question

Examine how information can reduce risk when making a decision.

answer

The more information a manager has, the less risk there is that a decision will be incorrect. Information produces knowledge and empowers managers and employees to make better decisions. Because of the volume of information they receive each day and their need to make decisions on a daily basis, business people use information rules to shorten the time spent analyzing choices. Information rules emerge when business research confirms the same results each time it studies the same or a similar set of circumstances. Although many people use the terms data and information interchangeably, there is a difference. Data are numerical or verbal descriptions that usually result from some sort of measurement. Information is data presented in a form that is useful for a specific purpose. A database is a single collection of data and information stored in one place that can be used by people throughout an organization to make decisions. Although databases are important, the way the data and information are used is even more important. As a result, management information experts now use the term knowledge management (KM) to describe a firm's procedures for generating, using, and sharing the data and information.

question

Discuss management's information requirements.

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A management information system (MIS) is a means of providing managers with the information they need to perform their jobs as effectively as possible. The purpose of an MIS (sometimes referred to as an information technology system or simply IT system) is to distribute timely and useful information from both internal and external sources to the decision makers who need it. The specific types of information managers need depend on their area of management and level within the firm. The size and complexity of an MIS must be tailored to the information needs of the organization it serves.

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Outline the five functions of an information system.

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The five functions performed by an MIS system are collecting data, storing data, updating data, processing data into information, and presenting information. Data may be collected from internal sources and external sources. An MIS must be able to store data until they are needed and to update them regularly to ensure that the information presented to managers and employees is accurate, complete, and timely. Data processing is the MIS function that transforms stored data into a form useful for a specific purpose. Finally, the processed data (which now can be called information) must be presented for use. Verbal information generally is presented in the form of a report. Numerical information most often is displayed in graphs, charts, or tables. In addition to the five basic functions performed by an MIS, managers and employees can use a decision-support system (DSS), an executive information system (EIS), expert system, and business application software to make decisions and to report data and information.

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Explain why accurate accounting information and audited financial statements are important.

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Accounting is the process of systematically collecting, analyzing, and reporting financial information. It can be used to answer questions about what has happened in the past; it also can be used to help make decisions about the future. The purpose of an audit is to make sure that a firm's financial statements have been prepared in accordance with generally accepted accounting principles. To help ensure that corporate financial information is accurate and in response to the accounting scandals that surfaced in the last few years, the Sarbanes-Oxley Act was signed into law. This law contains a number of provisions designed to restore public confidence in the accounting industry. Although many people think all accountants do the same thing, typical areas of expertise include managerial, financial, cost, tax, government, and not-for-profit. A private accountant is employed by a private firm. A public accountant performs accounting work for various individuals or firms on a fee basis. Most accounting firms include on their staffs at least one CPA.

question

Read and interpret a balance sheet.

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A balance sheet (sometimes referred to as a statement of financial position) is a summary of a firm's assets, liabilities, and owners' equity accounts at the end of an accounting period. This statement must demonstrate that the accounting equation is in balance. On the balance sheet, assets are categorized as current, fixed, or intangible. Similarly, liabilities can be divided into current liabilities and long-term liabilities. For a sole proprietorship or partnership, owners' equity is shown as the difference between assets and liabilities. For corporations, the owners' equity section reports the values of stock and retained earnings.

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Read and interpret an income statement.

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An income statement is a summary of a firm's financial operations during the specified accounting period. On the income statement, the company's gross profit is computed by subtracting the cost of goods sold from net sales. Operating expenses and interest expense then are deducted to compute net income before taxes. Finally, income taxes are deducted to obtain the firm's net income after taxes.

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Describe business activities that affect a firm's cash flow.

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Since 1987, the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) have required all publicly traded companies to include a statement of cash flows in their annual reports. This statement illustrates how the company's operating, investing, and financing activities affect cash during an accounting period. Together, the cash flow statement, balance sheet, and income statement illustrate the results of past decisions and the business's ability to pay debts and dividends as well as to finance new growth

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Summarize how managers evaluate the financial health of a business.

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The firm's financial statements and its accounting information become more meaningful when compared with information for competitors, for the industry in which the firm operates, and corresponding information for previous years. Such comparisons permit managers, employees, lenders, investors, and other interested people to pick out trends in growth, borrowing, income, and other business variables and to determine whether the firm is on the way to accomplishing its long-term goals. A number of financial ratios can be computed from the information in a firm's financial statements. These ratios provide a picture of a firm's profitability, its ability to pay its debts, and how often it sells its inventory. Like the information on the firm's financial statements, these ratios can and should be compared with information for competitors, for the industry in which the firm operates, and corresponding information for previous years.

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GAAPs have been developed to provide guidelines for the majority of international companies. a. True b. False

answer

b. False

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Much of the accounting information of a firm is proprietary, meaning it is not shared with anyone outside the firm. a. True b. False

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b. False

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Cost accounting determines the expense of producing specific products and services. a. True b. False

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a. True

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Accountants are generally classified as either for-profit or non-profit accountants. a. True b. False

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b. False

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Analyzing source documents is a step in the accounting cycle that's usually performed only at the end of an accounting period. a. True b. False

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b. False

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Retained earnings are revenue minus expenses in a business. a. True b. False

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b. False

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Net sales are the sales of goods and services after adjustments for permanent and temporary expenses are made. a. True b. False

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b. False

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A firm's operating expenses are all business costs including cost of goods sold. a. True b. False

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b. False

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Accounts receivable turnover is the number of times the firm collects its accounts receivable in one year. a. True b. False

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a. True

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The current ratio divides current assets by owners' equity. a. True b. False

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b. False

question

According to the text, which of the following U.S. companies has been convicted or accused of accounting fraud? a. Bank of America b. Costco c. Lehman Brothers d. McDonalds e. Walmart

answer

c. Lehman Brothers

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There is pressure on publicly held companies to look good to Wall Street analysts and investors. Companies report their revenues, expenses, profits, and projects a. quarterly. b. every month. c. bi-annually. d. annually. e. every six months.

answer

a. quarterly.

