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Questions and Answers
What is the primary focus of financial accounting?
What is the primary focus of financial accounting?
Which of the following best describes bookkeeping?
Which of the following best describes bookkeeping?
How do creditors primarily use accounting information?
How do creditors primarily use accounting information?
What are the three basic financial statements?
What are the three basic financial statements?
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Who primarily benefits from managerial accounting?
Who primarily benefits from managerial accounting?
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What is the primary role of a controller in a firm?
What is the primary role of a controller in a firm?
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Which statement accurately describes Generally Accepted Accounting Principles (GAAP)?
Which statement accurately describes Generally Accepted Accounting Principles (GAAP)?
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What is the definition of Owners' Equity?
What is the definition of Owners' Equity?
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Which of the following is NOT typically a service provided by CPAs?
Which of the following is NOT typically a service provided by CPAs?
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What does the accounting equation Assets = Liabilities + Owners' Equity represent?
What does the accounting equation Assets = Liabilities + Owners' Equity represent?
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What does a Statement of Financial Position primarily provide information about?
What does a Statement of Financial Position primarily provide information about?
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Which of the following is classified as a current asset?
Which of the following is classified as a current asset?
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What characterizes long-term liabilities?
What characterizes long-term liabilities?
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Which of the following components is included in owners' equity?
Which of the following components is included in owners' equity?
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What is represented by retained earnings?
What is represented by retained earnings?
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What is the primary purpose of an income statement?
What is the primary purpose of an income statement?
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In the profit calculation formula Profit = Revenues - Expenses, what do the revenues represent?
In the profit calculation formula Profit = Revenues - Expenses, what do the revenues represent?
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Which of the following is a characteristic of fixed assets?
Which of the following is a characteristic of fixed assets?
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What are accounts payable classified as?
What are accounts payable classified as?
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Which of the following best describes a short-term deposit?
Which of the following best describes a short-term deposit?
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Study Notes
Chapter 12: Accounting Information
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Learning Outcomes:
- Explain the role of accountants, distinguishing public and private accountants' work.
- Explain the accounting equation's application.
- Describe the three main financial statements.
- Explain reporting standards and principles for financial statements.
- Explain how financial ratios provide more insights into a business's financial strength.
What is Accounting?
- Accounting: A comprehensive system for gathering, analyzing, and communicating financial information.
- Bookkeeping: Recording accounting transactions.
Who Uses Accounting Information?
- Business managers: Use accounting information to set goals, create budgets, and evaluate prospects.
- Employees and unions: Use it to plan compensation and benefits.
- Investors: Use it to estimate returns, assess growth prospects, and make investment decisions.
- Creditors: Use it to determine the creditworthiness of a company.
- Tax authorities: Use it to plan tax inflows, determine tax liabilities, ensure timely tax payments.
- Government regulatory agencies: Use it to fulfill public duties.
Financial versus Managerial Accounting
- Financial Accounting: Focuses on external users of a company's financial information.
- Managerial Accounting: Focuses on internal users of a company's financial information.
Who Are Accountants and What Do They Do?
- Controller: Manages all accounting activities within a firm (chief accounting officer).
- Certified Public Accountant (CPA): Licensed by the state and provides services to the public.
- Private Accountant: Salaried professional hired by a company to manage daily accounting activities.
CPA Services
- Audit: Systematic examination of a company's accounting system to ensure reports reflect operations accurately.
- Generally Accepted Accounting Principles (GAAP): Guidelines for the content and format of financial reports.
- Tax Services: CPAs provide assistance for tax preparation and planning.
- Management Advisory Services: CPA firms provide guidance in areas like financial planning and information systems design.
The Accounting Equation
- Assets = Liabilities + Owners' Equity: Fundamental accounting equation. This equation helps accountants balance data for the company's financial transactions throughout the year.
- Asset: An economic resource expected to benefit the firm or individual owning it.
- Liability: Debt owed by the firm to an outside organization or individual.
- Owners' Equity: The amount owners would receive if all assets are sold, and liabilities are paid.
Financial Statements
- Financial Statement: A report summarizing a company's financial status for stakeholders and managerial decision-making.
- It includes:
- Statement of financial position (balance sheet),
- Income statement,
- Statement of cash flows.
Statement of Financial Position (Balance Sheets)
- Balance Sheet: Provides a snapshot of a firm's assets, liabilities, and owners' equity at a specific point in time.
- Current Asset: An asset that can be converted into cash within one year. (e.g., cash, short-term deposits, accounts receivable)
- Fixed Asset (non-current asset): An asset with long-term use or value. (e.g., land, buildings, equipment)
- Current Liability: A debt that must be paid within one year. (e.g., accounts payable; expenses that are yet to be paid.)
- Long-Term Liability: A debt not due for at least one year.
- Owners' Equity (or Shareholders Equity): The difference between assets and liabilities; the amount owners would receive if assets were sold and liabilities paid.
Income Statements
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Income Statement: Summarizes a company's revenues and expenses over a period, revealing profit or loss.
- Revenue/ Sales: Funds flowing into a business from sales of goods or services.
- Cost of Goods Sold (Cost of Revenues): Costs for materials to produce sold goods during the reporting period.
- Gross Profit: Revenues minus cost of goods sold.
- Operating Expenses: Costs (excluding cost of goods sold) incurred in producing goods or services.
- Operating Income: Calculation of profit after considering operating expenses.
- Net Income (Net Profit): Profit after all expenses and taxes are deducted.
Statement of Cash Flows
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Statement of Cash Flows: Describes a firm's yearly cash receipts and payments. It includes:
- Cash Flows from Operations: Cash inflows and outflows from routine business activities.
- Cash Flows from Investing: Cash inflows and outflows from investments of a company (buying and selling securities, equipment, or property).
- Cash Flows from Financing: Cash inflows and outflows from financing activities (issuing stocks, paying dividends, and repaying debt).
The Budget: An Internal Financial Statement
- Budget: A detailed statement of estimated receipts and expenditures for a future period.
Analyzing Financial Statements
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Financial Ratio: A quotient of two accounting figures used to assess a business's potential.
- Solvency Ratio: Measures a company's ability to meet short-term and long-term debts.
- Profitability Ratio: Assessing earnings power for owners (e.g. return on equity).
- Activity Ratio: Measures management's efficiency using its assets.
Reporting Standards and Practices
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Revenue Recognition: Formal accounting of revenues at the correct time. It involves:
- Sale completed and product delivered or services rendered.
- Sale price collected or collectible.
- Full Disclosure: Financial reporting should include numbers and management interpretations.
Additional Financial Ratios (Examples)
- Current ratio = Current assets / Current liabilities
- Return on Equity (ROE) = Net Income / Total owners' equity
- Earnings Per Share (EPS) = Net income / Number of common shares outstanding
- Debt-to-Owners' Equity ratio = Debt / Owners' Equity
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Description
This quiz covers essential concepts in Chapter 12 of Accounting, including the roles of public and private accountants, the application of the accounting equation, and an overview of financial statements. Learn about reporting standards, principles, and how financial ratios enhance understanding of a business's health.
