Exam 11: Understanding Accounting

What is an audit?

Documents generated by the financial accounting system focus on the activities of the company as a whole, rather than on individual departments or divisions. By contrast, documents generated by the management accounting system focus on individual departments.

What is the matching principle?

Which financial statement shows the cost of obtaining materials to make products that were sold during the year? Income statement Balance sheet Statement of cash flows Operating expenses statement Statement of retained earnings

Explain the importance and use of Generally Accepted Accounting Principles (GAAP).

All firms must issue a statement of cash flows.

Owners' equity consists of two sources of capital. What are they?

Which term is used to identify how quickly assets can be converted into cash? Acid test ratio Activity Accounts receivable Current ratio Liquidity

What are the steps in the accounting cycle?

List the potential users of accounting information.

What is the formula for return on equity?

How is gross profit calculated?

Identify an activity ratio and what it measures.

What is the purpose of computing the earnings per share ratio? To determine which firm gets the most out of its resources To determine the net profit margin To measure a firm's ability to meet its current liabilities To attract investors To measure the net income earned by a business for each dollar invested

The accounting equation is: assets = liabilities + owners' equity.

Maggie's Antiques and Collectibles opened with $14 000 beginning inventory. Maggie purchased an additional $5500 in antiques and sold all but $7500. What is Maggie's cost of goods sold? $27 000 $12 000 $19 500 $13 000 None of these

Kershner says: "Our income statement should be looking good this year. We've been doing excellent business this year, so we have a lot of gross sales. The company should be in good shape." Michaels replies: "It remains to be seen how our income statement will look overall. In spite of strong sales revenue, the overall income statement might not be as good as we might hope." Which of the following does Kershner assume? High revenues equate to a healthy income statement. Many factors must be taken into account to calculate the income statement. The company's revenue next year will be as good as this year's. Operating expenses have been relatively high this year. Gross profit is much lower than gross sales.

The most important user of accounting information is the government.

If a company needs cash for emergencies, it can use the money in retained earnings.

Liabilities reflected on the balance sheet are divided into two general categories: current (debts to be paid within one year) and long term (due more than a year into the future).