Accounting for Decision Makers (C213)
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Free Accounting for Decision Makers (C213) Questions
Which financial statement is used to determine a company's income and expenses for a specific period?
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Balance Sheet
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Statement of Retained Earnings
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Income Statement
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Statement of Cash Flows
Explanation
Explanation
Correct answer: (C.) Income Statement
The income statement shows a company's financial performance over a specific period, detailing revenues earned and expenses incurred. It provides insight into profitability by calculating net income or net loss for that period. In contrast, the balance sheet shows assets and liabilities at a single point in time, the statement of retained earnings shows changes in equity, and the statement of cash flows tracks cash inflows and outflows.
A leather-goods company switching to ABC knows its DM and DL. What is the FIRST step to calculating product cost?
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Calculate G&A
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Double-check DM and DL
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Assign overhead costs
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Identify overhead cost activities
Explanation
Correct answer
D. Identify overhead cost activities
Explanation
In Activity-Based Costing (ABC), the first step after knowing direct materials (DM) and direct labor (DL) is to identify overhead cost activities. ABC assigns overhead costs to products based on the activities that drive those costs, so understanding which activities consume resources is essential before assigning overhead. Calculating G&A or assigning overhead comes after identifying the relevant activities.
Using the same Alastair Company data as above: What is the percentage that would be given to current assets on a common-size balance sheet using the percent of sales method (round to the nearest percent)?
Selected data:
Current assets: \(450,000 Total assets:\)725,000
COGS: \(700,000 Sales revenue:\)915,000
Net income: $145,000
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77 percent
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20 percent
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100 percent
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49 percent
Explanation
Correct Answer:
49 percent
Explanation:
When preparing a common-size balance sheet using the percent of sales method, each item is expressed as a percentage of sales revenue, not total assets. The formula used is:
(Current Assets ÷ Sales Revenue) × 100
= (450,000 ÷ 915,000) × 100
≈ 0.4918 × 100
≈ 49%
This means current assets represent approximately 49% of total sales revenue, and that’s the value shown on the common-size balance sheet using the percent of sales method.
Why Other Options Are Wrong:
77 percent
This may reflect a miscalculation or confusion with another ratio, possibly using total assets instead of sales revenue. For example, 450,000 ÷ 725,000 = 62%, which still does not match, but shows how using the wrong denominator can lead to incorrect percentages.
20 percent
This is too low and likely results from a serious calculation error or misinterpretation of what the base figure should be (such as net income or COGS instead of sales).
100 percent
This would imply that current assets equal total sales revenue, which is clearly not the case. This option suggests no comparison or conversion was performed, or that the user assumed current assets and sales were equal.
Which organization establishes the rules US companies use to record and report accounting information?
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The Financial Accounting Standards Board (FASB)
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The International Accounting Standards Board (IASB)
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The Securities and Exchange Commission (SEC)
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The Internal Revenue Service (IRS)
Explanation
Explanation
Correct answer: (A.) The Financial Accounting Standards Board (FASB)
The Financial Accounting Standards Board (FASB) is responsible for creating and updating the generally accepted accounting principles (GAAP) that U.S. companies follow when recording and reporting financial information. While the IASB sets international accounting standards, the SEC regulates securities markets and enforces financial reporting for public companies, and the IRS handles tax matters, it is the FASB that specifically establishes accounting rules and standards.
What are the costs associated with two or more business units called?
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Variable costs
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Direct costs
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Product costs
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Indirect costs
Explanation
Correct answer
D. Indirect costs
Explanation
Indirect costs are costs that cannot be traced to a single business unit or product because they are shared among multiple units. Examples include utilities, rent, or administrative salaries that benefit more than one department. In contrast, direct costs can be specifically assigned to a single unit, and variable or product costs are categorized differently based on production and sales.
Generally accepted accounting principles are
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Natural laws
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Based on scientific proofs
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Developed by accounting rule makers
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None of these are correct
Explanation
Correct Answer
C. Developed by accounting rule makers
Explanation
Generally Accepted Accounting Principles (GAAP) are established by organizations such as the Financial Accounting Standards Board (FASB) to provide consistency, reliability, and comparability in financial reporting. These rules are developed based on best practices, industry needs, and regulatory considerations rather than natural laws or scientific proofs. The goal is to ensure transparency and accuracy in financial statements for stakeholders.
