Accounting Midterm

Card Set Information

Accounting Midterm
2014-10-11 18:45:15

Accounting Midterm Q
Show Answers:

  1. Describe Financial vs Managerial accounting
    Management accounting is a field of accounting that analyzes and provides cost information to the internal management for the purposes of planning, controlling and decision making.Management accounting refers to accounting information developed for managers within an organization. CIMA (Chartered Institute of Management Accountants) defines Management accounting as “Management Accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of information that used by management to plan, evaluate, and control within an entity and to assure appropriate use of an accountability for its resources”. This is the phase of accounting concerned with providing information to managers for use in planning and controlling operations and in decision making.

    Financial Accounting is concerned with providing information to stockholders, creditors, and others who are outside an organization. Managerial accounting provides the essential data with which organizations are actually run. Financial accounting provides the scorecard by which a company’s past performance is judged.

  2. What is accounting, and what are the three functions it fulfills?
    Accounting is a collection of systems and processes used to record, report and interpret business transactions.  It provides a way to demonstrate to stakeholders (owners, governments, investors, etc) that managers have acted in their best interest.

    • Accounting is traditionally seen as fulfilling three functions:
    • 1. Scorekeeping: - capturing, recording, summarizing and reporting financial performance (more financial accounting)
    • 2.Attention Directing:  Drawing the attention of managers to, and assisting in the interpretation of, business performance, particularly in terms of the comparison between actual and planned performance.
    • 3.Problem Solving: Identifying the best choice from a range of alternative actions. (this is more management accounting)
  3. What are three management accounting interrelated functions that are part of the role of both  non-financial and financial mangers?
    • 1. Planning - using financial information  to help establish goals and strategies to achieve those goals.  (i.e. budgets)
    • 2.Decision making - using financial information to make decisions consistent with goals/strategies.  

    3.Control - using financial information to maintain performance as close as possible to plan, or using the information to modify the plan itself.
  4. What is GAAP, IFRS and IASB?
    Financial accounting is regulated in Canada by generaly accepted accounting principles (GAAP) outlined by the International Financial Reporting Standards IFRS) as developed by the International Accounting Standards Board (IASB) and the rulings published in the Income tax act.
  5. What is the role of financial accountants?
    The role of the financial accountant is to ensure that financial transactions and reports are prepared in accordance with regulations, to provide accountability to stakeholders of a company and to create an equitable and fair basis for assessing business performance. A financial accountant is concerned primarily with external reporting - reports that are prepared for shareholders, tax authorities and other stakeholders.
  6. What are the core activities of management accounting?
    • 1. Cost Management, which encompasses managing and controlling costs within an organization.
    • 2. Strategic Performance Measurement - which involves measuring the performance of business units and teams and how performance relates back to the overall strategies of the company.

    • 3. Process Management entails assessing the process within a company to identify areas for improvement.  For example, cost improvements.
    • 4.Risk Management since assessing risk is an important part of a managers job. Any decision made by a company is accompanied by a degree of risk, but there are many risk-management tools that can help companies to asses these risks.
    • 5.Connecting company strategy with operations and anticipating customer and supplier needs for which many tools are used in the management accounting field.  For example the balanced scorecard (chapter 6).

    6. Looking to the future to provide real-world strategic direction, business management and leadership because many of the activities performed under the realm of management accounting are future-focused.
  7. What are some trends in management accounting? (7)
    • 1. Value based management - improving the value of the business to the shareholders
    • 2. Non-financial performance measurement systems - i.e. balanced scorecards, which include both financial and non-financial performance indicators as a means for evaluating divisional performance
    • 3.Quality managment - improving the quality of products and services... reducing waste... just in time inventory management, etc.
    • 4. Environmental accounting - i.e. efficient engergy usage and pollution

    5. Activity-based management - an approach that emphasizes how resources are used int he production of goods and services and the need to identify drivers or causes of those costs in order to be able to budget/control them...

    6. Strategic management accounting - an attempt to shift the perspective of accountants and non-financial managers from inward looking to outward looking.  They must recognize the need to look beyond business, along the value chain, to its suppliers and customers.

    7. LEAN accounting - a consequence of lean manufacturing, is a just-in-time philosophy supporting the elimination of wasteful accounting practices that contribute little to management decision making.
  8. Discuss shareholders and liability.
    Shareholders ave limited liability through which their personal liability in the event of business failure is limited to their investment in shares.  Shareholders appoint directors to manage the business, who in turn employ managers.

    Shareholders have few direct rights in relation to the conduct of the business. 

