Chapter 8

Review Questions

1)How do public accountants differ from management accountants? Who are the key users of the accounting information? What type of information does each stakeholder group need?

2. Financial statements are prepared using generally accepted accounting principles (GAAP). What group is responsible for establishing these principles, and what goals guide their formulation? Why are many generally accepted accounting principles likely to change in the near future?

3. State the “accounting equation” and define each of its terms. What is the logic behind this equation? How is the structure of the balance sheet related to this equation?

4. Describe the three basic categories of cash flows reported by a statement of cash flows and give examples of specific cash flows included in each category.

5. Identify and describe the basic elements of an income statement. Explain how the accrual basis of accounting guides the way the information on the income statement is reported.

6. What is the purpose of an external audit by an independent CPA firm? How does an auditor go about conducting an audit? How does a qualified opinion by an auditor differ from an unqualified opinion or an adverse opinion?

7. What is the purpose of budgeting? What is the master budget, and what are its major components? How does a top down budgeting process differ from a bottom up approach, and what are the advantages and disadvantages of each?

8. Describe the key differences between financial accounting and managerial accounting.

9. How do management accountants view cost? How do implicit costs differ from explicit costs? Give some examples to illustrate the difference.

.