2. Learning Outcomes
1. Why are financial reports and accounting information important,
and who uses them?
2. What are the differences between public and private accountants,
and how has federal legislation affected their work?
3. What are the six steps in the accounting cycle?
4. In what terms does the balance sheet describe the financial
condition of an organization?
5. How does the income statement report a firm’s profitability?
6. Why is the statement of cash flows an important source of
information?
7. How can ratio analysis be used to identify a firm’s financial
strengths and weaknesses?
8. What major trends affect the accounting industry today?
3. What Is Cooking the Books?
Off-Balance-Sheet Items
• Separate subsidiary business to house
liabilities or incur expenses
• Hidden from investors
Accelerating Pre-Merger
Expenses
• Company will pay/prepay expenses
• Earnings Per Share will seem higher
Inflating Revenues
Book lump-sum amounts in a
single year when service
revenues are distributed over
several years
11. Accounting involves the _____ of the
financial activities for firms.
A. delegating
B. summarizing
C. creation
D. empowering
E. planning
Accounting provides a framework for looking
at:
A. past performance
B. current financial health
C. possible future performance
D. financial performances of different firms
E. all of the above
Managerial accounting provides all of the
following financial information EXCEPT:
A. production reports
B. payroll summaries
C. income statements
D. budgets
E. monthly sales records
Managerial accounting provides information
that would probably be most beneficial to:
A. the IRS
B. financial analysts
C. a lending officer of the bank
D. a middle manager of the company
E. shareholders
12. _____ deals with reporting to outsiders. _____
accounting deals with the internal operations of the firm.
A. Bookkeeping; Financial accounting
B. Financial accounting; Auditing
C. Auditing; Managerial accounting
D. External accounting; Internal accounting
E. Financial accounting; Managerial accounting
To ensure accuracy and consistency in the way financial
information is reported, accountants follow rules known
as:
A. accounting rules and principles
B. principled accounting procedures
C. comparable accounting standards
D. generally accepted accounting principles
E. financial accounting standards
A(n) _____ is a yearly document that describes a
firm's financial status and usually discusses a firm’s
financial activities during the past year and its
prospects for the future.
A. trial balance
B. firm summary
C. annual report
D. earnings report
E. financial analysis
13. 1. Why are financial reports and accounting
information important, and who uses them?
• CONCEPT CHECK
1. Explain who uses financial information.
2. Differentiate between financial accounting
and managerial accounting.
3. Three primary financial statements
14.
15. Public Accountants Private Accountant
• Independent accountants who serve
organizations and individuals on a fee
basis
• Auditing, the process of reviewing the
records used to prepare financial
statements, is an important
responsibility of public accountants.
• Certified Public Accountant (CPA),
complete an approved bachelor’s
degree program
• Pass a test prepared by the American
Institute of Certified Public
Accountants.
• One particular organization
• Preparing financial statements
• Auditing company records to be sure
employees follow accounting policies
and procedures,
• Developing accounting systems,
preparing tax returns,
• Providing financial information for
management decision-making
• CPA designation
• Certified Management Accountant
(CMA) include passing an
examination.
16. Public Accountant versus a Private Accountant
Advantages of Public Accounting
-Job advancement may come sooner
than in private accounting
-Position allows for specialization
-Greater variety of clients and industries
than in private accounting
-Networking opportunities
-Possibility of travel (could be an
advantage or disadvantage)
Advantages of Private Accounting
-More relaxed atmosphere than public
accounting
-Steady, flexible work environment
-Can reach management level without a
CPA
Disadvantages of Public Accounting
-Often more stressful than private
accounting
-Competitive
-Long work hours
-CPA usually required
Disadvantages of Private Accounting
-Lack of variety in job duties
-Fewer opportunities to specialize than in
public account
Lecker, Stephen. “Pros and Cons of Public vs. Private Accounting Jobs
17.
18. _____ are independent accountants who serve
organizations and individuals on a fee basis.
A. Public auditors
B. Tax reviewers
C. Financial strategists
D. Private accountants
E. Public accountants
Accountants employed within organizations are called:
A. public accountants
B. public auditors
C. private auditors
D. private accountants
E. tax consultants
An accountant who has a bachelor's degree, passes a test
prepared by the professional organization AICPA, and has a
certain number of years of on-the-job training becomes a:
A. certified public accountant
B. certified private accountant
C. professional accountant
D. financial analyst
E. certified tax specialist
The Sarbanes-Oxley Act:
A. set national requirements for becoming a practicing CPA
B. restricts the types of nonaudit services auditors can
provide audit clients
C. dealt with accounting issues relevant to NAFTA members
D. mandated the use of international accounting standards
E. made fraudulent financial reporting illegal
19. Which of the following statements about the
accounting profession is true?