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Which of the following is not a component of the Sarbanes-Oxley Act? a. There is added whistle-blower protection. b. Public corporations must change lead auditing firms every five years. c. CEOs are liable for intentional violations of securities reporting requirements. d. It includes clear international audit procedures. e. Audit work papers must be maintained for five years.

answer

d. It includes clear international audit procedures.

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The primary user group that confirms tax liabilities are a. suppliers. b. stockholders and potential investors. c. management. d. lenders. e. government agencies.

answer

e. government agencies.

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Having adequate cash balances to help a business survive in a down economy is critical. The financial ratio that would be most important to keep track of with this approach would be the: a. return on sales b. earnings per share c. inventory turnover ratio d. current ratio

answer

d. current ratio

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In an economic downturn, management may need to depend on "internally generated cash" to operate the business. Which of the following would be considered a source of internally generated cash? a. Adjusting component and/or raw material inventory replenishment strategies b. Selling excess merchandise inventory at a discounted price c. All of these statements are correct. d. Collecting outstanding accounts receivable

answer

c. All of these statements are correct.

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Last year a furniture store had an average inventory of $40,000, and its cost of goods sold was $200,000. How many times did the store replace its inventory last year? a. Three times b. Two times c. Five times d. Four times e. It can't be determined with this information.

answer

c. Five times

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Portland Metro Advertising, Inc., has become a leader at understanding its market and using data and information in ways that are important and valuable to the firm. The management information team describes its process of generating, using, and sharing data and information as a. knowledge management. b. dataprocessing. c. an expert system. d. an MIS. e. an executive information system.

answer

a. knowledge management.

question

Evaluating financial statements permits managers, lenders, suppliers, and investors to do all of the following except a. identify trends in sales and profits. b. retain a firm's earnings. c. analyze borrowing needs. d. determine whether the firm is on track with its long-term goals. e. identify business variables.

answer

a. identify trends in sales and profits.

question

Nearly a year ago MariElena acquired her first accounting job with an accounting firm after finishing her undergraduate degree in accounting and passing the CPA exam. While consulting with Oakland City Paving, MariElena quickly noticed the lack of accounting understanding not only by employees but also by most of the mid-level managers. Her recent education is a big help to the company and she's been approached by several of the managers to share some of her knowledge and understanding with other employees. The CEO has encouraged her to start a series of short, semi-formal sessions that share some of her accounting knowledge with others. MariElena thinks she will start with a brief discussion of her education and experience. MariElena is a _____ accountant and she has passed the _____ requirements in order to be a CPA. a. private; state b. public; state c. private; federal d. public; regional e. public; federal

answer

b. public; state

question

Nearly a year ago MariElena acquired her first accounting job with an accounting firm after finishing her undergraduate degree in accounting and passing the CPA exam. Whileconsulting withOakland City Paving, MariElena quickly noticed the lack of accounting understanding not only by employees but also by most of the mid-level managers. Her recent education is a big help to the company and she's been approached by several of the managers to share some of her knowledge and understanding with other employees. The CEO has encouraged her to start a series of short, semi-formal sessions that share some of her accounting knowledge with others. MariElena thinks a good place to start will be to clarify what the process of ___ entails: collecting, analyzing, and reporting financial information. a. depreciation b. journalizing c. auditing d. accounting e. bookkeeping

answer

d. accounting

question

Taxes payable and salaries payable are examples of a. stockholders'equity. b. expenses. c. long-term liabilities. d. current liabilities. e. fixed assets.

answer

d. current liabilities.

question

The fifth step in the accounting cycle is a. preparing the financial statements. b. preparing the trial balance. c. analyzing source documents. d. recording the transactions. e. posting transactions

answer

a. preparing the financial statements.

question

How important is management and accounting information for a successful business?

answer

It would be extremely difficult to manage even a small business without management and accounting information.

question

Information

answer

One of the four major resources (along with material, human, and financial resources) managers must have to operate a business. when understood properly, produces knowledge and empowers managers and employees to make better decisions. is data presented in a form that is useful for a specific purpose. Example: Suppose that a HR manager wants to compare the wages paid to male and female EE over a period of five years. The manager might begin with a stack of computer printouts listing every person employed by the firm, along with each employee's current and past wages. The manager would be hard pressed to make any sense of all the names and numbers. Such printouts consist of data rather than information.

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Using relevant information results in better decisions...

answer

Relevant Information = Better Intelligence and knowledge + Better Decisions are especially important because they can provide a competitive edge over competitors and improve a firm's profits.

question

An information rule

answer

emerges when research confirms the same results each time that it studies the same or a similar set of circumstances. emerges when research confirms the same results each time that it studies the same or a similar set of circumstances. are the "great simplifiers" for all decision makers. Business research is continuously looking for new rules that can be put to good use and looking to discredit old ones that are no longer valid. This ongoing process is necessary because business conditions rarely stay the same for very long. Example: Now suppose that the manager uses a computer to graph the average wages paid to men and to women in each of the five years. The result is information because the manager can use it to compare wages paid to men with those paid to women over the five-year period. For a manager, information presented in a practical, useful form, such as a graph, simplifies the decision-making process.

question

Data

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are numerical or verbal descriptions that usually result from some sort of measurement. A description of an individual as a "tall, athletic person with short, dark hair" certainly would qualify as data. Example: Suppose that a HR manager wants to compare the wages paid to male and female EE over a period of five years. The manager might begin with a stack of computer printouts listing every person employed by the firm, along with each employee's current and past wages. The manager would be hard pressed to make any sense of all the names and numbers. Such printouts consist of data rather than information. Typical data include records pertaining to personnel, inventory, sales, and accounting.

