Accounting for Decision Makers (C213)
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Free Accounting for Decision Makers (C213) Questions
What are two examples of product costs?
- Raw materials
- Period expenses
- Selling and administrative expenses
- Direct labor
Explanation
Correct answer
A. Raw materials
D. Direct labor
Explanation
Product costs are costs directly associated with producing goods and are included in inventory until the products are sold. Examples include raw materials (the physical inputs) and direct labor (wages for workers who make the products). Period expenses, selling, and administrative costs are not product costs; they are expensed in the period incurred and do not become part of inventory.
Cash is 65 % of sales; remainder is on credit. Credit collections: 60 % month of sale, 30 % next, 10 % second. What are projected cash sales for the spring quarter?
- $105,000
- $195,000
- $350,000
- $650,000
Explanation
Explanation
Correct answer: (B.) $195,000
Projected cash sales are the portion of total sales collected immediately in cash. Since cash is 65% of sales, you calculate projected cash sales by multiplying total projected sales for the spring quarter by 65%. The credit collection percentages only affect the collection of the remaining 35% on credit, so they do not influence the cash sales figure. Assuming total sales for the spring quarter are $300,000, 65% of $300,000 equals $195,000.
Internal reports are generally used by
-
Lenders
-
Management
-
Employees
-
Suppliers
Explanation
Correct Answer
B. Management
Explanation
Internal reports provide detailed financial data that assist management in decision-making, operational planning, and strategic initiatives. These reports include budgets, performance evaluations, and cost analysis, helping managers track company progress and adjust strategies accordingly.
Why Other Options Are Wrong
A. Lenders Lenders rely on external financial statements rather than internal reports to assess a company’s creditworthiness.
C. Employees While employees may have access to some financial information, internal reports are primarily designed for decision-making at the managerial level.
D. Suppliers Suppliers may use financial data to assess a company’s ability to pay its obligations, but they do not typically access internal accounting reports.
___ evaluates the ability to repay loans?
- Financial Statements
- Balance Sheet
- Income Statement
- Cash Flow Statement
Explanation
Explanation
Correct answer: (D.) Cash Flow Statement
The ability to repay loans is primarily determined by a company's liquidity and the actual cash available to meet debt obligations. While financial statements, balance sheets, and income statements provide useful information about overall financial health and profitability, they do not directly measure cash availability. The cash flow statement tracks the inflows and outflows of cash, showing how much cash is generated from operations and whether the company can cover its loan repayments. Lenders rely on this information to assess the risk of lending.
Which of the following organizations has specific legal authority to establish accounting standards for publicly held companies?
-
Financial Accounting Standards Board (FASB)
-
Securities and Exchange Commission (SEC)
-
Internal Revenue Service (IRS)
-
American Institute of Certified Public Accountants (AICPA)
Explanation
Correct Answer
B. Securities and Exchange Commission (SEC)
Explanation
The Securities and Exchange Commission (SEC) has the legal authority to establish accounting standards for publicly traded companies in the United States. The SEC was created by the Securities Exchange Act of 1934 to regulate securities markets and protect investors. While the SEC often delegates the standard-setting process to the Financial Accounting Standards Board (FASB), it retains the ultimate authority to enforce and modify financial reporting requirements.
Why Other Options Are Wrong
A. Financial Accounting Standards Board (FASB) – While FASB is responsible for developing accounting standards, it does not have the legal authority to enforce them. Instead, it establishes generally accepted accounting principles (GAAP), which the SEC and other regulatory bodies require companies to follow. Without the SEC’s enforcement power, FASB’s standards would not be legally binding on public companies.
C. Internal Revenue Service (IRS) – The IRS overseas tax regulations, not accounting standards. While businesses must report financial information for tax purposes, tax accounting rules differ from financial reporting standards. If the IRS had authority over accounting standards, financial reporting would be influenced primarily by tax collection rather than by providing useful information to investors.
D. American Institute of Certified Public Accountants (AICPA) – The AICPA is a professional organization that provides guidance and ethical standards for certified public accountants (CPAs). It previously played a role in setting accounting standards but no longer has authority in this area. If the AICPA had legal authority, financial reporting standards might lack regulatory oversight and public accountability.
Which of the following would be included on an income statement?
-
Land
-
Cash
-
Accounts receivable
-
Rent expense
Explanation
Correct Answer
D. Rent expense
Explanation
An income statement includes all revenue and expense accounts that contribute to a company’s net income. Rent expense is a recurring cost that businesses incur, and it directly affects profitability. Since expenses are subtracted from revenues to calculate net income, they are an essential part of the income statement.