A. Most CPAs first work for public accounting
firms and later become private accountants
or financial managers.
B. Managerial accountants become a
certified management accountant when
they meet the requirements of the
professional certification program.
C. Public accountants serve individuals and
organizations on a fee basis.
D. Private accountants are also called
corporate accountants.
E. All of the above statement about the
accounting profession are true.
Which of the following statements about the
accounting profession is true?
A. Accountants are typically classified as
private or public accountants.
B. Accountants cannot legally offer
management consulting services.
C. Private accountants serve individuals and
organizations on a fee basis.
D. Public accountants work for local, state, and
national agencies.
E. All of the above statement about the
accounting profession are true.
20. 2. What are the differences between public and
private accountants, and how has federal
legislation affected their work?
• CONCEPT CHECK
1. Compare the responsibilities of public and
private accountants. How are they certified?
2. Summarize the major changes affecting
accounting and corporate reporting and the
reasons for them.
21. The Accounting Equation
Things of value owned by
a firm
Firm owes to its creditors Total amount of
investment in the firm
minus any liabilities
Net Worth
Double-Entry Bookkeeping
23. Data Analysis
• In the MANAGING CHANGE box of
Section 14.3, the value of data analytic
tools to today’s accountants is
discussed. In fact, the text goes as far as
to call this movement toward data
analytics a “seismic shift”. Perhaps the
authors of the text were referring to the
idea that modern accountants must not
only help business leaders accurately
report financial information, but also
assist them to forecast future
performance.
• View the video in which the presenter
summarizes the current importance of
data analysis to the accounting
profession, and moreover offers 5 free
tools tools that accountants would find
useful.
24. Data Analysis
1. With how many of these are you familiar? Probably, Excel for sure, but
what about Tableau or the others?
2. Not only are these 5 tools highly useful to accountants, but you may wish
to check out each analytics platform and consider learning about them
to further your value as a business professional.
26. Which of the following is an example of an
asset that might be owned by a minor
league baseball team?
A. salaries owed to its players
B. the cost of getting tickets printed
C. reputation as a winning team
D. the price made for advertising on local
radio
E. all of these
Which of the following is an example of a
liability that might be owned by an antique
mall?
A. an expensive Chinese urn with a small
crack
B. the sales prices paid by customers
C. promotional signs
D. money owed to utility companies
E. accounting and inventory software
Another term for owners' equity is:
A. assets
B. liabilities
C. net worth
D. gross worth
E. gross sales
Which of the following calculations is a formal
expression of the accounting equation?
A. assets + liabilities = owners' equity
B. assets liabilities = retained earnings
C. assets - owners' equity = liabilities
D. assets = liabilities + owners' equity
E. assets/liabilities = owners’ equity
27. In accounting, every transaction must be
recorded as two entries. This system is
called:
A. accounting-cycle bookkeeping
B. double-entry bookkeeping
C. dual-notation bookkeeping
D. double-decker bookkeeping
E. tandem record keeping
The first step in the accounting cycle is to:
A. analyze business transaction documents
B. prepare financial statements
C. analyze financial statements
D. prepare trial balance
E. post entries to ledger
Computers can enhance accounting by:
A. preparing tax returns
B. handling general ledger functions
C. controlling purchase orders
D. providing a means to control inventory
E. doing all of these
The last step in the accounting cycle is to:
A. analyze business transaction documents
B. prepare financial statements
C. analyze financial statements and
management reports
D. prepare trial balance
E. post entries to ledger
28. 3. What are the six steps in the accounting cycle?
• CONCEPT CHECK
1. Explain the accounting equation.
2. Describe the six-step accounting cycle.
3. What role do computers and other
technology play in accounting?
29. Table 14.1 Balance Sheet for Delicious Desserts
Summarizes a firm’s financial
position at a specific point in time.
Reports the resources of a company
(assets), the company’s obligations
(liabilities), and the difference
between what is owned (assets) and
what is owed (liabilities), or owners’
equity.
The assets are listed in order of their
liquidity, the speed with which they
can be converted to cash.
30. Table 14.1 Balance Sheet for Delicious Desserts, continued
Current assets are assets that can or
will be converted to cash within the
next 12 months.
Fixed assets are long-term assets
used by the firm for more than a year.
Depreciation is the allocation of the
asset’s original cost to the years in
which it is expected to produce
revenues.
Intangible assets are long-term assets
with no physical existence; common
examples are patents, copyrights,
trademarks, and goodwill.
