level of these; does not depend on the number of units sold
Fixed Costs
Sales revenue - Variable cost - Fixed cost
Profit
