Chapter 17 – Understanding Accounting and Financial Information
1. Accounting is an easy subject for people to understand because almost everyone is
exposed to basic accounting concepts in their everyday life.
2. Although managers who work for large firms must know something about accounting,
people who run small businesses only need to know the basics of bookkeeping.
3. It is impossible to run a company effectively without the ability to read and understand
basic accounting reports and financial statements.
4. With increased computer technology, the ability to read and understand financial
statements is no longer an important skill for managers.
5. Accounting provides information about the financial condition and operating
performance of a firm.
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6. The sole purpose of accounting is to help managers evaluate the financial condition of
the firm so that they may make better pricing decisions.
7. Inputs to the accounting system include sales documents.
8. Purchasing insurance, paying employees, and using supplies are examples of financial
transactions.
9.
Chapter 17 – Understanding Accounting and Financial Information
Accounting provides financial information that can be useful to owners, creditors,
suppliers, employees, and competitors of an organization.
10. Accountants do the work involved in recording financial events and transactions, but the
actual classifying and interpreting of this data is left to financial managers.
11. Accounting involves both the recording and the interpreting of financial events.
12. In an effort to maintain a competitive advantage, firms do not share accounting
information with people outside of the firm.
Feedback: Accounting is the measurement and reporting of financial information to users
inside and outside of the organization. People outside the firm would include owners,
creditors, suppliers, employees, and the government.
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19. Government organizations such as the IRS and other government regulatory agencies are
interested in a firm’s accounting information in order to help the firm strategize about
ways to cut costs in order to minimize net income before taxes.
Feedback: Government agencies such as the IRS collect tax revenues. They are interested in
the firm’s tax obligations; and/or they audit publicly traded firm’s accounting records to make
certain they follow generally accepted accounting principles.
20. There are five key working areas in accounting: financial accounting, managerial
accounting, auditing, tax accounting, and government and not-for-profit accounting.
21. Accounting information is not relevant for nonprofit organizations.
22. Churches, schools, and charitable organizations all hire accountants.
23.
Chapter 17 – Understanding Accounting and Financial Information
The accounting profession is divided into two main fields: bookkeeping and auditing.
24. Budget preparation is one aspect of managerial accounting.
25. The work of a certified management accountant is intended to enable people outside of
the organization to make investment decisions.
26. Activities of managerial accountants include measuring and reporting the costs of
production, marketing and other functions within the organization.
27. Financial accounting and managerial accounting are similar in that they both provide
information intended primarily for people inside the organization.
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28. Financial accounting involves activities such as preparing budgets and measuring
production costs.
29. Financial accounting is used to provide information and analysis managers within the
organization can use to assist them in decision-making.
30. Financial accountants prepare reports for owners, creditors, suppliers, and others outside
of the organization.
31. A firm’s annual report is a yearly statement of the financial condition, progress, and
expectations of the organization during one year.
32.
Chapter 17 – Understanding Accounting and Financial Information
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An individual who provides accounting services to individuals and businesses on a fee
basis is referred to as a private accountant.
33. All firms with more than four employees should have a full-time accountant.
34. The job of reviewing and evaluating the records used to prepare a company’s financial
statements is referred to as auditing.
35. Independent audits are prepared by accountants within the organization to ensure that
proper accounting procedures are followed.
36.
Chapter 17 – Understanding Accounting and Financial Information
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An independent audit is an evaluation and unbiased opinion about the accuracy of a
company’s financial statements.
37. A tax accountant is responsible for preparing tax returns and developing tax strategies.
38. An accountant who has a bachelor’s degree, two years of experience in internal auditing
and who has passed an exam by the Institute of Internal Auditors can become recognized
as a certified internal auditor.
39. The Internal Revenue Service is responsible for establishing accounting standards used
by accountants working in government accounting.
40.
Chapter 17 – Understanding Accounting and Financial Information
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Citizens and special interest groups often have interest in the information generated by
government accounting.
41. GAAP refers to a set of standards concerning accounting principles that were established
by the Financial Accounting Standards Board.
Feedback: GAAP refers to generally accepted accounting principles that are established by
the Financial Accounting Standards Board.
42. Information contained in a firm’s annual report largely represents work done by
managerial accountants.
Feedback: Annual reports are documents used by persons outside the organization to gain
knowledge about the organization. Financial accountants prepare the financial documents for
this report.
43.
Chapter 17 – Understanding Accounting and Financial Information
A series of high-profile scandals in the early 2000s put the accounting profession under
intense scrutiny.
Feedback: In the early 2000s, the accounting profession was plagued with several accounting
scandals which have resulted in new laws such as the Sarbanes-Oxley Act which adheres to
tough government reporting standards.
44. Accounting is not important for nonprofit organizations since financial data is not
critical to their success.
Feedback: Nonprofit organizations require accounting information. These organizations hire
accountants to show contributors how their money is being used.
45. Accounting, as the language of business, is solely concerned with providing information
useful to managers of profit-seeking firms.
Feedback: One purpose of accounting is to help managers evaluate the financial condition and
the operating performance of an organization so they may make better decisions. This type of
information is useful to managers of both profit-seeking and not-for-profit organizations.
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58. The Financial Accounting Standards Board only sets standards for accountants in the
private sector; however, government accountants have no universally accepted
procedures that they must follow.
Feedback: The Government Accounting Standards Board (GASB) has established generally
accepted procedures for government accountants.
59. Martha is a member of a conservative political group that wants to identify and publicize
examples of wasteful government spending. The type of accounting information Martha
and her group will follow most closely is provided by certified public accountants.
Feedback: Concerned citizens and special interest groups that want to determine how the
government is using the taxpayers’ money will be most interested in information provided by
government accountants.
60. Bookkeeping is part of the accounting cycle, but accounting goes far beyond the
activities involved in bookkeeping.
61.
Chapter 17 – Understanding Accounting and Financial Information
A major part of a bookkeeper’s job is to interpret financial data and suggest strategies for
improving the firm.
62. After recording a business’s transactions, bookkeepers usually classify the recorded
transactions into groups with common characteristics.
63. A bookkeeper’s first task is to record the firm’s transactions in a journal.
64. The books where accounting data are first entered are called ledgers.
65. Double-entry bookkeeping requires that every transaction be recorded in two places.
