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:	1	DIF: Difficult	TOP: The changing business environment

	2.	An __________ ___________ is a means by which accounting information about a business’ activity is identified, measured, recorded and summarised so it can be communicated in an accounting report. 

ANS:	accounting system

PTS:	1	DIF: Moderate	TOP: The accounting system

	3.	A business financial statement 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:	1	DIF: Difficult 	TOP: 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:	1	DIF: Moderate	TOP: Private enterprise

	5.	_________ ___________ perform services or activities that benefit individuals or business customers.

ANS:	Service businesses

PTS:	1	DIF: Easy	Top: Service businesses

	6.	____________________ businesses purchase goods for resale to their customers.

ANS:	Merchandising

PTS:	1	DIF: Easy	TOP: Merchandising business

	7.	____________________ are merchandising businesses that sell their products directly to the final customer or consumers.

ANS:	Retailers

PTS:	1	DIF: Easy	TOP: Merchandising business 

	8.	____________________ are merchandising businesses that sell their goods to retailers or other commercial users.

ANS:	Wholesalers

PTS:	1	DIF: Easy	 TOP: Merchandising business 

	9.	____________________ refers to the funds a business needs to operate or expand operations.

ANS:	Capital

PTS:	1	DIF: Moderate 	 TOP: Entrepreneurship and sources of capital 

	10.	____________________ businesses make their products and then sell these products to their customers.

ANS:	Manufacturing

PTS:	1	DIF: Moderate 	TOP: Manufacturing business

	11.	____________________ are businesses owned by two or more individuals.

ANS:	Partnerships

PTS:	1	DIF: Easy	TOP: 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:	1	DIF: Moderate	TOP: Entrepreneurship

	13.	_________________________ are businesses owned by one person who is the sole investor of capital into the business.

ANS:	Sole proprietorships or sole traders

PTS:	1	DIF: Moderate	 TOP: Sole proprietorship

	14.	_________________________ are the most common type of business organisation.

ANS:	Sole proprietorships or sole traders

PTS:	1	DIF: Easy 	TOP: Sole proprietorship

	15.	A ____________________ is a business organisation that has a separate identity from its owners.

ANS:	Company/Corporation

PTS:	1	DIF: Moderate 	TOP: Company/Corporation
	16.	_________________________ are issued to the owners of a company as evidence of their investment of capital in the business.

ANS:	Company shares

PTS:	1	DIF: Difficult 	TOP: Company/Corporation

	17.	_______________ ____________ ____________ __________ are the currently accepted principles, practices and standards that businesses use for financial accounting and reporting in Australia, New Zealand and all over the world.

ANS:	Generally accepted accounting principles

PTS:	1	DIF: Difficult 	TOP: Generally accepted accounting principles

	18.	_______________ is the difference between the cash and credit sales of a business (revenues) and its total costs (expenses).

ANS:	Profit

PTS:	1	DIF: Easy 	TOP: Basic financial statements

	19.	An _______________ shows a business’ revenues, expenses and net income (or net loss) for a time period, usually one year.

ANS:	income statement

PTS:	1	DIF: Moderate 	TOP: Income statement

	20.	The International Federation of Accountants (IFAC) is an independent, worldwide organisation. It has developed a ________ ___ ______ for accountants in each country to use as a basis for producing their own versions.

ANS:	code of ethics

PTS:	1	DIF: Moderate 	TOP: Professional organisations’ code of ethics

TRUE/FALSE

	1.	Accounting is an information tool which can help make good business decisions.

ANS:	T	PTS: 1		DIF: Easy 	TOP: The accounting system 

	2.	Unless you are a business owner, you will not be making business decisions.

ANS:	F	PTS: 1		DIF: Easy	TOP: Accounting support for management activities 

	3.	Many businesses have no need for accounting information and can actually exist without an accounting system.

ANS:	F	PTS: 1		DIF: Easy 	TOP: The accounting system

	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:	T	PTS:	1	DIF: Moderate 	TOP: The accounting system