    They are also entitled to an annual report.
  9. What is the capital market?
    The market in which investors buy and sell their shares of public companies is called the capital market, which is normally associated with the stock exchange.
  10. What is 'capital employed'?
    Companies obtain both funds raised from shareholders (equity) and borrowings from financiers (debt).  Both of these constitute the capital employed in the business.
  11. What is the cost of equity?
    The cost of equity is partly dividend and partly capital growth, because most shareholders expect both regular income from profits (the dividend) and an increase in the value of their shares over time in the capital market.    Thus, the different costs of each form of capital, weighted by the proportions of different forms of debt and equity constitute the weighted average cost of capital.
  12. What is value-based management?
    Value-based management emphasizes shareholder value, on the assumption that this is the primary goal of every business.  VBM approaches include total shareholder return, market value added, shareholder value added and economic value added.  A number of approaches to value based management exist, including...

    1. Total Shareholder Return (TSR) 

    2. Market value added (MVA)
  13. What is Total Shareholder Return?
    A value based management approach.

    Total Shareholder Return (TSR) compares the dividends received by shareholders and the increase in the share price with the original shareholder investment, expressing the TSR as a percentage of the total investment.
  14. What is Market Value Added?
    • A value based management 
    • Market Value Added (MVA) is the difference between total market capitalization (number of shares issued times share price plus the market value of debt) and the total capital invested in the business by debt and equity providers.  This is a measure of the value generated by managers for shareholders.
  15. What are three types of decisions that managers make to influence value drivers (sales growth, operating profit margin, income tax rate, working capital investment, fixed capital investment, cost of capital, forecast duration)?
    1. Operating Decisions including product mix, pricing and promotion... which are than reflected in the sales growth rate, operating profit margin and income tax rate

    2. Investment Decisions - in both inventory and capacity, which are then reflected in both working capital and fixed capital investment

    3.Financial Decisions - The mix of debt and equity and the choice of financial instrument determine the cost of capital, which is assessed by capital markets in terms of business risk
  16. What is EVA?
    Economic Value Added 

    is a financial performance measure developed by consultants to capture the economic profit of a business that leads to shareholder value creation  EVA is a net operating profit after deducting a charge to cover the opportunity cost to the capital invested in the business.

    EVA = Modified after-tax operating profit -  (modified total capital x weighted average cost of capital)
  17. What is modified after-tax operating profit?
    Part of EVA... it's modified in the sense that it "capitalizes" or shows certain expenditures that are normally shown as expenses when incurred as intangible assets instead, and writes these expenditures off over the time period they are deemed to provide benefit tot he company.
  18. What is Shareholder (or strategic) Value Analysis?
    Shareholder value analysis emphasizes the process by which shareholder value is achieved.  In practice, the pursuit of shareholder value can be achieved through the introduction of new or redesigned products and services, the management of costs, development of performance measurement systems, and improved decision making.
  19. In Canada, which laws can an organization incorporate?
    • under federal, provincial or territorial law.
    • 1. The legislation that governs companies registered federally is called the Canada Business Corporations Act (CBCA)
    • 2. If a company is incorporated provincially, it will fall under one of the provincial corporation acts such as BC Business Corporations Act.
  20. What is the responsibility of the directors of a corporation?
    Under governance legislation, the financial reports of a company are the responsibility of directors, not managers.

    • Directors are responsible for...
    • - keeping proper accounting records that disclose with resonable accuracy the financial position of the company at any time
    • -to ensure financial reports comply with GAAP standards
    • -safeguarding the company's assets and taking reasonable steps to prevent and detect fraud
  21. What is an audit? Who does them?
    • An audit is a periodic examination of the accounting records of a company carried out by an independent auditor to ensure that
    • 1. those records have been properly maintained
    • 2. the financial statements that are drawn up from those records do not contain any material misrepresentations

    3. the financial statements and other financial information fairly present the corporations financial condition.
  22. What types of reports can an auditor provide?
    • 1. Review engagements, where the intent of the report is to express negative assurance that nothing came to the auditors attention
    • 2. Agreed-on procedures where the auditor performs only audit procedures previously agreed on by teh user of the audit report and the auditor.

    3.Compilation reports - where the auditor assists management in preparation of the financial information. The auditor does not express an opinion or give assurance on the reasonableness of the financial information.
  23. What is an audit committee?
    • An audit committee is a committee of the board of directors to which the board delegates responsibility for oversight of the financial reporting process.  The objective of an audit committe are to:
    • 1. Help directors meet their responsibilities, especially for accountability
    • 2.Provide better communication between directors and external auditors
    • 3. Enhance the external auditors independence
    • 4. Increase the credibility and objectivity of financial reports

    5. Strengthen the role of the outside directors by facilitating in-depth discussions among directors on the committee, management and external auditors.
  24. What is financial risk?
    Risk can be defined as the uncertain future events that could influence the achievement of the organization's strategic, operational and financial objectives.
  25. What is internal control?
    Internal Control is the whole system of internal controls, financial and otherwise, established in order to provide reasonable assurance of effective and efficient operation, internal financial control and compliance with laws and regulations.  

