Accounting: Chapter 1

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49 Terms

1
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For what fundamental purpose do we keep records?
To help make business decisions
2
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Retained earnings represent an asset to the firm.
False
3
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Recordkeeping promotes trust and reduces the risk of loss from exchanging with strangers
True
4
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Accounting is not vital to the development of human civilization
False
5
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We use managing accounting information to evaluate management performance
False
6
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What is marketing?
collected knowledge and best practices of creating relationships
7
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One characteristic of an asset is:
it provides expected future benefits
8
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As shown in the syllabus, what is the main action of the Group Project?
Analyze publicly traded companies
9
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Fundamental Demand For Accounting is___________
to help guide exchange
10
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Accounting is ___________
an evolved economic institution
11
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A bill of lading is a document issued by a(n) __________.
carrier
12
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Which of the following documents is a primary source of accounting data (assets, liabilities, equity, revenues, expenses)?
Lease agreement
13
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Workload refers to the volume of goods or services the organization will provide
True
14
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A difference between a personal and a business budget is only a personal budget will help you stay on-track with long-range goals.
False
15
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Which of the following indicates the capital structure of a firm?
Debt-to-equity ratio
16
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Which of the following is a benefit of debt relative to equity?
Lower cost of capital
17
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More than half of CEO compensation is now comprised of _____________.
stock options
18
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A business plan should help you assess whether the proposed venture is sensible
True
19
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What is the first step in budget preparation?
completion of an environmental statement
20
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What does a strategic plan define?
broad set of goals for the organization
21
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**How much did I sell last year**
Helps decide how much wheat to grow this year
22
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How much wheat do I own right now?
Helps identify the scale of possible transactions
23
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Was this customer a reliable exchange partner *in the past*
Helps identify whether you should continue doing business with that customer

\
Who you can and cant trust
24
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Why do we need *recordkeeping*
* Humans are fallible – our memory storage is finite
* Recordkeeping supplements memory as exchange between strangers becomes common
25
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How does recordkeeping *promote exchange*
* Recordkeeping __improves our memory__ of past interactions in a complex exchange environment, which promotes reputation formation *(you can develop a reputation for* ***trustworthiness****)* and cooperation
* Recordkeeping promotes __**trust**__ and reduces the risk of loss from exchanging with strangers

KEY: Before we had laws protecting property and contract rights, __trust__ yielded implicit contracts that are self-reinforced
26
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Recordkeeping (i.e., accounting) has a central role in expanding the scale, scope, and complexity of __*human exchange*__
Which is the ultimate source of human __Economic development__.
27
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**“For the first time in our history, we had more stuff than we could carry.  We needed a way to keep track of it.”**
* Writing?  Recordkeeping → Accounting
*  Accountants invented writing!  \[*Numbers pre-date words*\]
28
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**Accounting is…**
* NOT just a *series of rules*
* NOT just __*Debits and credits*__
29
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Accounting is an __*evolved economic institution*__
Vital to the development of human civilization
Vital to humans’ recent economic development
30
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**Accounting is…**
* The process of recording, summarizing, and analyzing financial transactions
* To help people make __Economic decision__ (business decisions)
* SUMMARY: A __system__ for providing financial information
31
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Managerial Accounting:

1. designed primarily for decision-makers __**within**__ the company
* Demand arises as soon as the business is formed
* *Remember our “exchange guidance” discussion!*
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Financial Accounting:
designed primarily for decision-makers __outside__ the company

* Demand arises in a later stage of business development
33
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Managerial Accounting
* Looks **forward – the future**
* Provides information for improving decisions
* Internal users only: for the firm’s *managers*
34
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Financial Accounting
Looks backward – the past

Reports what has happened to external users

via annual and quarterly financial reports called __financial statements__
35
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Corporations can issue shares of stock to raise equity capital, separating ownership from control
**Stockholders**: Owners of the corporation, not usually involved in day-to-day business decisions
36
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__**Residual Claimants**__**:**
**owners hold a** ***residual*** **claim**
37
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*Use* __*financial accounting*__ __*accounting*__ *information to evaluate management performance, to assess the company’s financial condition, and to predict future success*
* *(non-managers have* __*no*__ __*access*__ *to internal company data, no access to managerial acct info)*
38
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__**Board of Directors**__:
* **Represents shareholder interests, hire & oversee management**
39
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40
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**Creditors (lenders)**
* Companies can also borrow (from a bank or another source) to raise credit capital
* *Use financial information to Assess Creditworthiness*
41
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**Suppliers**
* Companies that supply you with raw material that you use in your business
* ***Use financial information to assess creditworthiness***
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* **Potential investors**
* Individual investors, institutional investors, also credit rating agencies and security analysts (environment)
* *Use financial information to assess investment risk and expected Investment Returns*
43
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* The nature of business – the economic process businesses follow – is to:
1) Obtain Capital

2) Make investments

3) Generate a future return
44
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***Corporate finance***
informs capital acquisition/maintenance
45
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***Managerial accounting***
* ***informs investment decisions***
46
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***Financial accounting***
__measures__ the returns
47
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* **What is marketing?**
Informally: collected knowledge and best practices of __Creating relationships__ with and satisfying customers
48
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What is management?
Informally: collected knowledge and best practices of setting the _*strategy* of an organization and coordinating the __*efforts*__ of its employees
49
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What is financial accounting?
Informally: collected knowledge and best practices for evaluating the *financial* performance of a company