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Cisco Systems

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is a company known for transforming how people connect, communicate, and collaborate. The technology giant is also a respected innovator that develops state-of-the-art equipment needed by employees, managers, and individuals to manage knowledge and information.

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Database

answer

A single collection of data and information stored in one place that can be used by people throughout an organization to make decisions.

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Knowledge Management (KM)

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A firm's procedures for generating, using, and sharing the data and information. Typically, data, information, databases, and KM all become important parts of a firm's management information system.

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Management's Information Requirements (MIS)

answer

a system that provides managers and employees with the information they need to perform their jobs as effectively as possible. The purpose - To distribute timely and useful information from both internal and external sources to the managers and employees who need it Sometimes referred to as an information technology system or simply IT system Integrated database capable of receiving, organizing, summarizing, and calculating data and information and providing information to managers networked in the system. must be tailored to the needs of the organization it serves.

question

5 Areas of Management (Managers)

answer

1. Finance 2. Operations 3. Marketing 4. Human Resources 5. Administration

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5 Areas of Management (Managers/Responsibilities)

answer

Suppose, for example, that General Electric (GE) is designing a new plant in China to manufacture energy-efficient light bulbs that will open in five years. GE's Ops management will want answers to many questions: 3. Is the capacity of the plant consistent with marketing plans based on sales projections? (Marketing) 4. Will human resources managers be able to recruit U.S. employees with the appropriate skills who are willing to relocate to a foreign country and hire and train Chinese workers to staff the plant? (HR) 1. And do sales projections indicate enough income to cover the expected cost of the plant? (Finance) 5. Next, administrative managers must make sure that all managers and employees are able to use the information technology that is available. (Admin)

question

Financial Managers

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Finances 1. Most concerned with a firm's finances. 2. Ensure that the firm's managers and employees, lenders and suppliers, stockholders and potential investors, and government agencies have the information they need to measure the financial health of the firm

question

Operations Manager

answer

Sales (Present,future), Inventory (in progress,finished), Availability, Cost of Resources Concerned with present and future sales levels, current inventory levels of work in process and finished goods, and the availability and cost of the resources required to produce products and services.

question

Marketing Managers

answer

Product details and services by competitors. Need to have detailed information about a firm's products and services and those offered by competitors. Such information includes pricing strategies, new promotional campaigns, and products that competitors are test marketing. Information concerning the firm's customers, current and projected market share, and new and pending product legislation is also important to marketing managers.

question

Human Resources Managers

answer

Employees Must be aware of anything that pertains to a firm's employees. Key examples include current wage levels and benefits packages both within the firm and in firms that compete for valuable employees, current legislation and court decisions that affect employment practices, and the firm's plans for growth, expansion, or mergers.

question

Administrative Managers

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Overall Management Responsible for the overall management of the organization. Thus, they are concerned with the coordination of information—just as they are concerned with the coordination of material, human, and financial resources. Must ensure that the information is used in a consistent manner throughout the firm. Must commit to the costs of updating the firm's MIS and providing additional training when necessary.

question

information overload

answer

the amount of worthless information, junk e-mails, and advertising that contribute to information overload.

question

Chief Technology Officer

answer

One of the main goals - Ensure that a firm has the equipment necessary to provide information the employees need to make effective decisions—at a reasonable cost.

question

What happens if a business has a management information system that is too large?

answer

Unused capacity and complexity do nothing but increase the cost of owning and operating the system. In addition, a system that is difficult to use probably will not be used at all.

question

What happens if a business has a management information system that is too small?

answer

In some firms, a tendency to save on initial costs may result in a system that is too small or overly simple. Such a system generally ends up serving only one or two management levels or a single department. Managers in other departments "give up" on the system as soon as they find that it cannot process their data.

question

How do Employees Use a Management information system?

answer

To provide information, an MIS must perform five specific functions. It must 1. collect data, 2. store the data 3. update the data 4. process the data into information 5. present the information to users

question

How Much Should Businesses Know About Internet Users?

answer

When you click to conduct an online search or to download a digital coupon, businesses can follow your electronic movements. When you click to conduct an online search or to download a digital coupon, businesses can follow your electronic movements. Privacy advocates worry about the potential for identity theft and the possibility that data may be shared without consent. They also express concern that businesses might restrict access to some products based on what consumers do or say online. Businesses point out the benefits of collecting data to personalize website functionality based on each user's preferences and previous visits. They also look at behavioral data when planning new products and services.

question

Step 1: Collecting Data

answer

1-A firm's employees, with the help of an MIS system, must gather the data and information needed to establish the firm's database. 2-The database should include all past and current data that may be useful in managing the firm. Clearly, the data entered into the system must be relevant to the needs of the firm's managers. 3-And perhaps most important, the data must be accurate. Irrelevant data are simply useless; inaccurate data can be disastrous. There are two data sources: internal and external.

question

2 Types of Data Sources

answer

External Internal

question

Internal Sources of Data

answer

most of the data gathered for an MIS. Are managers and employees, company records and reports, accounting data, and minutes of meetings.

question

External Sources of Data

answer

Are customers, suppliers, financial institutions and banks, trade and business publications, industry conferences, online computer services, lawyers, government sources, and firms that specialize in gathering marketing research for organizations.

question

Internal/External Cautions

answer

1. The cost of obtaining data from some external sources, such as marketing research firms, can be quite high. 2. Outdated or incomplete data usually yield inaccurate information. 3. Although computers generally do not make mistakes, the people who use them can make or cause errors. When data (or information) and your judgment disagree, always check the data.

question

Step 2: Storing Data

answer

the method chosen to store data depends on the size and needs of the organization. Small businesses may enter data and then store them directly on an employee's computer. medium-sized to large businesses store data in a larger computer system and provide access to employees through a computer network.

question

Step 3: Updating Data

answer

an MIS must be able to update stored data regularly to ensure that the information presented to managers and employees is accurate, complete, and up-to-date. The frequency with which the data are updated depends on how fast they change and how often they are used. When it is vital to have current data, updating may occur as soon as the new data are available. (Macy's) Data and information may also be entered into a firm's data bank at certain intervals—every 24 hours, weekly, or monthly.