	5.	The term ‘private enterprise’ means that businesses keep their accounting information private.

ANS:	F	PTS: 1		DIF: Moderate 	TOP: Private enterprise

	6.	A dental surgery is an example of a service business.

ANS:	T	PTS:	1	DIF: Moderate 	TOP: Service business

	7.	A supermarket is an example of a retailing business.

ANS:	T	PTS: 1		DIF: Moderate 	TOP: Merchandising businesses

	8.	Sources of capital for a business include owner investments, and borrowing or seeking investments from outsiders.

ANS:	T	PTS: 1		DIF: Difficult	TOP: Sources of capital

	9.	Sole proprietorships are the most common form of business and as such, conduct more volume of business than partnerships and corporations put together.

ANS:	F	PTS: 1		DIF: Moderate 	TOP: Sole proprietorship

	10.	A business’ accounting system would provide information for both external and internal users.

ANS:	T	PTS:	1	DIF: Difficult 	TOP: The accounting system 

	11.	An internal user would receive “tailor-made” information from the accounting system.

ANS:	T	PTS:	1	DIF: Moderate 	TOP: Management accounting information

	12.	An external user would receive ‘tailor-made’ information from the accounting system.

ANS:	F	PTS: 1		DIF: Moderate 	TOP: Financial accounting 

	13.	External users are assumed to possess the skills to extract the information they need for decisions from the accounting information of a business.

ANS:	T	PTS:	1	DIF: 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:	T	PTS:	1	DIF: 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:	T	PTS:	1	DIF: Easy	TOP: Operating 

	16.	Evaluating is the process of establishing the business’ goals and objectives.

ANS:	F	PTS: 1		DIF: Moderate 	TOP: Evaluating
	
	17.	A balance sheet lists the business’ assets, liabilities and owners’ equity at a given date.

ANS:	T	PTS: 1		DIF: Easy 	TOP: Balance sheet

	18.	Cost analysis tells a business owner the selling price of a product or service.

ANS:	F	PTS: 1		DIF: Moderate 	TOP: Cost analysis

	19.	Having a code of ethics will always provide you with the correct solution to an ethical dilemma.

ANS:	F	PTS: 1		DIF: Difficult 	TOP: Ethics in business and accounting

	20.	The modern day accountant generally works alone and therefore does not require teamwork skills.

ANS:	F	PTS: 1		DIF: Easy 	TOP: Communication and teamwork skills.

MULTIPLE CHOICE
	1.	Which of the following is false?
a.	Accounting keeps track of a business’ economic resources and activities, then reports the 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:	B	PTS:	1	DIF: Difficult 	TOP: Accounting information and decision making

	2.	Which of the following is an example of a manufacturer?
a.	Dell Calculator	
b.	Bob’s lawnmower services	
c.	Air NZ 	
d.	Qantas 	

ANS:	A	PTS:	1	DIF: Easy	TOP: 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:	A	PTS:	1	DIF: 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:	C	PTS:	1	DIF: 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:	B	PTS:	1	DIF: 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:	A	PTS:	1	DIF: 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:	D	PTS:	1	DIF: 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:	A	PTS:	1	DIF: 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:	C	PTS:	1	DIF: 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 a governing body. 	

ANS:	B	PTS:	1	DIF: 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:	A	PTS:	1	DIF: Moderate 	TOP: Budgets

	
	12.	Which of the following summarises the results of a business’ operating activities for a specific time period?
a.	Income statement 	
b.	Cash flow statement	
c.	Balance sheet 	
d.	Payables ledger 	

ANS:	A	PTS:	1	DIF: Moderate 	TOP: Income statement 

	13.	Which of the following summarises a business’ financial position on a given date?
a.	Income statement 	
b.	Cash flow statement	
c.	Balance sheet 	
d.	Budget	

