Study Guide for Test Chapters 18 Through 21

STUDY GUIDE FOR TEST CHAPTERS 18 THROUGH 21

18-3.It is almost impossible to run a company effectively without the ability to read and understand basic accounting reports and financial statements.

Answer: True LG: 1/LL: 1 Page: 548

18-6. The sole purpose of accounting is to help managers evaluate the financial condition of the firm so that they may make better decisions.

Answer: False LG: 1/LL: 1 Page: 549

18-12. In an effort to maintain a competitive advantage, most firms do not share accounting information with people outside of the firm.

Rationale: 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.

18-14. If you know how to keep your customers satisfied, you can successfully manage a business without knowing anything about accounting.

Rationale: Financial information, provided mainly by accountants, is a critical input into managerial decision-making. In order to be a successful manager, you must know something about accounting.

18-26. Activities of managerial accountants include measuring and reporting the costs of production, marketing and other functions within the organization.

18-27. Financial accounting and managerial accounting are similar in that they both provide information intended primarily for people inside the organization.

Answer: False LG: 2/LL: 1 Page: 549-550

18-38. Independent audits are prepared by accountants within the organization to ensure that proper accounting procedures are followed.

18-48. Accounting, as the language of business, is solely concerned with providing information useful to managers of profit-seeking firms.

Rationale: 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.

18-49. As a certified public accountant, you would be working primarily in the area of managerial accounting.

Rationale: A certified management accountant works in the area of managerial accounting. A certified public accountant is involved primarily in financial accounting.

18-53. Because each business is unique, the accounting profession recognizes that the accounting principles followed by one company may need to be completely different from the accounting principles followed by another firm.

Answer: False LG: 2/LL: 2 Page: 550-551

Rationale: In order for investors, creditors, government officials, employees, and other stakeholders to have faith and confidence in accounting reports and financial statements, it is important that methods used by accountants adhere to specific guidelines. The Financial Accounting Standards Board (FASB) defines the generally accepted accounting principles (GAAP) that accountants must follow.

18-58. Accounting and bookkeeping are terms used for essentially the same activity in an organization.

18-63. Double-entry bookkeeping requires that every transaction be recorded in two places.

18-81. One advantage of the double-entry method of bookkeeping is that it can help identify mistakes made in recording financial transactions.

Rationale: Since there are so many numbers to be recorded, it is quite possible that a mistake is made. For that reason, bookkeepers record all their transactions in two places. They then can check one list against the other to make sure that they add up to the same amount.

18-84. Miko is the head of the accounting department at Microflush. She and her subordinates recently completed a trial balance. They are now likely to be working on the balance sheet, income statement and statement of cash flows.

Answer: True LG: 3/LL: 2 Page: 554 Rationale: After the trial balance is completed, the accounting cycle moves to the preparation and analysis of the major financial statements: the balance sheet, income statement, and statement of cash flows.

18-88. The income statement reports the difference between a firm’s assets and its liabilities as of a certain date.

18-89. A firm’s balance sheet reports its financial condition on a specific date.

18-91. An income statement reports what a company owns and owes on a certain day.

18-92. Revenues, cost of goods, and expenses would all be reported on a firm’s income statement.

18-93. Assets are reported on the balance sheet.

18-94. Liabilities are reported on the income statement.

18-95. Assets are economic resources that are owned by a firm.

18-96. Liabilities are what the firm owes to others.

18-97. A statement of cash flows summarizes a company’s cash receipts and cash payments over a period of time.

18-98. The fundamental accounting equation is as follows: Assets = Liabilities + Owners' equity.

18-99. The balance sheet reflects the fact that assets equal the sum of liabilities and owners' equity.

18-100. A balance sheet is composed of assets, liabilities, and revenues.

18-101. The equipment a firm owns and the money it has in its bank account would both be considered among its assets.

19-1. Finance is the function in a business that acquires, manages, and plans for the expenditure of funds.

19-2. Managing a firm’s resources so that it can meet its goals and objectives is the goal of financial accounting.

19-3. A financial manager is responsible for obtaining the necessary money to enable a firm to achieve its goals and objectives.

19-4. The duties and responsibilities of a financial manager are virtually identical to the duties and responsibilities of an accountant.

19-5. Financial managers use data prepared by accountants to develop strategies for improving the financial strength of the firm.

19-6. There is actually a stronger relationship between finance and marketing than there is between finance and accounting.

19-7. Financial managers examine the data prepared by accountants and make recommendations to top management regarding strategies for improving the financial well being of the company. Answer: True LG: 1/LL: 1 Page: 582

19-8.Most small businesses are unable to secure long-term financing.

19-9.Suppliers of short-term financing are prohibited from requiring collateral for the funds they lend to small businesses.

19-10. The most widely used source of short-term funding is trade credit.

19-11. Trade credit represents one of the most expensive forms of short-term financing.

19-12. Trade credit is the practice of buying goods now and paying for them later.

19-13. A revolving credit agreement represents a line of credit that is guaranteed.

19-14. Commercial finance companies normally charge lower rates on short-term loans than those charged by commercial banks.

19-15. Factoring refers to process of selling of accounts receivable for cash.

