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Study Guide

[BMGT 220] - Midterm Exam Guide - Comprehensive Notes for the exam (17 pages long!)


Department
Business and Management
Course Code
BMGT 220
Professor
Dr.Progyan Basu
Study Guide
Midterm

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UMD
BMGT 220
MIDTERM EXAM
STUDY GUIDE

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Introduction to Accounting and Business!
!
!
Nature of Business and Accounting!
business - an organization in which basic resources (inputs: materials, labor), are assembled and processed
provide goods or services (outputs) to customers.!
objective: earn a profit - the dierence btw the amounts received from customers for goods or services and the
amounts paid for the inputs used to provide the goods or services!
!
Types of businesses!
Service Business - provide services rather than products to customers!
Delta Air Lines (transportation services)!
The Walt Disney Company (entertainment services) !
Merchandising Businesses - sell products they purchase from other businesses to customers!
Walmart !
Amazon.com!
Manufacturing Businesses - change basic inputs into products that are sold to customers!
Ford Motor Co (cars, trucks, vans)!
Dell Inc. (personal computers)!
!
Role of Accounting in Business
Role of Accounting = provide info for managers to use in operating the business + info for other users in
assessing the economic performance and condition of the business!
Accounting - an information system that provides reports to users about the economic activities and condition of
a business; "language of business"!
Process: 1) Identify users (internal: managers, employees; external: investors, creditors, customers, government).
2) Assess users' information needs. 3) Design the accounting information system to meet users' needs. 4)
Record economic data about business activities and events. 5) Prepare accounting reports for users.!
Managerial (management) Accounting - the area of accounting that provides internal users (managers,
employees who are directly involved in managing and operating the business) with info !
Objective of managerial accounting = provide relevant and timely info for managers' and employees' decision-
making needs (sensitive info: customers, prices, plans to expand)!
Managerial accountants employed by a business are employed in private accounting!
Financial Accounting - the area of accounting that provides external users (investors, creditors, customers, gvt.)
with info!
Objective of financial accounting = provide relevant and timely info for the decision-making needs of users
outside the business (financial reports provided to bank/creditors in deciding to lend money)!
General-purpose financial statements - one type of financial accounting report distributed to external users!
!
Role of Ethics in Accounting and Business
Accountants must behave in an ethical manner so that the info they provide is trustworthy and useful for decision
making!
Ethics - moral principles that guide the conduct of individuals !
Accounting and Business Frauds!
Computer Associates International, Inc > Inflated financial results > CEO and senior executives indicted,
$225 million fine!
Xerox Corporation > Recognized $3 billion in revenue prior to when it should have been recorded > $10
million fine to SEC. Six executives forced to pay $22 million!
Failure of Individual Character: managers/accountants face pressures from supervisors and justify small ethical
violations!
Culture of Greed and Ethical Indierence: senior managers set the company culture!
Sarbanes-Oxley Act (SOX) - established a new oversight body for the accounting profession called the Public
Company Accounting Oversight Board (PCAOB) and standards for independence, corporate responsibility, and
disclosure!
Guidelines for ethical behavior: 1) Identify an ethical decision by using your personal ethical standards of honesty
and fairness. 2) Identify the consequences of the decision and its eect on others. 3) Consider your obligations
and responsibilities to those who will be aected by your decision. 4) Make a decision that is ethical and fair to
those aected by it.!
!
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!
Opportunities for Accountants
Accountants employed by a business (companies, gvt, not-for-profit) are employed in private accounting !
Career opportunities: bookkeeper, payroll clerk, general accountant, budget analyst, cost accountant,
international auditor, information technology auditor)!
auditors - verify the accuracy of financial records, accounts, and systems!
Public accounting - Accountants employed publicly (individually, in audit, tax, or management advisory services)
provide services on a fee basis !
Career opportunities: large, mid-size, or small firms)!
Certified Public Accountants (CPAs) - public accountants who have met a state's education, experience, and
examination requirements!
!
!
Generally Accepted Accounting Principles (GAAP)
Financial info in U.S. based on GAAP - a collection of accounting standards, principles, and assumptions that
define how financial info will be reported!
Accounting standards - the rules that determine the accounting for individual business transactions!
Accounting principles and assumptions - the framework upon which accounting standards are constructed!
(U.S.) Financial Accounting Standards Board (FASB) - has the primary responsibility for developing accounting
standards; publishes Statements of Financial Accounting Standards, Statements of Financial Accounting
Concepts, and Interpretations!
Securities and Exchange Commission (SEC) - an agency of the U.S. gvt that has authority over the accounting
and financial disclosures for companies whose shares of ownership (stock) are traded and sold to the public;
may issue Sta Accounting Bulletins on accounting matters not addressed by FASB!
International Accounting Standards Board (IASB) - issues International Financial Reporting Standards (IFRS)
(dierent from FASB)!
!
Characteristics of Financial Information
Primary goal of financial accounting is to provide info useful for decision-making; must possess two
characteristics: relevance and faithful representation!
Relevant - info has the potential to impact decision making!
faithful representation - the info accurately reflects an entity's economic activity or condition!
!
Assumptions
Financial accounting and GAAP are based on following assumptions: monetary unit, time period, business entity,
going concern!
monetary unit assumption - requires that financial reports be expressed in a single money unit, or currency,
normally determined by the country in which the company operations (United States = U.S. Dollar) in order to
maintain a common measurement of the eects of economic events and transactions on an entity!
time period assumption - allows a company to report its economic activities on a regular basis for a specific
period of time so that changes in financial condition are reported periodically on a consistent basis (United States
= yearly basis supplemented by quarterly reports)!
business entity assumption - limits the economic data in financial reports to that directly related to the activities
of the business (business is separate from its owners, creditors, or other businesses)!
business entity = proprietorship, partnership, corporation, or limited liability company (LLC)!
!
Form: Proprietorship - owned by one individual!
Characteristics: 70% of businesses in U.S., easy and inexpensive to organize, resources are limited to those of the
owner, used by small businesses!
Examples: A&B Painting!
!
Form: Partnership - is owned by 2+ individuals!
Characteristics: 10% of business organizations in the U.S. (combined with LLCs), combines the skills and
resources of more than one person!
Examples: Jones & Smith, Architects!
!
Form: Corporation - is organized under state or federal statues as a separate legal taxable entity!
Characteristics: generates 90% of business revenues, 20% of the business organizations in the U.S., ownership is
divided into shares called stock, can obtain large amounts of resources by issuing stock, used by large businesses!
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