Chapter 1—Introduction to Business Accounting and the Role of Professional Skills
COMPLETION
1.Information explosion, evolving forms of businesses, more complex business activities, increased regulations, globalisation and technological advances are all factors affecting the ______of the business environment
ANS: complexity
PTS:1DIF: DifficultTOP: The changing business environment
2.An ______is a means by which accounting information about a business’ activityis identified, measured, recorded and summarised so it can be communicated in an accounting report.
ANS:accounting system
PTS:1DIF: ModerateTOP: The accounting system
3.A business financial statements is meant to convey information about the business to ______and ______users in order to help them make decisions about the business.
ANS:internal, external
PTS:1DIF: DifficultTOP: Ethics in business and accounting
4.______is a system in which individuals own businesses that produce and sell services and/or goods for a profit.
ANS:Private enterprise
PTS:1DIF: ModerateTOP: Private enterprise
5.______perform services or activities that benefit individuals or business customers.
ANS:Service businesses
PTS:1DIF: EasyTop: Service businesses
6.______businesses purchase goods for resale to their customers.
ANS:Merchandising
PTS:1DIF: EasyTOP: Merchandising business
7.______are merchandising businesses that sell their products directly to the final customer or consumers.
ANS:Retailers
PTS:1DIF: EasyTOP: Merchandising business
8.______are merchandising businesses that sell their goods to retailers or other commercial users.
ANS:Wholesalers
PTS:1DIF: EasyTOP: Merchandising business
9.______refers to the funds a business needs to operate or expand operations.
ANS:Capital
PTS:1DIF: Moderate TOP: Entrepreneurship and sources of capital
10.______businesses make their products and then sell these products to their customers.
ANS:Manufacturing
PTS:1DIF: Moderate TOP:Manufacturing business
11.______are businesses owned by two or more individuals.
ANS:Partnerships
PTS:1DIF: EasyTOP:Partnership
12.An ______is an individual who is willing to risk the uncertainty of not knowing if customers will buy what their business provides, in exchange for the reward of a profit, along with the reward of seeing their business succeed.
ANS:entrepreneur
PTS:1DIF: ModerateTOP: Entrepreneurship
13.______are businesses owned by one personwho is the sole investor of capital into the business.
ANS:Sole proprietorships or sole traders
PTS:1DIF: Moderate TOP: Sole proprietorship
14.______are the most common type of business organisation.
ANS:Sole proprietorships or sole traders
PTS:1DIF: Easy TOP: Sole proprietorship
15.A ______is a business organisation that has a separate identity from its owners.
ANS:Company/Corporation
PTS:1DIF: Moderate TOP: Company/Corporation
16.______are issued to theowners of a company as evidence of their investment of capital in the business.
ANS:Company shares
PTS:1DIF: Difficult TOP: Company/Corporation
TRUE/FALSE
1.Accounting is an information tool which can help make good business decisions.
ANS:TPTS: 1DIF: Easy TOP: The Accounting system
2.Unless you are a business owner, you will not be making business decisions.
ANS:FPTS: 1DIF: EasyTOP: Accounting support for management activities
3.Many businesses have no need for accounting information and can actually exist without an accounting system.
ANS:FPTS: 1DIF: Easy TOP: Accounting information
4.Accounting keeps track of a business’ economic resources and activities, then reports the results and financial position to users who have an interest.
ANS:TPTS:1DIF: Moderate TOP: The Accounting system
5.The term ‘Private Enterprise’ means that businesses keep their accounting information private.
ANS:FPTS: 1DIF: Moderate TOP: Private Enterprise
6.A dental surgery is an example of a service business.
ANS:TPTS:1DIF: Moderate TOP: Service business
7.Woolworths is an example of a retailing business.
ANS:TPTS: 1DIF: Moderate TOP: Merchandising businesses
8.Sources of capital for a business include owner investments, borrowing or seeking investments from outsiders.
ANS:TPTS: 1DIF: DifficultTOP: Sources of capital
9.Sole proprietorshipsare the most common form of business and as such, conduct more volume of business than partnerships and corporations put together.
ANS:FPTS: 1DIF: Moderate TOP: Sole proprietorship
10.A business’ accounting system would provide information for both external and internal users.
ANS:TPTS:1DIF: DifficultTOP: The Accounting system
11.An internal user would receive “tailor-made” information from the accounting system.
ANS:TPTS:1DIF: ModerateTOP: Management accounting information
12.An external user would receive “tailor-made” information from the accounting system.