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Step 4: Processing Data

answer

Some data are used in the form in which they are stored, whereas other data require processing to extract, highlight, or summarize the information they contain. Data Processing - is the transformation of data into a form that is useful for a specific purpose.

question

Data Processing

answer

transformation of data into a form that is useful for a specific purpose.

question

verbal data

answer

this processing consists mainly of extracting the pertinent material from storage and combining it into a report. Most business data, however, are in the form of numbers—large groups of numbers, such as daily sales totals or production costs for a specific product.

question

statistic

answer

a measure that summarizes a particular characteristic of an entire group of numbers.

question

Step 5: Presenting Information

answer

An MIS must be capable of presenting information in a usable form Method of presentation—reports, tables, graphs, or charts

question

Business Reports

answer

Verbal information may be presented in list or paragraph form. Employees often are asked to prepare formal business reports. A typical business report includes 1. An introduction - Sets the stage for the remainder of the report, describes the problem to be studied in the report, identifies the research techniques that were used, and previews the material that will be presented in the report 2. The body of the report - Objectively describe the facts that were discovered in the process of completing the report. Provides a foundation for the conclusions and the recommendations. 3. The conclusions - Atatements of fact that describe the findings contained in the report. Conclusions should be specific, practical, and based on the evidence in the report. 4. The recommendations - Suggestions on how the problem might be solved. Specific, practical, and based on the evidence.

question

Who are the people who use information?

answer

Although the primary users of information are a firm's managers and employees, parties outside the organization—lenders, suppliers, stockholders, and government agencies—are also interested in the firm's information. In fact, both managers and employees and outside groups often examine a firm's annual report to determine the financial health of a firm.

question

three different software applications to improve/speed the decision-making process for people at different levels within an organization

answer

Decision-support system (DSS) Executive information system (EIS) Expert System

question

Decision-support system (DSS)

answer

type of software program that provides relevant data and information to help a firm's employees make decisions. It also can be used to determine the effect of changing different variables and answer "what if" type questions. Example: A manager at Michigan-based Pulte Homes may use a DSS to determine prices for new homes built in an upscale, luxury subdivision. By entering the number of homes that will be built along with different costs associated with land, labor, materials, building permits, promotional costs, and all other costs, a DSS can help to determine a base price for each new home. It is also possible to increase or decrease the building costs and determine new home prices for each set of assumptions with a DSS.

question

Executive information system (EIS)

answer

Computer-based system that facilitates and supports the decision-making needs of top managers and senior executives by providing easy access to both internal and external information.

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Expert System

answer

type of computer program that uses artificial intelligence to imitate a human's ability to think. uses a set of rules that analyze information supplied by the user about a particular activity or problem. Based on the information supplied, provides recommendations or suggests specific actions in order to help make decisions. Example: Have been used to schedule manufacturing tasks, diagnose illnesses, determine credit limits for credit card customers, evaluate loan applications, and develop electronic games.

question

2 Integration Benefits

answer

Once data have been entered into an application in an integrated package, the data can be used in another integrated package without having to reenter the data. Once a user learns one application, it is much easier to learn another application in an integrated package. (Microsoft Office)

question

integrated software

answer

combines many functions in a single package. Integrated packages allow for the easy linking of text, numerical data, graphs, photographs, and even audiovisual clips. Example: A business report prepared using the Microsoft Office package, for instance, can include all these components.

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Current Business Application Software Used to Improve Productivity

answer

1. Word Processing 2. Desktop Publishing 3. Accounting 4. Database Management 5. Graphics 6. Spreadsheets

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Current Business Application Software Used to Improve Productivity

answer

Users can prepare and edit written documents and store them in the computer or on a memory device.

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Desktop publishing

answer

Users can combine text and graphics in professional reports, newsletters, and pamphlets.

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Accounting

answer

Users can record routine financial transactions and prepare financial reports at the end of the accounting period.

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Database management

answer

Users can electronically store large amounts of data and transform the data into information.

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Graphics

answer

Users can display and print pictures, drawings, charts, and diagrams.

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Spreadsheets

answer

Users can organize numerical data into a grid of rows and columns

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Why Accounting Information Is Important

answer

Executives, managers, and employees also rely on the firm's accounting system to provide needed financial information To improve the accuracy of a firm's accounting information and its financial statements, businesses rely on audits conducted by accountants employed by public accounting firms.

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Accounting

answer

the process of systematically collecting, analyzing, and reporting financial information. accounting information can be used to answer questions about what has happened in the past, it can also be used to help make decisions about the future

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Common FAQ's for Firm Accountants

answer

1-How much profit did a business earn last year? 2-How much tax does a business owe the Internal Revenue Service? 3-How much cash does a business have to pay lenders and suppliers?

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Audit

answer

An examination of a company's financial statements and the accounting practices that produced them. The purpose of an audit is to make sure that a firm's financial statements have been prepared in accordance with generally accepted accounting principles (GAAPs) Although an audit and the resulting report do not guarantee that a company has not "cooked" the books, it does imply that, on the whole, the company has followed GAAPs. Bankers, creditors, investors, and government agencies are willing to rely on an auditor's opinion because of the historically ethical reputation and independence of auditors and accounting firms. Without the audit function and GAAPs, there would be very little oversight or supervision. The validity of a firm's financial statements and its accounting records would drop quickly, and firms would find it difficult to obtain debt financing, acquire goods and services from suppliers, find investor financing, or prepare documents requested by government agencies.