    Accounting controls are important and include control over cash, debotors, inventory, creditors, the business infrastructure, loans, income and expenses.
  26. Which of the following is NOT a key characteristic of financial accounting?
    a. Primary focus on external reporting
    b. developed to ensure accountability to stakeholders
    c. founded primarily in regulation
    d. initially developed in response to the industrial revolution
    d. initially developed in response to the industrial revolution

    • These ones are correct:
    • a. Primary focus on external reportingb. developed to ensure accountability to stakeholdersc. founded primarily in regulation
  27. Which of the following best describes the main difference between management accounting and financial accounting?
    A. Management accounting is focused on non-financial factors, whereas financial accounting is focused on financial factors.
    B. Management accounting is primarily concerned with external stakeholders, such as shareholders and investors.
    C. management accounting is focused on internal users of information and is concerned with information used for planning, decision making and control.

    d. Management accounting is based solely on cost control within organizations.
    C. management accounting is focused on internal users of information and is concerned with information used for planning, decision making and control.
    (this multiple choice question has been scrambled)
  28. Why are stewardship and accountability interrelated?
    • Accountability is important since owners are separate from the management of most companies. 
    • AND
    • Part of the role of a steward is to be accountable to the owners of the company
  29. Why has accountability become so important in today's organizations?
    There is a separation of management from ownership in most companies today.
  30. Which of the following are recent trends in management accounting?
    a. the use of non-financial measures of performance
    b. the use of methods to help determine the cost of environmental practices
    c. reducing waste in the workplace and focusing on quality
    d. focusing on how organizations use resources and assigning costs accordingly
    All of these!!

    a. the use of non-financial measures of performance

    b. the use of methods to help determine the cost of environmental practices

    c. reducing waste in the workplace and focusing on quality

    d. focusing on how organizations use resources and assigning costs accordingly
  31. What changes in the business environment increased the importance of management accounting?
    The increased complexity of production processes increased the need for better information for decision making.
  32. The Industrial Revolution resulted in growth of industries and as a result of this growth which of the following occurred?
    A. the separation of ownership and control
    B. many new cost accounting processes were developed to assist with creating economies of scale.
    C. new organizational forms became common due to remotely located managers who made decisions on behalf of absent owners
    D. All of the above
    B. many new cost accounting processes were developed to assist with creating economies of scale.
    (this multiple choice question has been scrambled)
  33. The functions of management accounting do not include which of the following (according to CMA Canada)?
    a. cost management
    b. strategic performance measurement

    c. auditing of financial statements

    d. risk management and assurance services

    e. looking to the future to provide real-world strategic direction, business management and leadership
    c. auditing of financial statements
  34. The responsibility to produce financial statements for a company belongs to the company's...
  35. CEOs and CFOs are required to personally certify that the company's financial statements...
    Do not contain misrepresentations and that the financial statements and other financial information fairly present the company's financial position
  36. Canadian legislation states that persons are prohibited from
    committing fraud that will mislead the public or create an artificial price for the company's shares
  37. The main principles of corporate governance found in Canada corporate governance legislation are in relation to the roles and responsibilities of
    Directors, accountability, audit, and internal control
  38. Shareholder value can refer to...
    • - The price a shareholder can get for his/her shares
    • - increasing the value of the business to its shareholders through dividends from profits and or through capital growth

    -the fair value of the company's net assets and good will.
  39. What is a Transaction?  Where are they recorded?
    A transaction is the financial description of each business event (i.e. buying equipment, purchasing goods, paying expenses, making sales, distributing goods/services, etc).

    Transactions are recorded on source documents that form the basis for recording in a business system.  Examples of source documents are invoices and cheques.
  40. What are the five types of accounts in accounting?
    • 1.Assets: things the business owns
    • 2.Liabilities debts the business owes
    • 3.Income the revenue generated from the sale of goods and services
    • 4. Expenses the costs incurred in buying or producing the goods or services
    • 5.Shareholder's equity the capital invested int he shareholders and the retained ernings - the profit that is left int he business after all expenses have been paid and any payments of dividends have been made to the shareholders.
  41. How is profit calculated?
    Profit = income - expenses
  42. How is shareholder equity calculated?
    Equity = Assets - Liabilities
  43. What is the main calculation of accounting?
    Assets = Equity + liabilities
  44. What are the two forms that transactions take place as?
    Cash. If the business sells goods/services for cash, the double entry is an increase in income and an increase in the bank account (an asset).  If the business buys goods/services for cash, either an asset or an expense will increase (depending on what is bought).