Why Other Options Are Wrong
A. Land. – Land is a long-term asset and appears on the balance sheet, not the income statement. It does not directly impact a company’s net income during a given period.
B. Cash. – Cash is an asset and is reported on the balance sheet and the statement of cash flows. While it plays a role in business operations, it is not an income or expense item that belongs on the income statement.
C. Accounts receivable. – Accounts receivable represent money owed by customers and are listed as an asset on the balance sheet. They do not appear on the income statement because they are not an expense or revenue but rather an outstanding claim to future cash.
Which body oversees a certified public accounting firm's audit practices when the firm is auditing large, public companies?
- The Public Company Accounting Oversight Board (PCAOB)
- The Internal Revenue Service (IRS)
- The Financial Accounting Standards Advisory Council (FASAC)
- The Financial Accounting Standards Board (FASB)
Explanation
Explanation
Correct answer: (A.) The Public Company Accounting Oversight Board (PCAOB)
The Public Company Accounting Oversight Board (PCAOB) was established to oversee the audits of public companies to protect investors and ensure the accuracy of financial reporting. It sets auditing standards, inspects audit firms, and enforces compliance for firms auditing large, publicly traded companies. The IRS focuses on tax enforcement, the FASAC advises on accounting standards, and the FASB sets accounting principles but does not oversee audit practices.
With the current state of information technology, investors outside a company are now allowed access to a company's internal database of financial information and do their own customized analysis of a firm's performance.
-
True
-
False
Explanation
Correct Answer
B. False
Explanation
Investors outside a company do not have direct access to a company's internal financial database. Instead, they rely on publicly available financial statements, such as balance sheets, income statements, and cash flow statements, which are regulated by financial reporting standards. Companies maintain confidentiality over their internal databases to protect proprietary data and ensure compliance with privacy regulations.
Why Other Options Are Wrong
A. True This statement is incorrect because companies do not grant external investors direct access to their internal financial databases. Such access would pose serious security risks and violate regulatory requirements for financial disclosure. Investors must rely on audited financial statements and reports filed with regulatory agencies like the SEC.
The idea that transactions are recorded at their exchange prices at the transaction date is referred to as the?
-
Cost principle
-
Arm's-length transaction assumption
-
Going concern assumption
-
Monetary measurement principle
Explanation
Correct Answer
A. Cost principle
Explanation
The Cost Principle states that transactions should be recorded at their original purchase price, also known as historical cost, at the time they occur. This ensures that financial statements remain objective and reliable, as recorded values are based on actual, verifiable transactions rather than fluctuating market estimates.
Why Other Options Are Wrong
B. Arm's-length transaction assumption - This concept refers to the idea that transactions should occur between independent, unrelated parties under normal market conditions. It ensures that financial transactions are fair and unbiased, but it does not dictate that transactions must be recorded at their original cost.
C. Going concern assumption - This assumption states that a company is expected to continue operating for the foreseeable future. It justifies the use of accrual accounting and long-term asset valuation but does not specifically require recording transactions at their historical exchange prices.
D. Monetary measurement principle - This principle states that financial transactions should only be recorded if they can be measured in monetary terms. While it ensures that only quantifiable transactions appear in financial records, it does not dictate that they must be recorded at the transaction date's exchange price.
Which of the following is one of the purposes of financial statement analysis?
-
Prognosis
-
Diagnosis
-
Neither diagnosis nor prognosis
-
Both diagnosis and prognosis
Explanation
Correct Answer
D. Both diagnosis and prognosis
Explanation
Financial statement analysis serves two main purposes: diagnosis and prognosis. Diagnosis identifies financial problems and inefficiencies in a business, while prognosis predicts future financial performance. Together, these analyses help businesses make informed strategic decisions and improve financial stability.
Why Other Options Are Wrong
A. Prognosis - This option is incorrect because prognosis alone does not fully capture the purpose of financial statement analysis. Prognosis focuses on future projections, but without diagnosis, businesses would not understand existing financial challenges that might impact future performance.
B. Diagnosis - This option is incorrect because while diagnosis is important, it is only part of financial statement analysis. Understanding current problems is crucial, but businesses also need prognosis to anticipate future outcomes and make strategic plans.
C. Neither diagnosis nor prognosis - This option is incorrect because financial statement analysis is specifically used to both identify current financial issues (diagnosis) and predict future trends (prognosis). Without these components, businesses would struggle to evaluate their financial health effectively.
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