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generally accepted accounting principles (GAAPs)

answer

have been developed to provide an accepted set of guidelines and practices for U.S. companies reporting financial information and the accounting profession.

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Financial Accounting Standards Board (FASB)

answer

Establishes and improves accounting standards for U.S. companies

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international Financial Reporting Standards (IFRS)

answer

Created by the International Accounting Standards Board now used in more than 100 different countries around the world For multinational firms like Royal Dutch Shell, ExxonMobil, Walmart, and Toyota, the benefits of global accounting standards are huge because preparing financial statements and accounting records that meet global standards saves both time and money. According to many accounting experts, the United States is on a path toward the adoption of IFRS, the question is when

question

If an accountant determines that a firm's financial statements present financial information fairly and conform to GAAPs, then he or she will issue the following statement:

answer

In our opinion, the financial statements ... present fairly, in all material respects the financial position of the company ... in conformity with generally accepted accounting principles.

question

Does this executive trust the numbers?

answer

A firm's managers and employees must have accurate accounting information to make decisions and plan for the future. Other groups including investors, lenders, and suppliers also must "trust" accounting information to determine the financial health of a company. In fact, without accurate accounting information, the numbers are just that numbers.

question

Which of the following firms has been convicted or accused of accounting fraud?

answer

1-Lehman Brothers (Banking in the United States) 2-Sino-Forest (Forestry Operations in China) 3-Fannie Mae (Home Mortgages in United States) 4-Autonomy Software (Software Development in Britain) 5-All of the above. The accounting problems at these companies—and similar problems at even more companies—have forced many investors, lenders and suppliers, and government regulators to question the motives behind fraudulent and unethical accounting practices.

question

Today, much of the pressure on corporate executives to "cook" the books is driven by the desire to look good to Wall Street analysts and investors.

answer

If a company reports sales and profit figures that are lower than expected, the company's stock value can drop dramatically. Greed—especially when executive salaries and bonuses are tied to a company's stock value—is another factor that can lead some corporate executives to use unethical accounting methods to inflate a firm's sales revenues and profit amount. Victims - the ones that hurt when companies (and their accountants) report inaccurate or misleading accounting information often are not the high-paid corporate executives. It's the employees who lose their jobs when the company files for bankruptcy, as well as the money they invested in the company's retirement program. Investors, lenders, and suppliers who relied on fraudulent accounting information in order to make a decision to invest in or lend money to the company also usually experience a loss.

question

Sarbanes-Oxley Act in 2002

answer

Congress enacted to help ensure that corporate financial information is accurate and to prevent the type of accounting scandals that have occurred in the past Complex rules make compliance more expensive and time-consuming for corporate management and more difficult for accounting firms. Yet, most people agree that the cost of compliance is justified.

question

Sarbanes-Oxley Act (SOX) Key Components

answer

1. The Securities and Exchange Commission (SEC) is required to establish a full-time five-member federal oversight board that will police the accounting industry. 2. Chief executive and financial officers are required to certify periodic financial reports and are liable for intentional violations of securities reporting requirements. 3. Accounting firms are prohibited from providing many types of non-audit and consulting services to the companies they audit. 4. Auditors must maintain financial documents and audit work papers for five years. 5. Auditors, accountants, and employees can be imprisoned for up to 20 years and subject to fines for destroying financial documents and willful violations of the securities laws. 6. A public corporation must change its lead auditing firm every five years. 7. There is added protection for whistle-blowers who report violations of the Sarbanes-Oxley Act.

question

Different Types of Accounting

answer

1. Managerial Accounting 2. Financial Accounting 3. Cost Accounting 4. Tax Accounting 5. Government Accounting 6. Not-for-Profit Accounting

question

Managerial Accounting

answer

provides managers and employees within the organization with the information needed to make decisions about a firm's financing, investing, marketing, and operating activities. Both managers and employees can evaluate how well they have done in the past and what they can expect in the future

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Financial Accounting

answer

generates financial statements and reports for interested people outside of an organization. stockholders, financial analysts, bankers, lenders, suppliers, government agencies, and other interested groups use the information provided by financial accounting to determine how well a business firm has achieved its goals.

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Cost Accounting

answer

determining the cost of producing specific products or services

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Tax Accounting

answer

planning tax strategy and preparing tax returns for firms or individuals

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Government Accounting

answer

providing basic accounting services to ensure that tax revenues are collected and used to meet the goals of state, local, and federal agencies

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Not-for-Profit Accounting

answer

helping not-for-profit organizations to account for all donations and expenditures

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Careers in Accounting

answer

Private Accountant Public Accountant Certified Public Accountant (CPA)

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Accountants

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1-Inspect a firm's accounting systems to ensure the business is using generally accepted accounting procedures. 2-Examine financial statements to be sure that they are accurate. 3-Calculate the amount of taxes owed, prepare tax returns, and ensure that taxes are paid properly and on time. 4-Organize and maintain financial records. Assist employees, managers, and owners to improve financial decisions. 5-Suggest ways to reduce costs, enhance revenues, and improve profits. Accountants, as well as auditors in the accounting area, are expected to experience a 16% increase or about average employment growth between now and the year 2020. Often higher than the starting salaries for other entry-level positions. generally are classified as either private accountants or public accountants

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private accountant

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employed by a specific organization

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public accountant

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works on a fee basis for clients and may be self-employed or be the employee of an accounting firm.

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Largest Accounting Firms (aka "Big Four")

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1. PricewaterhouseCoopers (PwC) 2. Ernst ; Young 3. KPMG 4. Deloitte Touche Tohmatsu

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Certified public accountant (CPA)

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an individual who has met state requirements for accounting education and experience and has passed a rigorous accounting examination Public accounting firms typically include on their staffs at least one State requirements usually include a college degree or a specified number of hours of college course work and generally from one to three years of on-the-job experience. Certification as a CPA brings both status and responsibility. Publicly traded corporations, for example, must hire an independent CPA to audit their financial statements. Fees for the services provided by CPAs generally range from $50 to $100/hr.

