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Questions and Answers
The accounting profession in Canada is unifying under the ______ designation.
The accounting profession in Canada is unifying under the ______ designation.
Chartered Professional Accountant (CPA)
______ accounting supports the decisions of internal clients, while ______ accounting provides information to external users like shareholders, banks, and the government.
______ accounting supports the decisions of internal clients, while ______ accounting provides information to external users like shareholders, banks, and the government.
Which of the following is categorized as a current asset?
Which of the following is categorized as a current asset?
A _______ provides details about the generation of cash and the use of cash in a given time period.
A _______ provides details about the generation of cash and the use of cash in a given time period.
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The ______ ratio is an indicator of how efficiently the firm's managers utilized investor resources.
The ______ ratio is an indicator of how efficiently the firm's managers utilized investor resources.
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What is the accounting equation?
What is the accounting equation?
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What are the three basic financial statements?
What are the three basic financial statements?
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Financial accounting is directed at internal parties (managers) and provides information to facilitate planning, forecasting, and decision-making.
Financial accounting is directed at internal parties (managers) and provides information to facilitate planning, forecasting, and decision-making.
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What is the role of ethics in accounting?
What is the role of ethics in accounting?
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Depreciation is the process of distributing the cost of a major asset over its lifetime, deducted annually.
Depreciation is the process of distributing the cost of a major asset over its lifetime, deducted annually.
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Goodwill is a non-physical asset with economic value that is easily calculated.
Goodwill is a non-physical asset with economic value that is easily calculated.
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The inventory turnover ratio measures the average number of times inventory is sold and restocked quarterly.
The inventory turnover ratio measures the average number of times inventory is sold and restocked quarterly.
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How can computing financial ratios help investors and other stakeholders interpret information from financial statements?
How can computing financial ratios help investors and other stakeholders interpret information from financial statements?
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Study Notes
Business Essentials - Chapter 11: Understanding Accounting
- Accounting is a comprehensive system for collecting, analyzing, and communicating financial information.
- Bookkeeping records accounting transactions.
- Accounting Information System (AIS) is an organized procedure for identifying, measuring, recording, and retaining financial information.
- Users of accounting information include business managers, employees and unions, investors and creditors, taxing authorities, and government regulatory agencies.
- The controller is the head of the Accounting Information System (AIS). They ensure the system provides reports and statements needed for planning, controlling, and decision-making.
- Financial accounting keeps external parties informed about a firm's financial condition.
- Managerial accounting is directed at internal parties (managers) and provides information to facilitate planning, forecasting, and decision-making.
- Professional accountants include chartered accountants (CA), certified general accountants (CGA), and certified management accountants (CMA). These are unifying under the Chartered Professional Accountant (CPA) designation.
- Accounting services include auditing, tax services, and management consulting.
- Auditing examines financial records to ensure fair representation (GAAP).
- Tax services include tax return preparation and planning.
- Management consulting includes personal financial planning for businesses.
- Private accountants are hired as salaried employees, covering day-to-day accounting needs. Small businesses may have just one, while larger businesses may have area specialists (e.g., budgeting, taxation, accounts payable).
- The accounting cycle includes analyzing transactions from documents (e.g., sales slips, travel expenses), recording transactions in a journal, transferring entries to a ledger, creating a trial balance, preparing financial statements (such as income statement, balance sheet, and statement of cash flows), and analyzing the statements.
- The International Accounting Standards Board (IASB) has members in over 80 countries to eliminate differences in financial reporting. IASB statements include income statements, balance sheets, and statements of cash flows.
- International Financial Reporting Standards (IFRS) are standard accounting rules developed by the IASB, used by publicly accountable enterprises and private government enterprises.
- Accounting Standard For Private Enterprises (ASPE) are standard accounting rules used by private businesses in Canada.
- Assets are anything of economic value owned by a firm or individual.
- Liabilities are any debt owed by a firm or individual.
- Owners' equity is the positive difference between a firm's assets and liabilities.
- The accounting equation states that Assets = Liabilities + Owners' Equity.
- Financial statements reflect activity and financial condition of a company, including balance sheets, income statements, and statements of cash flow.
- Balance sheets provide details about the accounting equation factors (Assets, Liabilities, Owner's Equity) and shows a firm's financial condition at one point in time.
- Current assets include cash, accounts receivable, inventory, and prepaid expenses.
- Fixed assets include land, buildings, and machinery. Depreciation is the distributing of the cost of a major asset over its lifetime, deducted yearly.
- Intangible assets are non-physical assets with economic value (e.g., patents, trademarks, franchise fees, copyrights).
- Goodwill is the amount paid for an existing business beyond the value of its other assets.
- Current liabilities are debts owed (e.g., accounts payable) that must be repaid within one year.
- Long-term liabilities are debts owed and due in more than one year.
- Income statements (profit and loss statements) describe revenues and expenses to show the firm's annual profit or loss. Formula: Revenues - Expenses = Profit (or loss).
- Statements of cash flows provide details about the generation of cash and the use of cash in a given time period. Cash flows are sorted into operations, investments, and financing activities.
- Revenue recognition is the formal recording and reporting of revenues in financial statements once the earnings cycle is completed.
- Matching ensures expenses are matched with revenues to show net income for an accounting period.
- A budget is a detailed financial plan of estimated receipts and expenditures for a future period.
- Budgeting is an internal financial statement that usually covers 1 year and requires input from other departments, comparing actual vs. budget to signal problems.
- Analyzing financial statements may include solvency ratios (short-term and long-term, estimate of risk), profitability ratios (measure potential earnings), or activity ratios (reflect management's use of assets).
- Solvency ratios examples are short term (current ratio), and long term (debt-to-equity and leverage).
- Profitability ratios examples are return on equity, return on sales, and earnings per share.
- Activity ratios examples are inventory turnover ratio (cost of goods sold/average inventory).
- Accounting ethics help maintain public confidence in business institutions, financial markets, and the accounting profession.
Quick-Check Questions and Answers
- (Question 1):* The accounting profession in Canada is unifying under the Chartered Professional Accountant (CPA) designation.
- (Question 2):* Managerial accounting supports internal clients, while financial accounting provides information to external users (shareholders, banks, and government).
- (Question 3):* Accounts receivable is a current asset.
- (Question 4):* A statement of cash flows provides details about the generation and use of cash.
- (Question 5):* The debt-to-equity ratio is an indicator of how effectively the firm's managers utilized investor resources.
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