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Exam 17: Understanding Accounting and Financial Information

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Question 81

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Jill wants to start her own business, but knows little about how to set up an accounting system or interpret financial information. "I'm not worried about accounting," she tells her friends. "I'll just hire a part-time bookkeeper to handle all that type of stuff, and focus my attention on what I like-finding ways to satisfy my customers." Which of the following is the best response to Jill's comments?

A) Fine. Just make sure the bookkeeper you hire knows how to use a database, since this type of software is the heart of any efficient accounting system.
B) Although you can hire someone to keep your books, you'll still need to know how to read, understand, and interpret basic accounting reports in order to make good business decisions.
C) Most entrepreneurs would agree with your opinion. The work done by accountants is mainly clerical in nature, so time spent by business owners on accounting tends to take them away from more important tasks.
D) You have a good plan. Only managers of large firms require knowledge of accounting. Owners and managers of small businesses can

E) B) and C)
F) A) and D)

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Question 82

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The cost of goods sold includes all the costs of buying and keeping merchandise available for sale.

A) True
B) False

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Question 83

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Financial accountants prepare reports for owners, creditors, suppliers, and others outside of the organization.

A(n) is a yearly published statement of the financial condition, progress and expectations of an organization.

Inputs to the accounting system include sales documents.

What is the difference between a profit [net income after taxes] on an income statement and the cash balance reflected at the bottom of the statement of cash flows?

Bark Three Times Pet Store's owner is concerned with how his business decisions affect the "bottom line". This is another way of saying that he is concerned with the impact of his decisions on net income after taxes.

The Barkley Company balance sheet shows the following items: Accounts payable totaling $50,000; salaries payable totaling $65,000, and notes payable totaling $100,000. These are liabilities, or money that the firm owes others.

The fundamental accounting equation states: Assets = .

Julio borrowed money from a close friend to obtain a liquor license for his pub, and gave him a written promise to repay the amount within six months. Julio should list this business debt as an operating expense on his pub's balance sheet.

For firms that sometimes have difficulty selling their inventory, the current ratio is likely to be a better measure of liquidity than the acid-test ratio.

On December 31, 2001, Virginia Laboratories had assets of $235,000 and owners equity of $84,000. We can conclude that on December 31, 2001, Virginia Laboratories balance sheet showed:

Generally, a high ratio could lead investors and creditors to view the company as being very risky.

Jasmine is categorizing journal entries in order to post to the .

For the past several years, Bill Reynolds has retained accountant Chelsea Jones for help in preparing his personal income tax forms. Bill's boss recommended Chelsea because she had done a good job setting-up the company's new accounting system. Bill is very satisfied with Chelsea's work and feels that the fees she charges are quite reasonable. Chelsea would be classified as a(n) :

Mini-Case Minnie A. Wright-Hoff works as an accountant for Double Entry Doors, Inc. Her company sells and installs oversized garage doors needed by large vehicles. Most of Minnie's work involves helping department heads and other decision-makers by measuring and reporting costs for their departments, and by identifying areas where departments are exceeding their budgets. However, as one of only three accountants employed by Double Entry Doors, Minnie is something of a "jill-of-all-trades" in terms of her accounting assignments. For example, she recently spent several hours summarizing all of the financial data in account ledgers to see if the information was correct and balanced. Her efforts revealed no problems, so she is now ready to start working on the firm's financial statements. Minnie is interested in this part of the accounting cycle because she likes to be one of the first to know the "bottom line" her company will report. She knows that she and the other accountants who work on these statements can influence the results by the choices they make about the way they report certain items. -The last major task Minnie completed before getting ready to prepare the firm's financial statements was the preparation of the:

The "bottom line" of the Barkley Company's income statement is equal to the net worth of the firm.

Peak Performance Sporting Goods Company competes with several other firms in the retail industry for important visibility and retail space in large stores. The company's chief financial officer knows that in order to attract investors, the company must demonstrate growth, and its management must outperform the competition. The CFO continuously watches because these are key to measuring growth.

Citizens and special interest groups often have interest in the information generated by government accounting.

Activity ratios measure the effectiveness of the firm's management in using its various resources to achieve profits.