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American Institute of CPAs (AICPA)

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More information about general requirements and the CPA profession

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Financial Data

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Financial Data --> Financial Information = Reporting financial data is transformed into financial information and reported on three very important financial statements—the balance sheet, income statement, and statement of cash flows.

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3 Important Financial Statements

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1. Balance Sheet 2. Income Statement 3. Statement of Cash Flows

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The Accounting Equation

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simple statement that forms the basis for the accounting process. This equation shows the relationship between a firm's assets, liabilities, and owners' equity. Assets = Liabilities + Owners Equity To use this equation, a firm's accountants must record raw data—that is, the firm's day-to-day financial transactions—using the double-entry system of bookkeeping

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Assets

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the resources a business owns—cash, inventory, equipment, and real estate The dollar total of all of a firm's assets cannot equal more than the total funds obtained by borrowing money (liabilities) and the investment of the owner(s). Doesn't matter the size of the business. Before determining the total value of a firm's assets, accountants must determine the value of each type of inventory a firm has on hand to meet customer demand. Accurate accounting procedures for inventory can also determine when it is time to order more inventory.

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Liabilities

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the firm's debts—borrowed money it owes to others that must be repaid

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Owners' equity

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The difference between total assets and total liabilities— what would be left for the owners if the firm's assets were sold and the money used to pay off its liabilities

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double-entry bookkeeping system

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System in which each financial transaction is recorded as two separate accounting entries to maintain the balance shown in the accounting equation. End of a specific accounting period, all of the financial transactions can now be summarized in the firm's financial statements. This information is presented in a standardized format to make the statements as accessible as possible to the various people who may be interested in the firm's financial affairs—managers, employees, lenders, suppliers, stockholders, potential investors, and government agencies.

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Financial Statements

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Pretty much the same for all businesses Prepared at least once a year and included in the firm's annual report Most firms prepare semiannually, quarterly, or monthly

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Annual Report

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Report distributed to stockholders and other interested parties that describes a firm's operating activities and its financial condition.

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The Balance Sheet (or Statement of Financial Position)

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a summary of the dollar amounts of a firm's assets, liabilities, and owners' equity accounts at the end of a specific accounting period Reports dollar values for assets, liabilities, and owners' equity must demonstrate that assets are equal to liabilities plus owners' equity, and the accounting equation is still in balance as a statement that reports the financial condition of a business firm (Hershey Foods Corp) and individuals. On a balance sheet, assets are listed in order from the most liquid to the least liquid.

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Where could you find the total amount of assets, liabilities, and owners' equity for Hershey Foods Corporation?

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The firm's balance sheet.

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Personal Balance Sheet

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individuals determine their net worth, or owners' equity, by subtracting the value of their liabilities from the value of their assets.

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Liquidity

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of an asset is the ease with which it can be converted into cash.

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Current Assets

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assets that can be converted quickly into cash or that will be used in one year or less.

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marketable securities

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stocks, bonds, and other investments can be converted into cash in a matter of days.

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Types of Current Assets

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1. Cash (most liquid asset) 2. Marketable Securities 3. Firm's Receiveables 4. Merchandise Inventory 5. Prepaid Expenses

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Accounts Receivables

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which result from allowing customers to make credit purchases, generally are paid within 30 to 60 days. However, the firm expects that some of these debts will not be collected. Thus, it has reduced its accounts receivables by a 5% allowance for doubtful accounts.

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Notes receivable

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are receivables for which customers have signed promissory notes. They generally are repaid over a longer period of time than the firm's accounts receivable.

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merchandise inventory

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represents the value of goods on hand for sale to customers

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Prepaid Expenses

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are assets that have been paid for in advance but have not yet been used. Example - Insurance Premiums. Usually paid at the beginning of the policy year. The unused portion (say, for the last four months of the time period covered by the policy) is a prepaid expense.

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Fixed Assets

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Assets that will be held or used for a period longer than one year. Generally include land, buildings, and equipment used in the continuing operation of the business.

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Depreciation

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is the process of apportioning the cost of a fixed asset over the period during which it will be used, that is, its useful life. The depreciation amount allotted to each year is an expense for that year, and the value of the asset must be reduced by the amount of depreciation expense.

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Intangible Assets

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are assets that do not exist physically but that have a value based on the rights or privileges they confer on a firm. Include patents, copyrights, trademarks, and goodwill. By their nature, are long-term assets—they are of value to the firm for a number of years.

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Liabilities and Owners' Equity

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The liabilities and the owners' equity accounts complete the balance sheet. The firm's liabilities are separated into two categories—current and long-term liabilities.

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Firm Liabilities Categories

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Current Liabilities Long-Term Liabilities

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Current Liabilities

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are debts that will be repaid in one year or less. Example: Northeast Art Supply purchased merchandise from its suppliers on credit. Thus, its balance sheet includes an entry for accounts payable.

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Accounts payable

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are short-term obligations that arise as a result of a firm making credit purchases

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Notes Payable

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obligations that have been secured with promissory notes. They are usually short-term obligations, but they may extend beyond one year. Only those that must be paid within the year are listed under current liabilities.

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Salaries payable and taxes payable

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Listed as current liabilities - These are both expenses that have been incurred during the current accounting period but will be paid in the next accounting period.

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Long-Term Liabilities

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are debts that need not be repaid for at least one year.

