BU121 Study Guide - Midterm Guide: Accounting Equation, Grocery Store, Luxury Vehicle

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BUS 121 – MIDTERM EXAM
STUDY FRAMEWORK
Part A: 10 marks multiple choice – 3 Accounting and 2 CVP, 5 Marketing
Part B: 60 marks short answers – 10 marks Accounting and CVP, 50 marks Marketing
Part C: 30 marks problems – 10 marks CVP, 20 marks Accounting combined problem
– merchandising corporation
TOTAL 100 marks – 3 ½ hours
ACCOUNTING (33% = 3 multiple choice, 10 short answers, 20 combined problem)
financial vs. managerial accounting
Two different Branches:
- This is because a lot of people use accounting information and they fit into these
two groups. They are making different decisions so they need different information.
Each attempts to convey different types of information to different types of users
Three differences:
Difference Managerial Financial
Who uses? people inside company (how I
run the company)
People outside and whether they
want to deal with company
(shareholders, investors etc.)
Who prepares? Certified management
accountant
Chartered Accountant
How? In whatever suitable form In terms of GAAP
Why? done for speed cause they
already trust info
focus on precise info for people
outside to trust info
G.A.A.P. – what, why, concepts
What:
- Generally Accepted Accounting Principles
- guidelines prepared by the accounting profession (the Canadian Institute of
Chartered Accountants) that all firms should follow in preparing their financial
statements
Why:
- all about trusting and relying on the financial information
- 1) Relevancy: it provides predictive and feedback value {the way the statements are
laid out allows an outside person to get the information they need. EX: creditors use
to predict if that company will pay them back. Or shareholder wants to know if the
company has done something worthwhile with their investment and they need a
feedback on the company’s performance
- 2) Reliability: that information is reliable through.. .
Comparability (outsiders should be able to look at Company A and Company B and
compare them..since both companies using gaap it is easier)
Consistency (a company must choose one approach and must stick to it consistently
so you can trust and rely on the information of the company)
Representational faithfulness (numbers you see represent the true facts so people can
trust info)
Verifiability (requires that all numbers can be verified)
Numbers are neutral (do not sway people one way or another, don’t feel being
mislead)
- GAAP is being used for now, but starting 2011 public and crown companies will not
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be using it and instead international reporting financial standards (IRFS) will be in
use. {New standards}
Concept:
- CONSERVATISM
This is a rule that’s going to effect our numbers. Must be conservative, thus do not
overestimate use the lesser number (ex: selling inventory)
- OBJECTIVITY
This effects our numbers again and goes back to verifiability. If they are objective
they are concrete can be backed up vs. subjective which is your opinion. When we
look at assets we look at historic cost “what you paid for it” (this is objective as the
market price + your opinion based on other buildings, area, etc is subjective)
- MATCHING
Expenses have to connect to the revenue that it earned. One of the ways we do this is
through amortization. So if it’s a 300 000 building we spread the cost over the years it
will help to earn revenue
audit and auditor’s statement
How do you know GAAPS been used:
-process whereby an independent third party examines the information prepared by a
public company’s internal accountants (look at financial statements and make sure
they are following G.A.A.P.)
- paid by the company (but shareholders have right to appoint/reappoint at company
annual general meeting) since employed on behalf of shareholders to safeguard their
interests
- check that G.A.A.P. applied on consistent basis (don’t check every transaction, just
check certain amount to provide for statistical certainty) and info has been prepared
in accordance with GAAPs
- in Canada, all public corporations must have their books audited once yearly
- only Chartered Accountants can conduct audits in the Province of Ontario
- Auditor’s statement includes:
1) Scope [what we did, what we looked at, and at what time – “Here’s the scope”]
2) Opinion [“Here’s our opinion on them”]
- Auditor’s Statement opinions do not say statements are accurate [this suggests
everything was checked though only checked by sampling and estimates must be
made] - only says fair [fairly represented both relevant & reliable] and no material
errors [no significant errors in all material aspects]… nothing large enough to
mislead
3) Qualifications [if the qualifications is put before the opinions that is a huge red flag
because qualifications say “except for…”which is saying what is wrong. Most
companies do not have this paragraph, but an auditor would put this in if they had
concerns. “Before what I say, take a look at these”.
- section 404 of the Sarbanes-Oxley Act/Canadian Securities Administrators(CSA) in
Canada says that CEOs and CFOs must certify the design and effectiveness of
internal accounting controls. CFOS and CEOs are not necessarily doing the work but
they are overseeing it + signing the papers so if anything goes wrong unethically they
singed the paper to certify it thus they are going to jail… bill was enacted as reaction
to number of major corporate/accounting scandals (unethical accounting)
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balance sheet vs. income statement
- balance sheet has cash on it, where as income statement shows revenue & profit
-we can have sales revenue even though people haven’t paid us {money in accounts
receivable}
- expenses are still included on income statement {but accounts payable is shown on
balance sheet}
- amortization is not a cash item {we have to match it to revenue it earns}
- owner’s equity is theoretical it’s not real cash, it is profit that has been reinvested
along with owner’s investments
manufacturing vs. merchandising company
Manufacturing:
- more complicated [two additional expenses & three types of inventory]
- must account for three types of inventories: raw materials, work-in-process, and
finished goods
- this is due to taking raw inputs and changing their form [via processing procedure],
adding value [via inputs of labour & overhead costs], and producing finished products
[ready for sale]
- must make three adjustments in the cost of goods sold section for each of the types
of inventory [materials, goods in process and finished goods]
- in transforming raw material inputs into finished goods there are conversion costs
which take form of direct labour [people working directly on changing form of
product to finished good] or manufacturing overhead costs [factory power, factory
supplies, etc.]
Merchandising:
- components: revenues, cost of goods sold, operating expense, other income &
expenses
- does not manufacture anything, so no conversion costs
- instead buys products from a large number of different manufacturer and arranges
them in store, so inventory consists of finished products called merchandising
inventory
accounting equation
ASSETS = EQUITIES {Assets is what business owns, Equities is what business owes}
ASSETS = LIABILITIES + OWNERS’ EQUITY {there are two different types of
equities}
ASSETS – LIABILITIES = OWNERS’ EQUITY
- what the business owns always equals what the business owes because owners
equity is always viewed as being a residual amount/an amount of money remaining
when all of a firm’s liabilities have been paid
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Document Summary

10 marks multiple choice 3 accounting and 2 cvp, 5 marketing. 60 marks short answers 10 marks accounting and cvp, 50 marks marketing. 30 marks problems 10 marks cvp, 20 marks accounting combined problem. Accounting (33% = 3 multiple choice, 10 short answers, 20 combined problem) This is because a lot of people use accounting information and they fit into these two groups. They are making different decisions so they need different information. Each attempts to convey different types of information to different types of users. In whatever suitable form done for speed cause they already trust info. People outside and whether they want to deal with company (shareholders, investors etc. ) In terms of gaap focus on precise info for people outside to trust info. Guidelines prepared by the accounting profession (the canadian institute of. Chartered accountants) that all firms should follow in preparing their financial statements. All about trusting and relying on the financial information.

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