19-16. Factoring refers to the process of selling inventory to generate short-term funds.

19-17. Factoring represents the least expensive way for a firm to raise short-term funds.

19-18. Equity financing represents funds provided by the owners of a firm.

19-19. Retained earnings represent a source of equity financing. Answer: True LG: 5/LL: 1 Page: 599

19-20. The first time a company offers to sell its stock to the general public is called an initial private label (IPL).

Answer: False LG: 5/LL: 1 Page: 599 - 600

19-21. Corporations must comply with the Securities and Exchange Commission (SEC) requirements in order to sell their stock publicly.

19-22. Debt is the favorite source of long-term financing.

19-23. Venture capital is money that is invested in new or emerging companies that are perceived as having great profit potential.

20-1. Securities markets represent the financial marketplaces for stocks and bonds.

20-2. Securities markets provide private investors a place to buy and sell stocks, bonds, and mutual funds.

20-3. Businesses primarily benefit from securities markets by having a convenient place to buy and sell investments.

20-4. Securities markets benefit businesses and private investors.

20-5. Corporations receive money each time their securities are traded.

20-6. An initial public offering (IPO) represents the first time a corporation's stock is sold to the general public. Answer: True LG: 1/LL: 1 Page: 610

20-7.Institutional investors include pension funds, mutual funds, and insurance companies.

20-8.Securities markets help companies raise long-term debt and equity financing.

20-9.The New York Stock Exchange will underwrite new issues of stocks or bonds.

20-10. Many observers suggest that the stock market is dominated by the buying and selling activities of institutional investors.

20-11. Investment bankers assist in the issuing and selling of new securities.

20-12. Institutional investors include insurance companies, individual investors, and mutual funds.

20-13. Corporations receive funds only in the primary market sale of their stock.

20-14. The integrity of the securities markets impact the entire economy.

21-1.Regulations peg the value of the euro so that one euro equals one U.S. dollar.

21-2.The President of the U.S. determines the supply of money in the U.S.

21-3.Both the M-1 and M-2 definitions of money include coins and paper money.

Answer: True LG: 1/LL: 1 Page: 646 21-4.The M-1 money supply includes money in savings accounts and money market accounts.

21-5.M-2 represents the most commonly used definition of the money supply.

21-6.A significant increase in the money supply creates inflationary pressures in the economy.

21-7.Inflation occurs in an economy with too little money chasing too many goods.

21-8.When the value of the dollar falls, foreign goods become less expensive for American consumers.

21-9.The strength of the U.S. dollar depends on the strength of the U.S. economy relative to the economies of other nations.

21-10. When the value of the euro increases compared to the U.S. dollar, the price of U.S. exports to Europe will decrease.

Rationale: If the value of the euro appreciates against the dollar, U.S. made goods will be less expensive to holders of euros. It will take fewer euros to buy items priced in U.S. dollars.

21-11. While M-1 money supply includes certificates of deposit, M-2 money supply does not.

Rationale: Certificates of deposit are a component of the M-2 money supply, but not the M-1 money supply. M-2 includes everything in M-1 and other types of money such as CDs, savings account deposits, and money market deposits.

21-12. Newspapers in the nation of St. Lunatic report a significant increase in money supply during the past few months. This information indicates that St. Lunatic may experience a serious recession in the near future.

Rationale: An increase in the money supply tends to stimulate spending, making a recession unlikely. The increased spending is more likely to create inflationary pressures in St. Lunatic.

21-13. The government of Beckham worries about inflationary pressures that seem to be building within the nation. Restricting the growth of money supply provides an effective strategy to reduce these inflationary pressures.

Rationale: A basic cause of inflation is a rapid increase in the supply of money. When the money supply increases too rapidly, the extra money in circulation increases the demand for goods relative to supply, causing inflation pressures to build.

21-14. When the value of the dollar increases relative to the euro, the number of U.S. dollars needed to purchase a bottle of French wine decreases.

Rationale: A rising value for the dollar relative to another nation's currency means that Americans can buy more of that nation's goods with their dollars. This indicates that the price of French goods (such as wine) tends to fall in the United States when the value of the dollar rises relative to the euro.

21-15. The President of the U.S appoints the members of the Federal Reserve’s board of governors.

21-16. The Federal Reserve board of governors establishes our nation's fiscal policy.

21-17. The reserve requirement represents the interest rate charged by the Federal Reserve for government guaranteed student loans.

21-18. The reserve requirement represents the Fed's most powerful tool for conducting monetary policy.

Answer: True LG: 2/LL: 1 Page: 648 21-19. A savings and loan association (S&L) is a profit seeking financial institution that accepts both savings and checking deposits.

21-20. The federal government insures saving and loan deposits, as well as deposits with commercial banks and credit unions.

21-21. While electronic funds transfer represents a faster and more flexible method of making payments than writing checks, it is, however, more expensive for banks.

Rationale: Checks are very expensive, primarily because of all of the paperwork involved. Electronic funds transfer will reduce paperwork and improve the efficiency of the banking system, thus reducing costs.

21-22. The World Bank primarily finances projects to improve the productivity and standards of living in poor nations.