Accounting: Chapter 1

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For what fundamental purpose do we keep records?

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For what fundamental purpose do we keep records?

To help make business decisions

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Retained earnings represent an asset to the firm.

False

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Recordkeeping promotes trust and reduces the risk of loss from exchanging with strangers

True

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Accounting is not vital to the development of human civilization

False

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We use managing accounting information to evaluate management performance

False

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What is marketing?

collected knowledge and best practices of creating relationships

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One characteristic of an asset is:

it provides expected future benefits

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As shown in the syllabus, what is the main action of the Group Project?

Analyze publicly traded companies

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Fundamental Demand For Accounting is___________

to help guide exchange

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Accounting is ___________

an evolved economic institution

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A bill of lading is a document issued by a(n) __________.

carrier

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Which of the following documents is a primary source of accounting data (assets, liabilities, equity, revenues, expenses)?

Lease agreement

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Workload refers to the volume of goods or services the organization will provide

True

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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

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Which of the following indicates the capital structure of a firm?

Debt-to-equity ratio

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Which of the following is a benefit of debt relative to equity?

Lower cost of capital

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More than half of CEO compensation is now comprised of _____________.

stock options

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A business plan should help you assess whether the proposed venture is sensible

True

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What is the first step in budget preparation?

completion of an environmental statement

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What does a strategic plan define?

broad set of goals for the organization

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How much did I sell last year

Helps decide how much wheat to grow this year

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How much wheat do I own right now?

Helps identify the scale of possible transactions

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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

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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

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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

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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.

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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]

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Accounting is…

  • NOT just a series of rules

  • NOT just Debits and credits

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Accounting is an evolved economic institution

Vital to the development of human civilization Vital to humans’ recent economic development

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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

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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

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Managerial Accounting

  • Looks forward – the future

  • Provides information for improving decisions

  • Internal users only: for the firm’s managers

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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

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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

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Residual Claimants:

owners hold a residual claim

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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)

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Board of Directors:

  • Represents shareholder interests, hire & oversee management

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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

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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

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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

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Corporate finance

informs capital acquisition/maintenance

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Managerial accounting

  • informs investment decisions

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Financial accounting

measures the returns

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  • What is marketing?

Informally: collected knowledge and best practices of Creating relationships with and satisfying customers

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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

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What is financial accounting?

Informally: collected knowledge and best practices for evaluating the financial performance of a company

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