ANS:FPTS: 1DIF: ModerateTOP: Financial accounting
13.External users possess skills to extract the information they need for decisions from the accounting information of a business.
ANS:TPTS:1DIF: Moderate TOP: Accounting support for external decision making
14. Feedback from operations can be effectively used in the planning, operating or evaluating stages of a business.
ANS:TPTS:1DIF: Moderate TOP: Evaluating
15.Operating refers to the set of activities that the business engages in to conduct its business according to its plan.
ANS:TPTS:1DIF: EasyTOP: Operating
16.Evaluating is the process of establishing the business’ goals and objectives.
ANS:FPTS: 1DIF: Moderate TOP: Evaluating
MULTIPLE CHOICE
1. Which of the following is false?
a. / Accounting keeps track of a business’ economic resources and activities, then reportsthe results and financial position to users who have an interest.b. / Accounting is a mere numbers game. The information is only useful to a limited few. The reality is that few managers need accounting information to make quality operating decisions.
c. / Accounting focuses on the resources and activities of individual businesses.
d. / Products and services affect almost every minute of our lives.
ANS:BPTS:1DIF: Difficult TOP: Accounting Information
2.Which of the following is an example of a manufacturer?
a. / Dell Calculatorb. / Bob’s lawnmower services
c. / Air NZ
d. / Qantas
ANS:APTS:1DIF: EasyTOP: Manufacturing businesses
3.What is the primary difference between a manufacturer and a merchandiser?
a. / Merchandisers purchase finished goods ready to sell, whereas a manufacturer must create the goods.b. / Manufacturers purchase finished goods ready to sell, whereas a merchandiser must create the goods.
c. / Merchandisers do not sell directly to the public, but rather only to manufacturers.
d. / Manufacturers buy the finished goods from a merchandiser then resell it, basically acting as a middle man.
ANS:APTS:1DIF: Moderate TOP: Merchandising business
4.Which type of business organisation generates the greatest volume of business?
a. / Proprietorships.b. / Partnerships.
c. / Company/corporation.
d. / Each generates roughly the same amount of business.
ANS:CPTS:1DIF: Easy TOP: Company/Corporation
5.Managerial accounting information:
a. / is a one size fits all approach to reporting business results.b. / can be tailored to the needs of the internal user.
c. / follows GAAP in the reporting process.
d. / helps shareholders make decisions.
ANS:BPTS:1DIF: Moderate TOP: Management accounting information
6.Financial accounting information:
a. / is a one size fits all approach to reporting business results.b. / can be tailored to the needs of the internal user.
c. / follows statements on management accounting in the reporting process.
d. / helps only external users make decisions.
ANS:APTS:1DIF: Moderate TOP: Financial accounting information
7.Which of the following would a manager do as a part of planning activities?
a. / Compare estimates to benchmarks.b. / Purchase inventory.
c. / Hire employees.
d. / Prepare cost estimates.
ANS:DPTS:1DIF: Moderate TOP: Planning
8.Operating activities consist of:
a. / how products get made and sold.b. / measuring actual operations and progress against a standard or benchmark.
c. / establishing business goals.
d. / establishing means of achieving business goals.
ANS:APTS:1DIF: Difficult TOP: Operating
9.Evaluating activities consist of:
a. / establishing business goals.b. / establishing a means of achieving business goals.
c. / providing feedback to managers to correct deviations from standards.
d. / setting benchmarks or standards.
.
ANS:CPTS:1DIF: Difficult TOP: Evaluating
10.Statements on management accounting:
a. / are binding and contractual in nature.b. / are general guidelines management accountants may turn to when faced with new situations to resolve.
c. / are developed primarily to guide the structure of reporting to external users.
d. / are issued by CPA Australia.
ANS:BPTS:1DIF: Moderate TOP: Accounting support for external decision making
11.A budget:
a. / quantifies management’s plans.b. / determines and evaluates the cost of specific products or activities in a business.
c. / compiles actual costs for a given period.
d. / is used to determine if a product should be continued or discontinued.
ANS:APTS:1DIF: Moderate TOP: Budgets
12.Which of the following summarises the results of a business’ operating activities for a specific time period?
a. / Incomestatementb. / Cash flow statement
c. / Balance sheet
d. / Payables ledger
ANS:APTS:1DIF: Moderate TOP: Income statement
13.Which of the following summarises a business’ financial position on a given date?
a. / Income statementb. / Cash flow statement
c. / Balance sheet
d. / Budget
ANS:CPTS:1DIF: Moderate TOP: Balance sheet
14.The business’ economic resources are:
a. / Revenues.b. / Liabilities.
c. / Owners' equity.
d. / Assets.