31. Table 14.1 Balance Sheet for Delicious Desserts, continued
Liabilities are the amounts a
firm owes to creditors.
Current liabilities are those due
within a year of the date of the
balance sheet.
Long-term liabilities come due
more than one year after the
date of the balance sheet.
Owners’ equity is the owners’
total investment in the business
after all liabilities have been
paid.
Retained earnings are the
amounts left over from
profitable operations since the
firm’s beginning.
32. Current asset Current liabilities Fixed assets Long-term
liabilities
May include cash
and accounts
receivable
May include
accounts payable
and wages due to
employees.
May include
equipment and
furniture.
May include
mortgages or loans
on a large piece of
equipment.
Owners’ equity Retained earnings
Owners’ total investment in the business
after all liabilities have been paid..
The amounts left over from profitable
operations since the firm’s beginning
Total profits minus all dividends
(distributions of profits) paid to
stockholders.
33. The _____ summarizes an organization's
financial status at the end of an accounting
period.
A. trial balance
B. income statement
C. cash flow statement
D. balance sheet
E. accounts payable ledger
Amounts owed to the firm by customers
who bought goods and services on credit are
called:
A. accounts receivable
B. owners' equity
C. notes payable
D. marketable receivables
E. accounts payable
Which of the following is the BEST example of a
current asset for a university bookstore?
A. the building in which the store is located
B. accounting software used to control store's
inventory
C. credit card charges by book buyers
D. money paid for rent and utilities
E. salary paid to student employees
Fixed assets are property and buildings that a
firm expects to use for more than:
A. one month
B. six months
C. one year
D. two years
E. five years
34. _____ is the process of distributing the
original cost of a long-term asset over the
years of its useful life.
A. Depreciation
B. Appreciation
C. Accountable life
D. Cost distribution
E. Amortization
Sullins Cleaning Service has purchased a new
pressure washer for $18,000. Sullins
Cleaning is allowed to charge a portion of
the company’s cost during its useful life
against the profits it generates. This practice
is called:
A. amortization
B. deceleration
C. acceleration
D. depreciation
E. appreciation
_____ are debts that are to be paid within
twelve months.
A. Fixed liabilities
B. Current assets
C. Fixed assets
D. Current liabilities
E. Intangible liabilities
A short-term loan from a bank, supplier, or
others that must be repaid within a year is a(n):
A. account payable
B. note payable
C. account receivable
D. note receivable
E. prepaid payable
35. Trademarks, franchises, patents, and
copyrights are carried on the company's
books as:
A. tangible assets
B. intangible assets
C. owners' equity
D. long-term assets
E. goodwill
In 2006, the retail industry voted the Bike
Gallery as one of the top 100 bicycle
retailers in the United States. It recently
purchased a truckload of Thule brand bike
racks from the manufacturer. Until the Bike
Gallery pays the bill, the purchase will be
carried on Thule's books as a(n):
A. account receivable
B. intangible asset
C. account payable
D. current asset
E. fixed liability
Ennis Worth has a six-month loan for $7,500
that he used to refurbish the fishing boat he
uses to earn his living. This loan is an example
of:
A. a current liability
B. owners' equity
C. a long-term liability
D. a current asset
E. a fixed asset
Which of the following terms equals the total
profits of a company minus all dividends
(distributions of profits) to stockholders?
A. owners' equity
B. net worth
C. net earnings
D. retained earnings
E. current equity
36. 4. In what terms does the balance sheet describe the
financial condition of an organization?
• CONCEPT CHECK
• What is a balance sheet?
• What are the three main categories of
accounts on the balance sheet, and how do
they relate to the accounting equation?
• How do retained earnings relate to owners’
equity?
37. Table 14.2 Income Statement for Delicious Desserts
Revenues
Sales plus any other income received
from sources such as interest,
dividends, and rents.
Gross Sales
Total dollar amount of a company’s
sales.
Net sales
Amount left after deducting sales
discounts and returns and allowances
from gross sales.
38. Table 14.2 Income Statement for Delicious Desserts, continued
Expenses
Costs of generating revenues. Two types
are recorded on the income statement:
Cost of Goods Sold Operating Expenses
Total expense of
buying or producing
the firm’s goods or
services
Expenses of running
the business that
are not related
directly to
producing or buying
its products.
Net Profit or Loss
It is calculated by subtracting all
expenses from revenues.
39. A(n) _____ is a summary of what a company
has earned and spent over a given period.