ANS:	C	PTS:	1		DIF: Moderate 	 	 TOP: Balance sheet

	14.	The business’ economic resources are:
a.	Revenues.	
b.	Liabilities.	
c.	Owners’ equity.	
d.	Assets.	

ANS:	D	PTS:	1	DIF: Moderate 	TOP: Balance sheet

	15.	The business’ obligations to its creditors are:
a.	Liabilities.	
b.	Expenses.	
c.	Payments.	
d.	Owners’ equity.	

ANS:	A	PTS:	1	DIF: Moderate	TOP: 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:	C and D	PTS:	1	DIF: 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:	B	PTS:	1	DIF: 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:	B	PTS:	1	DIF: 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:	D	PTS:	1	DIF: Moderate 	TOP: Cash flow statement 

	20.	Which of the following is the first stage in solving a business problem?
a.	Knowing the possible outcomes.	
b.	The recognition and definition of the problem.	
c.	Understanding the available resources to solve the problem.	
d.	Assessing the total cost and benefits of solving the problem.	

ANS:	B	PTS:	1	DIF: Easy 	TOP: Recognising and defining the problem 

SHORT ANSWER

	1.	What is private enterprise?

ANS:	
Private enterprise is a system in which individuals own businesses that produce and sell services and/or goods for a profit. These businesses include service businesses, merchandising businesses, and manufacturing businesses.

PTS:	1	DIF: 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 businesses are trying to earn a profit from selling to a customer. The difference is in what is sold. Service businesses provide a service to their customers, while merchandising and manufacturing businesses provide goods to their customers.

PTS:	1	DIF: 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:	1	DIF: 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:	1	DIF: 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:	1	DI: 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:	1	DIF: 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 your own country. Discuss the pros and cons of locating your manufacturing plants abroad versus in your own country. 

ANS:	
The regulatory environments might be very different between Your country 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 your country 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:	1	DIF: Difficult 	TOP: The regulatory environment of business 

	8.	Describe the planning function of management.

ANS:	
This is the start of management. The plan lays out the organisation 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:	1	DIF: Moderate 	TOP: Planning 

	9.	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:	1	DIF: Moderate 	TOP: Operating 

	10.	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:	1	DIF: Moderate 	TOP: Evaluating 

	11.	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:	1	DIF: Difficult 	TOP: Operating 

	12.	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:	1	DIF: Easy	TOP: Budgets

	13.	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:	1	DIF: Moderate 		TOP: Cost analysis 

	14.	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:	1	DIF: Moderate 		TOP: Cost reports for products and services

	15.	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 and all over the world. The principles must be followed in the external reports of all businesses that sell stock to the public in Australia, New Zealand and some other parts of the world, as well as many other businesses.

PTS:	1	DIF: Moderate		TOP: Guidelines for reporting to people outside the business 

	16.	Briefly describe what information is contained in an Income Statement.

ANS:	
A business’ income statement summarises the results of its operating activities for a specific time period and shows the business’ profit for that period. An income statement summarises the business’ revenues which is what the business charged its customers for services or goods provided to them. It also summarises the business’ expenses which is the cost to the business of providing those goods and services. Net income is the difference between revenues and expenses.

PTS:	1	DIF: Moderate 		TOP: Income statement 

	17.	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:	1	DIF: Moderate 	TOP: Ethics in business and accounting 

PROBLEM

	1.	Your friend has been provided with the most recent financial statements for a business that she is interested in buying. She is familiar with the income statement and cashflow statement but is unsure about the contents of the balance sheet. Briefly describe the information contained in a 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:	1		DIF: Moderate 		TOP: Balance sheet

	2.	You really like the topic of accounting and are considering it as a possible career opportunity. You are aware that professional accountants are bound by a code of ethics. Discuss some of the issues that are addressed by having a code of ethics.

ANS:	
The International Federation of Accountants’ (IFAC) and CAANZ’s (Chartered Accountants Australia and New Zealand) code of ethics considers issues such as self-discipline, honourable behaviour, moral judgements, the public interest, professionalism, integrity, and technical and ethical standards. The different codes of ethics address competence, confidentiality, integrity, objectivity, and resolution of ethical conduct. They also address objectivity, resolution of conflicts, professional competence, confidentiality, tax practice, cross-border activities, publicity, independence, fees, and activities incompatible with the practice of accounting, advertising and soliciting.

PTS:	1	DIF: Moderate 	TOP: Professional organisations’ codes of ethics