ANS:DPTS:1DIF: Moderate TOP: Balance sheet
15.The business’ obligations to its creditors are:
a. / Liabilities.b. / Expenses.
c. / Payments.
d. / Owners' equity.
ANS:APTS:1DIF: ModerateTOP: Balance sheet
16.Which of the following do not cover a period of time?
a. / Income statement.b. / Cash flow statement.
c. / Balance sheet.
d. / Accounts receivable ledger .
ANS:CPTS:1DIF: Moderate TOP: Balance sheet
17.A lack of solvency is demonstrated when:
a. / assets are greater than liabilities.b. / liabilities are greater than assets.
c. / revenues are greater than expenses.
d. / expenses are greater than revenues.
ANS:BPTS:1DIF: Difficult TOP: Basic financial statements
18.Financial position of a business can best be evaluated with which of the following?
a. / Net income.b. / Assets, liabilities and owner’s equity.
c. / Cash received and paid.
d. / Owner investments.
ANS:BPTS:1DIF: Moderate TOP: Balance sheet
19.Which of the following summarises a business’ receipts and payments?
a. / Budget.b. / Income statement.
c. / Balance sheet.
d. / Cash flow statement.
ANS:DPTS:1DIF: Moderate TOP: Cash flow statement
SHORT ANSWER
1.What is private enterprise?
ANS:
Private enterprise is a system in which individuals own businessesthat produce and sell services and/or goods for a profit. Thesebusinesses include service businesses, merchandising businesses, and manufacturing businesses.
PTS:1DIF: Easy TOP: Private enterprise
2.What are the primary similarities and differences between service business and merchandising/manufacturing businesses?
ANS:
Service businesses and merchandising/manufacturing businessesare trying to earn a profit from selling to a customer. The difference is in what is sold. Service businessesprovide a service to their customers, while merchandising and manufacturing businessesprovide goods to their customers.
PTS:1DIF: Easy TOP: Private enterprise
3.What is the role of accounting information in business?
ANS:
Accounting information helps decision-makers. It aids managers by providing quantitative information about the business to help them in planning, operating, and evaluating the business’activities. Accounting information helps external decision-makers by providing them with financial statements containing economic information about the performance and state of the businesses.
PTS:1DIF: Moderate TOP: The Accounting System
4.Define entrepreneurship.
ANS:
Entrepreneurship is a combination of three factors: the entrepreneur's ideas, the willingness of the entrepreneur to take risks, and the abilities of all of the business’personnel to use capital to produce and sell goods or services.
PTS:1DIF: Moderate TOP: Entrepreneurship
5.What sources of capital are available to an entrepreneur? How do these sources of capital differ?
ANS:
The two primary sources of capital are the owner's investment and borrowing. The owner hopes to get a return on his/her investment greater than the amount that would be obtained from a different investment. Borrowings require repayments, along with interest payments. If the borrowed money cannot be repaid, then the business may become insolvent and cease operations.
PTS:1DI: Moderate TOP: Sources of capital
6.What are the primary differences between companies/corporations and partnerships/sole proprietorships?
ANS:
Company/corporations are legally established as entities separate from their owners. The company/corporation issues capital stock to its owners as evidence of their ownership. The stock is readily transferable to other owners. Sole proprietorships and partnerships are not legally organised separately from their owners.
PTS:1DIF: Moderate TOP: The forms that businesses take
7.Suppose that you are the manager of a business that manufactures various types of athletic shoes for sale primarily in Australia. Discuss the pros and cons of locating your manufacturing plants abroad versus in Australia.
ANS:
The regulatory environments might be very different between Australia and the international location. The tax structures might differ considerably. This might lead to substantial tax saving. Minimum wage laws and working condition standards are present in Australia and might be non-existent abroad. This could lead to substantial labour savings abroad. If the plant were located abroad, restrictions on the flow of cash might make it difficult to bring your profits home. Some countries restrict foreign ownership of assets. The supply lines might be much longer, and burdened by import/export regulations. This might cause difficulties in delivering the product on a timely basis.
PTS:1DIF: Difficult TOP: The Regulatory environment of business
9.Describe the planning function of management.