A. balance sheet
B. trial balance
C. income statement
D. cash flow statement
E. annual stockholders’ report
The dollar amount of sales plus any other
income received from sources like interest
and dividends is called:
A. equities
B. intangible assets
C. capital
D. revenues
E. gross profit
Gross sales for Nevada Silver, a retailer of silver
jewelry was $120,000 for the month of May.
Sales discounts amounted to $18,000. There
were no returns. The difference, $102,000, is
Nevada Silver’s:
A. gross profit
B. cost of goods sold
C. gross revenues
D. net sales
E. gross sales
There are two types of expenses recorded on
the income statement. They are:
A. cost of goods sold and production costs
B. production costs and sales expense
C. operating expenses and administrative
expenses
D. sales expense and cost of goods sold
E. cost of goods sold and operating expenses
40. In manufacturing, all costs directly related to
production including raw materials, labor,
and factory overhead are classified as:
A. operating expenses
B. inventory expenses
C. cost of goods sold
D. intangible profits
E. administrative expenses
After all expenses have been subtracted
from revenues on an income statement, the
final figure or bottom line is called the _____
when it is a positive number.
A. gross profit
B. net revenue
C. net profit
D. owners’ equity
E. net sale
The difference between net sales and cost of
goods sold is:
A. net income
B. net revenues
C. gross profit
D. general income
E. gross revenues
After all expenses have been subtracted from
revenues on an income statement, the final
figure or bottom line is called the _____ when it
is a negative number.
A. negative liability
B. net liability
C. net loss
D. owners’ negative equity
E. net expense
41. 5. How does the income statement report a firm’s
profitability?
• CONCEPT CHECK
1. What is an income statement? How does it
differ from the balance sheet?
2. Describe the key parts of the income
statement. Distinguish between gross sales
and net sales.
3. How is net profit or loss calculated?
42. Table 14.3 Statement of Cash Flows for Delicious Desserts
Summary of the money flowing into and out
of a firm
Cash flow from operating activities
• Related to the production of the firm’s
goods or services
Cash flow from investment activities
• Related to the purchase and sale of fixed
assets
Cash flow from financing activities
• Related to debt and equity financing
43. What is a fiscal year?
Accounting period of 365 consecutive days that a company uses for preparing its
financial statements.
A fiscal year does not always reflect the calendar year, since the Internal Revenue
Service (IRS) allows companies to choose their 12-month consecutive reporting period.
44. A(n) _____ is a summary of the money
flowing into and out of a firm.
A. balance sheet
B. short-term budget
C. income statement
D. statement of cash flows
E. annual stockholders’ report
On a statement of cash flows for a pizza
restaurant, the cash flows from investment
activities section would include:
A. the brick oven stove used to cook the
pizzas
B. the aprons the employee's wear
C. the table linens
D. the recipes used by the restaurant
E. the delivery service provided by the
restaurant
On a statement of cash flows for a
manufacturer of digital thermometers, the
cash flows from operating activities would
include:
A. the money borrowed from the bank to start
the company
B. the sale of land adjacent to the
manufacturer’s administrative office building
C. repayment of long-term loan by a
wholesaler of weather-related items
D. purchase of new $25,000 copying machine
E. increases in the manufacturer’s inventory
On a statement of cash flows for a provider of tutoring
services, the cash flows from financing activities would
include:
A. the flashcards used to tutor math students
B. the promotional sign at the entrance to the building
where the tutoring takes place
C. the money borrowed to purchase the furniture in the
tutorial area and the interest owed on that debt
D. the reputation of the tutors working for the service
E. the students who benefit from the service
45. 6. Why is the statement of cash flows an important
source of information?
• CONCEPT CHECK
1. What is the purpose of the statement of
cash flows?
2. Why has cash flow become such an
important measure of a firm’s financial
condition?
46. Liquidity ratios
Measure the firm’s ability to pay its short-term debts as they come due
Current Ratio
Ratio of total current assets to total current liabilities. Traditionally, a
current ratio of 2 ($2 of current assets for every $1 of current liabilities) has
been considered good.
Net working capital
Used to measure a firm’s overall liquidity;
Calculated by subtracting total current liabilities from total current assets.
Acid-Test Ratio
Excludes inventory, which is the least liquid current asset.
The acid-test ratio is used to measure the firm’s ability to pay its current
liabilities without selling inventory.
47. Profitability ratios
Measure how well the firm is using its resources to generate profit and how
efficiently it is being managed
Net Profit Margin Return on Equity (ROE) Earnings per share (EPS)
Ratio of net profit to net
sales is the, also called
return on sales.
Net profit to total owners’
equity
Net profit to the number
of shares of common stock
outstanding
Measures the percentage
of each sales dollar
remaining after all
expenses
Measures the return that
owners receive on their
investment in the firm, a
major reason for investing
in a company’s stock.