Why Other Options Are Wrong
A. Natural laws – GAAP is not derived from natural laws; it is a set of guidelines created by accounting professionals to standardize financial reporting. Natural laws, such as gravity, exist independently of human influence, whereas GAAP evolves over time based on changes in business practices, economic conditions, and regulatory requirements. Without continuous updates, GAAP would fail to address emerging financial complexities.
B. Based on scientific proofs – While accounting relies on logic and structured methods, it is not based on scientific proofs like those found in physics or chemistry. Instead, accounting principles are developed through industry consensus, practical experience, and economic reasoning. If GAAP were based purely on scientific proofs, it would not be able to adapt to the changing business environment and financial innovations.
D. None of these are correct – This option is incorrect because GAAP is explicitly developed by accounting rule makers. Organizations such as FASB, the Governmental Accounting Standards Board (GASB), and the International Accounting Standards Board (IASB) work together to establish and refine these principles. Without rule-making bodies, financial reporting would lack standardization and transparency.
The emphasis in financial accounting is on which of the following external user groups?
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Management
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Investors and creditors
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Educators
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Certified Public Accountants
Explanation
Correct Answer
B. Investors and creditors
Explanation
Financial accounting is primarily designed to provide useful information to external users, such as investors and creditors. These stakeholders rely on financial statements to assess a company’s financial health, profitability, and creditworthiness. Financial accounting follows standardized principles to ensure transparency and consistency in reporting.
Why Other Options Are Wrong
A. Management While management uses accounting information, managerial accounting—not financial accounting—is primarily designed for internal decision-making.
C. Educators Educators may study financial accounting for academic purposes, but they are not the primary audience for financial statements.
D. Certified Public Accountants CPAs may audit or prepare financial reports, but they are not the primary users of financial accounting information. Their role is to ensure accuracy and compliance rather than to make business decisions based on financial data.
Vital information that CANNOT be captured solely by dollar amounts is reported in a firm's
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Notes to financial statements
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Balance sheet
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Statement of retained earnings
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Income statement
Explanation
Correct Answer
A. Notes to financial statements
Explanation
The notes to financial statements provide additional context and explanations that numerical data alone cannot convey. These notes include disclosures about accounting policies, contingencies, legal matters, and other essential details that influence financial interpretation. Without these notes, stakeholders may misunderstand financial data since certain important qualitative factors, such as legal disputes or changes in accounting methods, cannot be represented purely by numbers.
Why Other Options Are Wrong
B. Balance sheet. – The balance sheet presents a company's financial position at a specific point in time using quantitative data. However, it does not explain policies, contingencies, or non-monetary details that may affect financial decision-making. The balance sheet alone is insufficient to convey all critical business information.
C. Statement of retained earnings. – This statement primarily tracks the changes in retained earnings over a period, including net income, dividends, and adjustments. It does not provide additional explanations about company policies, potential liabilities, or qualitative financial information.
D. Income statement. – The income statement details revenue, expenses, and profitability over a period, but it only presents numerical data. It does not include supplementary disclosures about accounting policies, potential risks, or non-monetary considerations that are critical to understanding a company’s financial health.
Which overhead cost is associated with batch-level activities?
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Product engineering wages
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Property taxes
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Factory insurance
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Machine setups
Explanation
Correct answer
D. Machine setups
Explanation
Batch-level activities are activities that occur each time a batch of products is produced, regardless of the number of units in the batch. Machine setups are a classic example because every batch requires setup of equipment before production begins. In contrast, product engineering wages relate to product-level activities, while property taxes and factory insurance are facility-level costs.
A leather-goods company switching to ABC knows its DM and DL. What is the FIRST step to calculating product cost?
-
Calculate G&A
-
Double-check DM and DL
-
Assign overhead costs
-
Identify overhead cost activities
Explanation
Explanation
Correct answer: (D.) Identify overhead cost activities
In Activity-Based Costing (ABC), the first step after knowing direct materials (DM) and direct labor (DL) is to identify overhead cost activities. ABC assigns overhead costs to products based on the activities that drive those costs, so understanding which activities consume resources is essential before assigning overhead. Calculating G&A or assigning overhead comes after identifying the relevant activities.
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