ANS:
This is the start of management. The plan lays out the organization of and provides direction to the operating and evaluating activities. Planning establishes the business’ goals and the means of achieving those goals. Planning identifies the resources and employees necessary to achieve the business’ goals. It also sets standards against which to measure achievement. This allows management to adjust future strategy.
PTS:1DIF: Moderate TOP: Planning
10.What activities contribute to the operations of a business?
ANS:
Managers set goals, make decisions, and commit the business’ resources in an attempt to achieve those goals. Planning provides organisation and direction for the business. Operating involves gathering the necessary resources and employees and implementing the plans. Evaluating measures the actual progress against standards or benchmarks so problems can be corrected.
PTS:1DIF: Moderate TOP: Operating
11.Describe the evaluating function of management.
ANS:
Evaluation measures the actual operations and progress against standards and then acts to correct deviations from the standards. It is a continuous process that attempts to prevent problems from occurring and to minimise their effect if they do occur.
PTS:1DIF: Moderate TOP: Evaluating
12.Describe the operating function of management.
ANS:
This set of activities allows the business to conduct its business according to plan. They include gathering the necessary resources and employees to achieve the business’ goals. Day-to-day decisions are made about how to best achieve the goals.
PTS:1DIF: Difficult TOP: Operating
13.What is the role of the budget in management?
ANS:
The budget is the result of quantifying management plans and showing the impact of these plans on the business’ operations. Once the planned activities have occurred, managers can evaluate the results against the budget to make sure that the actual operations have achieved the desired results.
PTS:1DIF: EasyTOP: Budgets
14.What is the role of cost analysis in management?
ANS:
Cost analysis is the process of determining and evaluating the costs of specific products or activities within a business. Cost analysis is used when making decisions about these products or activities. Such a decision might include whether to continue a particular product line.
PTS:1DIF: Moderate TOP: Cost analysis
15.What is the role of manufacturing cost reports in management?
ANS:
Manufacturing cost reports are used to monitor and evaluate a business’ operations. The manufacturing cost report can highlight variances of actual costs from budgeted costs. This might allow the manager to take corrective action.
PTS:1DIF: Moderate TOP: Cost reports for products and services
16.Define generally accepted accounting principles.
ANS:
Accounting principles are the set of currently accepted principles, procedures, and practices that are used for financial reporting in Australia and New Zealand. The principles must be followed in the external reports of all businesses that sell stock to the public in Australia and New Zealand, as well as many other businesses.
PTS:1DIF: ModerateTOP: Guidelines for reporting to people outside the business
17.Briefly describe what information is contained in anIncome Statement .
ANS:
A business’ income statement summarises the results of its operatingactivities for a specific time period and shows the business’ profit for that period.This is what the business charged its customers for services or goods provided to them. It also summarises the business’ expenses. This is the cost to the business of providing those goods and services. Net income is the difference between revenues and expenses.
PTS:1DIF: Moderate TOP: Income Statement
18.Briefly describe what information is contained in the balance sheet
ANS:
The assets section lists the business’ economic resources, such as cash, inventories, and equipment. The liabilities section lists the business’obligations to its creditors, such as banks, suppliers, and employees. The owners' equity section shows the owner's current investment in the assets of the business (the contributions of the owner plus the cumulative retained earnings of the business).
PTS:1DIF: Moderate TOP: Balance sheet
19.What are some of the issues addressed by accountants' codes of ethics?
ANS:
The International Federation of Accountants (IFAC) andAICA (Australian Institute of Chartered Accountants) and, NZICA (New Zealand Institute of Chartered Accountants)code of ethics considers issues such as self-discipline, honourablebehaviour, moral judgments, the public interest, professionalism, integrity, and technical and ethical standards. The different code of ethics addresses competence, confidentiality, integrity, objectivity, and resolution of ethical conduct. Thecode of ethics also addresses objectivity, resolution of conflicts, professional competence, confidentiality, tax practice, cross-border activities and publicity. It also addresses independence, fees, and activities incompatible with the practice of accounting, advertising and soliciting.
PTS:1DIF: Moderate TOP: Professional organisations’codesof ethics
20.What is the purpose of a code of ethics?
ANS:
Many situations and decisions are conducted in an environment in which there is not a clear right or wrong. Many situations fall between the two extremes. A code of ethics is designed to provide guidance to various people in maintaining high ethical standards when faced with difficult decisions.
PTS:1DIF: Moderate TOP: Ethics in business and accounting