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Owners' or Stockholders' Equity

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For a sole proprietorship or partnership, the owners' equity is shown as the difference between assets and liabilities. In a partnership, each partner's share of the ownership is reported separately in each owner's name. For a corporation, the owners' equity usually is referred to as stockholders' equity. The dollar amount reported on the balance sheet is the total value of stock plus retained earnings that have accumulated to date. Owners Equity = Total Value Stock + Retained Earnings (YTD)

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Retained earnings

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are the portion of a business's profits not distributed to stockholders.

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Smart Career Moves - Before you accept a company's job offer or buy its stock

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Check financials and its business situation. Are profits increasing or decreasing? How is it handling its debt? What are its plans for expansion?

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Income Statement

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a summary of a firm's revenues and expenses during a specified accounting period—one month, three months, six months, or a year. Reports the firm's dollar amount of profit or loss Sometimes called the earnings statement or the statement of income and expenses. Difference between income and expenses: Profit/Loss for a business cash surplus/cash deficit for an individual.

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Where can you find the profit or loss amount for Apple, Inc.?

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The firm's income statement

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Personal Income Statement

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By subtracting expenses from income, anyone can construct a personal income statement and determine if he or she has a surplus or deficit at the end of each month. Income - Expenses = Personal Income Statement

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personal budget

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a specific plan for spending your income—over the next month

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Business Income Statement

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Revenue - Cost of Goods - Operating Expenses = Net Income Summarizes a firm's revenues and expenses during a specified accounting period

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Revenues

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are the dollar amounts earned by a firm from selling goods, providing services, or performing business activities. obtains from the sale of its products or services. The revenues section of its income statement begins with gross sales.

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Gross sales

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are the total dollar amount of all goods and services sold during the accounting period. Deductions made from this amount: 1. Sales Returns 2. Sales Allowances 3. Sales Discounts The remainder is the firms net sales

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Sales Returns

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merchandise returned to the firm by its customers

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sales allowances

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price reductions offered to customers who accept slightly damaged or soiled merchandise

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sales discounts

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price reductions offered to customers who pay their bills promptly

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Net Sales

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are the actual dollar amounts received by the firm for the goods and services it has sold after adjustment for returns, allowances, and discounts. Total Amt Sold - Deductions = Net Sales

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Cost of Goods Sold

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The standard method of determining by a retailing or a wholesaling firm: Cost of goods sold = Beginning inventory + Net Purchases - Ending Inventory

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Gross Profit

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is its net Sales less the cost of goods sold. Gross Profit = Net Sales - Cost of Goods Sold

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Operating Expenses

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are all business costs other than the cost of goods sold

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2 Operating Expenses Categories

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Selling Expenses General Expenses

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Net Income

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The difference when revenues exceed expenses.

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Net Loss

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The difference when expenses exceed revenues.

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net income from operations

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Net Income from Ops = Gross Profit - Total Operating Expense

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Net Income Before Taxes

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Net Income Before Taxes = Net Income from Ops - Interest Expense

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Net Income After Taxes

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This amount may be used to pay a dividend to stockholders, it may be retained or reinvested in the firm, it may be used to reduce the firm's debts, or all three.

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Statement of Cash Flows

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illustrates how the company's operating, investing, and financing activities affect cash during an accounting period. focuses on how much cash is on hand to pay the firm's bills Executives and managers can also use the information to determine how much cash is available to pay dividends to stockholders. the information can be used to evaluate decisions related to a firm's future investments and financing needs Investors want to know if a firm can pay dividends. Before extending credit to a firm, lenders and suppliers often use the information on the statement of cash flows to evaluate the firm's ability to repay its debts.

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In 1987, what did the SEC and FASB require from all publicly traded companies to include in their annual report?

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The SEC and the FASB required all publicly traded companies to include a statement of cash flows, along with their balance sheet and income statement, in their annual report.

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3 Activities in the Statement of Cash Flows

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1. Cash Flows from Operating Activities 2. Cash Flows from Investing Activities 3. Cash Flows from Financing Activities The totals of all three activities are added to the beginning cash balance to determine the ending cash balance.

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Cash Flows from Operating Activities

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This is the first section of a statement of cash flows. It addresses the firm's primary revenue source—providing goods and services. Typical adjustments include adding the amount of depreciation to a firm's net income. Other adjustments for increase or decrease in amounts for accounts receivable, inventory, accounts payable, and income taxes payable are also required to reflect a true picture of cash flows from operating activities.

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Cash flows from investing activities

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The second section of the statement is concerned with cash flow from investments. This includes the purchase and sale of land, equipment, and other assets and investments.

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Cash flows from financing activities

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The third and final section deals with the cash flow from all financing activities. It reports changes in debt obligation and owners' equity accounts. This includes loans and repayments, the sale and repurchase of the company's own stock, and cash dividends

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3 Financial Statements

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1. Statement of Cash Flows 2. Balance Sheet 3. Income Statement illustrate the results of past business decisions and reflect the firm's ability to pay debts and dividends and to finance new growth. can provide answers to a variety of questions about a firm's ability to do business and stay in business, its profitability, and its value as an investment

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Evaluating Financial Statements

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To evaluate a firm's financial health, often the first step is to compare a firm's financial data with other firms in similar industries and with its own financial results over recent accounting periods. Evaluating financial statements is serious business. Even after a firm's financial statements are prepared, accountants often dig deeper and prepare audits to make sure that accounting information is accurate. They also calculate financial ratios to measure a firm's profitability, its ability to pay its debts, and how well it manages inventory.