Measures the number of
dollars earned by each
share of stock.
48. Inventory turnover ratio
• Measures the speed with which
inventory moves through the firm
and is turned into sales;
• Calculated by dividing cost of goods
sold by the average inventory.
Activity ratios
Measure how well a firm uses its assets.
49. Debt-to-Equity ratio
Measures the relationship
between the amount of debt
financing (borrowing) and the
amount of equity financing
(owners’ funds).
Debt Ratios
• Measure the degree and effect of the firm’s use of
borrowed funds to finance its operations.
50. _____ involves calculating and interpreting
financial ratios taken from the firm’s financial
statements in order to assess its condition
and performance.
A. Organizational performance appraisal
B. Performance analysis
C. Financial reporting
D. Ratio analysis
E. Benchmarking
The ratios that are of special interest to the
firm's creditors and measure the firm's ability to
pay short-term debts as they come due are
called _____ ratios.
A. profitability
B. earnings
C. liquidity
D. current
E. activity
The ratio of total current assets to current
liabilities is called the _____ ratio.
A. profitability
B. activity
C. net margin
D. net worth
E. current
The _____ ratio is a measure of the firm's ability
to pay its current liabilities once inventory is
subtracted from current assets.
A. inventory
B. net worth
C. net margin
D. profitability
E. acid-test
51. _____ is arrived at by subtracting current
liabilities from current assets.
A. Net margin
B. Owners’ equity
C. Net profit
D. Retained earning
E. Net working capital
The ratio of net profit to the number of shares of
common stock outstanding is called the:
A. equity earnings
B. earnings per share
C. earnings for profit
D. stock-to-earnings ratio
E. profitability index
The ratio of net profit to total owners' equity is
called return on:
A. sales
B. earnings
C. equity
D. margin
E. inventory
_____ ratios reflect the speed with which
resources are converted to cash or sales.
A. Profitability
B. Equity
C. Leverage
D. Activity
E. Liquidity
52. By dividing cost of goods sold by the average
inventory to measure the speed with which
inventory moves through the firm and is
turned into sales, the _____ ratio is
calculated.
A. profitability
B. price-earnings
C. total asset
D. inventory turnover
E. sales to inventory
The _____ ratio measures the relationship
between the amount of debt financing and the
amount of equity financing.
A. liability-to-asset
B. sales-to-ownership
C. debt-to-revenue
D. liability-to-ownership
E. debt-to-equity
____ ratios measure the degree and effect of the
firm's use of borrowed funds to finance its
operations.
A. Equity
B. Liquidity
C. Income
D. Profitability
E. Debt
The Art Institute, a school for training artists to
be financially self-sufficient, has a debt-to-equity
ratio of 120 percent. This means the school has:
A. excessive liquidity
B. more debt than equity
C. surplus retained earnings
D. high accrued expenses
E. more equity than debt
53. Table 14.4 Ratio Analysis for Delicious Desserts at Year-End 2018
54. 7. How can ratio analysis be used to identify a firm’s
financial strengths and weaknesses?
• CONCEPT CHECK
1. How can ratio analysis be used to interpret
financial statements?
2. Name the main liquidity and profitability
ratios, and explain what they indicate.
3. What kinds of information do activity ratios
give? Why are debt ratios of concern to
lenders and investors?
55. Trends in Accounting
Cloud-Based Accounting
Companies and firms can have
access to their system anytime
Utilizing Social Media
• improve brand awareness
• increases sales
• drive website traffic
56.
57. Common set of accepted accounting
• Principles
• Standards
• Procedures
Companies and their accountants
must follow when they compile their
financial statements.
States how particular types of
transactions and other events should
be reported in financial statements
International Accounting Standards
Board (IASB)
• Specify exactly how accountants
must maintain and report their
accounts
58. How has the Sarbanes-Oxley Act affected accountants?
A. It has made financial statements reviewable by the SEC.
B. It has allowed companies to replace accountants with
accounting software.
C. It has made in possible for a U.S.-trained accountant to
pursue his or her craft in all countries of the world.
D. It requires accountants to conduct an environmental scan
for all customers.
E. It has eliminated many nonauditing tasks they use to
provide for their customers.
The Financial Accounting Standards Board (FASB) is
currently:
A. pushing for major changes in GAAP
B. creating international accounting regulations
C. calling for the repeal of Sarbanes-Oxley
D. encouraging accountants to serve as their clients'
advisors
E. lobbying to change the format of the balance sheet
so it can reflect a more ethical environment
