CHAPTER 1 Review

CHAPTER 1 Review - CHAPTER 1 Uses of Accounting Information...

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CHAPTER 1 Uses of Accounting Information and the Financial Statements 0REVIEWING THE CHAPTER Objective 1: Define accounting and describe its role in making informed decisions, identify business goals and activities, and explain the importance of ethics in accounting. 10. Accounting is an information system that measures, processes, and communicates financial information about an identifiable economic entity. It provides information that is essential for decision making. 20. A business is an economic unit that sells goods and services at prices that will provide an adequate return to its owners. To survive, a business must meet two goals: profitability, which means earning enough income to attract and hold investment capital, and liquidity, which means keeping sufficient cash on hand to pay debts as they fall due. 30. Businesses pursue their goals by engaging in operating, investing, and financing activities.0 a0. Operating activities are the everyday activities needed to run the business, such as hiring personnel; buying, producing, and selling goods or services; and paying taxes. b0. Investing activities spend the funds raised. They include such activities as buying and selling land, buildings, and equipment. c0. Financing activities are needed to obtain funding for the business. They include such activities as obtaining capital from owners and creditors, paying a return to owners, and repaying creditors. 40. Performance measures indicate the extent to which managers are meeting their business goals and whether the business activities are well managed. Performance measures thus often serve as the basis for evaluating managers. Examples of performance measures include cash flow (for liquidity), net income or loss (for profitability), and the ratio of expenses to revenue (for operating activities). 50. A distinction is usually made between management accounting, which focuses on information for internal users, and financial accounting, which involves generating and communicating accounting information in the form of financial statements to persons outside the organization. 60. Accounting information is processed by bookkeeping, computers, and management information systems. 0 a0. A small but important part of accounting, bookkeeping is the mechanical and repetitive process of recording financial transactions and keeping financial records. b0. The computer is an electronic tool that rapidly collects, organizes, and communicates vast amounts of information. The computer does not take the place of the accountant, but the accountant must understand how the computer operates because it is an integral part of the accounting information system.
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c0. A management information system (MIS) is an information network of all major functions (called subsystems ) of a business. The accounting information system is the financial hub of the management information system. 70.
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CHAPTER 1 Review - CHAPTER 1 Uses of Accounting Information...

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