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Comparing Financial Data

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Many firms compare their financial results with those of competing firms, with industry averages, and with their own financial results. Most corporations include in their annual reports comparisons of the important elements of their financial statements for recent years. Comparisons are possible as long as accountants follow GAAPs. Comparisons among firms give executives, managers, and employees a general idea of a firm's relative effectiveness and its standing within the industry. Competitors' financial statements can be obtained from their annual reports—if they are public corporations. Industry averages are published by reporting services such as D;B (formerly Dun ; Bradstreet) and Hoover's, Inc., as well as by some industry trade associations. Most corporations include in their annual reports comparisons of the important elements of their financial statements for recent years: 1. Revenue 2. Research & Development (R) 3. Operating Income 4. Sales & Marketing Expenses

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Financial Ratios

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a number that shows the relationship between two elements of a firm's financial statements these ratios can be compared with those of competitors, with industry averages, and with the firm's past ratios from previous accounting periods. The information required to form these ratios is found in a firm's balance sheet, income statement, and statement of cash flows

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Financial Ratios

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Measuring a Firm's Ability to Earn Profits Measuring a Firm's Ability to Pay its Debts Measuring How Well a Firm Manages Its Inventory Return on owners' equity Earnings per share Working capital Debt-to-equity Based on the information contained in a firm's balance sheet, income statement, and statement of cash flows.

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Measuring a Firm's Ability to Earn Profits

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Sec 15-8b

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Measuring a Firm's Ability to Pay its Debts

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Sec 15-8b

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Measuring How Well a Firm Manages Its Inventory

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Sec 15-8b

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return on sales (or profit margin)

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a financial ratio calculated by dividing net income after taxes by net sales

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current ratio

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a financial ratio computed by dividing current assets by current liabilities

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inventory turnover

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a financial ratio calculated by dividing the cost of goods sold in one year by the average value of the inventory

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The more information a manager has, the less risk there is that a decision will be incorrect True or False

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True

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A single collection of data stored in one place is called a data center. True or False

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False

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Information is defined as numerical or verbal descriptions that usually result from sort of measurement. True or False

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False

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In a business report, the conclusions present suggestions on how the problem might be solved. True or False

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False

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An expert system uses artificial intelligence to imitate a human's ability to think. True or False

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True

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There is added protection for whistle-blowers who report violations of the Sarbanes-Oxley Act. True or False

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True

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A private accountant is an accountant whose services may be hired on a fee basis by individuals or business firms. True or False

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False

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The accounting equation is assets + liabilities = owners' equity. True or False

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False

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Marketable securities can be converted into cash in a matter of days. True or False

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True

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Stockholders' equity represents the total value of a corporation's stock plus retained earnings that have accumulated to date. True or False

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True

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Which statement is not true about a balance sheet? a-It provides proof that Assets = Liabilities + Owners' equity. b- It lists the current, fixed, and intangible assets. c- It summarizes the firm's revenues and expenses during one accounting period. d-It gives the liabilities of the firm. e-It shows the owners' equity in the business.

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c- It summarizes the firm's revenues and expenses during one accounting period.

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The board of directors decided to pay 50% of the firm's $460,000 earnings in dividends to the stockholders. The firm has retained earnings of $680,000 on the books. After the dividends are paid, which of the following statements is true about the firm's retained earnings account? a-The new value of the firm's retained earnings is $910,000. b-The new value of the firm's retained earnings is $450,000. c-The firm failed to reach its profit goal. d-Each shareholder will receive more than he or she received last year. e-The firm's retained earnings are too high.

answer

a-The new value of the firm's retained earnings is $910,000

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Sales slips, invoices, and receipts can be described as source documents. True False

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False

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For all businesses, the desired acid-test ratio is 1.0. True False

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False

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IFRS guidelines are the set of accounting standards set up specifically for U.S. companies. True False

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False

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According to the Sarbanes-Oxley Act of 2002, a public corporation must change its lead auditing firm every ________ years. two seven ten fifteen five.

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five.

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Inventory turnover is the number of times a firm sells its merchandise inventory in one month. True False

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False

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The return on sales ratio is also known as the profit margin of a company. True False

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True

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Accounts receivable turnover is considered a short-term ratio. True False

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True

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An area of accounting that regularly deals with donations and expenditures is ________ accounting. tax government cost managerial not-for-profit

answer

not-for-profit

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The guidelines for acceptable accounting principles and practices are known as an audit. aCMA. GAAP. double-entry. aCPA.

answer

GAAP.

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Lenders and suppliers are very interested in the approval of new issues of stocks and bonds. True False

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False

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The guidelines for acceptable accounting principles and practices are known as a. aCPA. b. GAAP. c. double-entry. d. an audit. e. aCMA.

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b. GAAP.

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Accounts receivable turnover is considered a short-term ratio. True False

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True

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Lenders and suppliers are very interested in the approval of new issues of stocks and bonds. True False

answer

False

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According to the Sarbanes-Oxley Act of 2002, a public corporation must change its lead auditing firm every ________ years. a. seven b. two c. five d. ten e. fifteen

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c. five

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Inventory turnover is the number of times a firm sells its merchandise inventory in one month. a. True b. False

answer

b. False

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The return on sales ratio is also known as the profit margin of a company. a. True b. False

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a. True

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The accounting equations is assets + liabilities = owners' equity. a. True b. False

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b. False

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There is added protection for whistle-blowers who report violations of the Sarbanes-Oxley Act. a. True b. False

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a. True

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IFRS guidelines are the set of accounting standards set up specifically for U.S. companies. a. True b. False

answer

b. False

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As part of the Sarbanes-Oxley Act, public corporations must maintain financial documents for ten full years. a. True b. False

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b. False

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When expenses exceed revenue, your company has achieved net income. a. True b. False

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b. False

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An area of accounting that regularly deals with donations and expenditures is ________ accounting. a. managerial b. cost c. government d. not-for-profit e. tax

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d. not-for-profit

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Fannie Mae was one of the major U.S. companies that ended up with a massive federal bailout from the U.S. government. a. True b. False

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a. True

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________ forms the basis for the accounting process. a. The annual report b. The accounting equation c. Owners' equity d. The income statement

answer

b. The accounting equation

GEB1101: M2-C15: Using Management ; Accounting Information – Flashcards

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