    2. Credit. If the business sells goods/services on credit, the double entry is an increase in debt owed to the buisness - called accounts receivable.
  45. What does double entry mean?
    Double Entry means that every business transaction affects at least two accounts.  Those accounts may increase or decrease.
  46. Describe inventory/cost of goods sold relationship?
    When goods are bought that will be sold again or used as raw materials to manufacture goods that will be sold, they become an asset called inventory.  When the same goods are sold, there are two transactions:

    • a. the sale, either by cash or credit
    • b. the transfer of the cost of those goods, now sold, from inventory to an expense, called cost of sales or cost of goods sold.
  47. What is gross profit?
    Gross Profit is the difference between the price at with the goods were sold and the purchase cost of the same goods.  Importantly, the purchase of goods into inventory does not affect profit until the goods are sold. Deducting other costs, for example, rent, wages, etc, gives us Net profit.
  48. What is a ledger?
    A ledger is a collection of all the different accounts for a business
  49. What is a statement of comprhensive income
    • Income
    • Less cost of goods sold
    • Gross profit
    • Wages
    • Advertising
    • Net Profit
  50. What is the accounting period?
    The accounting period arbitury and not necessarily related to business cycles... Many businesses end their financial year at the end of the calendar year.  It's so they can compare year to year.
  51. What is accrual accounting?
    Accural accounting dictates that income is recognized when it is earned and expenses when they are incurred rather than on a cash basis.  For example, utilities expense for January belongs tot he expenses for January and should affect January's profit, even though the bill might not be paid until February.  THe accural method of accounting provides a more meaningful picture of the financial performance of a business year to year.
  52. What is the matching principle?
    Closely related to the accural principle is the matching principle.   This principle is based on the fact that profit equals income less expenses.  It is important for users of financial statements to know what the profit for a specific accounting period is.  
  53. What is a going concern
    The financial reports are prepared on the basis that the business will continue in operation for the foreseeable future, and is therefore known as a going concern.
  54. What is a cash cost/opportunity cost?
    A cash cost is the amount of cash expended (a valuable resource), whereas an opportunity cost is the lost opportunity of not doing something, which may be the loss of time, the loss of a customer, or the diminution in value of an asset (such as machinery), all equally valuable resources.
  55. What are some internal controls for information systems?
    • 1. Security controls - to prevent unauthorized access
    • 2. Application controls - i.e. designed for each individual application, such as payroll, accounting and inventory control.  The aim is to prevent, detect and correct transaction processing errors. 

    3. Network crontrols - i.e. firewalls
  56. Which one of the following equations is not correct?
    Income - expenses = profit
    assets - liabilities = equity
    income + assets = equity
    income + assets = equity
  57. A transaction to record the sale of merchandise for profit on credit would have the following effect:
    a. increase sales and decrease inventory
    b. increase profit and increase sales
    c. increase accounts receivable and increase sales
    d. all of the above
    d. all of the above
  58. A transaction to record the purchase of merchandise for cash would have the following effect:
    A. increase in expenses and decrease in assets
    B. increase in expense and assets
    C. increase in expense and liabilities
    D. total assets will not change
    D. total assets will not change
    (this multiple choice question has been scrambled)
  59. A transaction to record the purchase of an asset on credit would involve
    A. increasing assets and decreasing profit
    B. decreasing assets and increasing accounts payable
    C. increasing assets and increasing expenses
    D. increasing assets and increasing accounts payable
    D. increasing assets and increasing accounts payable
    (this multiple choice question has been scrambled)
  60. A retail business had cash of 15,000 and inventory of 70,000 on hand on January 1.  ON January 7, it sold half of the inventory on credit for 50,000 and collected half of this amount on January 26th.  The financial statement would show.... profit/cash/loss of...
    Profit of 15,000 and cash of 40,000
  61. An accounting system comprises accounts that can be grouped into...
    Assets, liability, income and expenses
  62. A transaction to record the sale of goods on credit would involve double entry for the sales value to which accounts?
    Increase accounts receivable and increase sales
  63. A transaction to record the purchase of assets on credit would involve...
    Increasing accounts payable and increasing assets
  64. A company has an income of 200,000 and expenses of 175,000 for the year.  At the end of the year, it has assets of 600,000 and liabilities of 500,000.  Equity at the end of the year is...