Accounting for Decision Making Review
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Course Introduction
Accounting for Decision Making is designed to equip students with the essential concepts and tools of accounting that are vital for informed managerial decision-making. The course introduces the basics of financial and managerial accounting, emphasizing how to interpret, analyze, and use accounting information to support strategic planning, control, and operational decisions. Students learn how to evaluate performance, assess costs, prepare budgets, and interpret financial statements, all while considering ethical and practical implications in real-world contexts. By the end of the course, learners are empowered to apply accounting data to make sound business decisions and contribute effectively to organizational success.
Recommended Textbook Financial Reporting Financial Statement Analysis and Valuation 9th Edition James M. Wahlen
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14 Chapters
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Chapter 1: Overview of Financial Reporting, Financial
Statement Analysis, and Valuation
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Q1) What is the rationale for the statement of cash flows?
Answer: The statement of cash flows provides information on the sources and uses of cash.Even profitable firms sometimes find themselves in need of cash and unable to pay suppliers,employees,and other creditors.This may occur for two reasons:
1.The timing of cash receipts from customers does not necessarily coincide with the recognition of revenue,and the timing of cash expenditures does not necessarily coincide with the recognition of expenses under the accrual basis of accounting. Normally cash expenditures precede the recognition of expenses and cash receipts occur after the recognition of revenue.
2.The firm may need to acquire new property,plant,and equipment; retire outstanding debt; or reacquire shares of its common stock when there is insufficient cash available.
Q2) The five economic attributes that are normally studied are demand,supply,manufacturing,____________________,and investing and financing.
Answer: marketing
Q3) Normally,intense rivalries have a tendency to reduce ____________________.
Answer: profitability
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Chapter 2: Asset and Liability Valuation and Income Recognition
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Q1) U.S.GAAP,IFRS,and other major accounting standards are best characterized as:
A) historical accounting models.
B) current value accounting models.
C) acquisition cost accounting models.
D) mixed attribute accounting models.
Answer: D
Q2) Discuss the three ways in which GAAP allows value changes to be treated in the financial statements.Provide an example of each value change treatment.
Answer: 1.Value changes recognized on the balance sheet and the income statement when realized in a market transaction.Examples include selling inventory or land.
2.Value changes recognized on the balance sheet when they occur,but recognized on the income statement when realized.Examples include marketable securities.
3.Value changes recognized on the balance sheet and the income statement when they occur.Examples include impairment losses.
Q3) Refer to Balance Sheet Equation.The payment of a note payable by a firm reduces cash and ______________________________.
Answer: liabilities
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Chapter 3: Income Flows versus Cash Flows: Understanding
the Statement of Cash Flows
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Q1) A firm's cash flows will differ from net income each period for all of the following reasons except:
A) cash receipts from customers do not necessarily occur in the same period in which a firm recognizes revenues.
B) cash expenditures to employees, suppliers, and governments do not necessarily occur in the same period in which a firm recognizes expenses.
C) the company is sustaining losses each period.
D) cash inflows and outflows that pertain to investing and financing activities do not immediately flow through the income statement.
Answer: C
Q2) Which statement is false regarding the preparation of the indirect method of the statement of cash flows?
A) An increase in merchandise inventory is subtracted from net income.
B) Depreciation expense is added to net income.
C) An increase in accounts receivable is added to net income.
D) An increase in accounts payable is added to net income.
Answer: C
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Chapter 4: Profitability Analysis
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Sample Questions
Q1) Firms that have either convertible securities or stock options or warrants outstanding have __________________________________________________.
Q2) Discuss the economic characteristics of firms that have the following mix of profit margin and asset turnover.In addition provide an example of an industry that would have the relevant profit margin asset turnover mix:
A.High profit margin and low asset turnover.
B.Low profit margin and high asset turnover
Q3) Refer to the information for Net Devices Inc.What is the accounts receivable turnover ratio for Net Devices for 2011?
A) 24.65
B) 14.85
C) 14.81
D) 10.50
Q4) Refer to the information for Extreme Sports Company and All Sports Corporation. Calculate All Sports' inventory turnover ratio.
A) 5.3
B) 1.2
C) 3.9
D) .256
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Chapter 5: Risk Analysis
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Q1) Which of the following is not one of the three explanatory variables that determine a firm's market beta?
A) Degree of investing leverage.
B) Degree of operating leverage.
C) Degree of financial leverage.
D) Variability of sales.
Q2) Here are several ratios calculated from Midas Company's financial statements:
Days in Receivables = 45
Days in Payables = 36
Days in Inventory = 30
How many days of working capital financing does Midas need to obtain from other sources?
A) 39 days
B) 36 days
C) 56 days
D) 26 days
Q3) One problem with debt ratios is that they provide no information about the ability of the firm to generate ________________________________________ to service debt.
Q4) The current ratio is one of the measures of the __________ of the firm.
Page 7
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Chapter 6: Accounting Quality
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Q1) ____________________ represents the concept of being able to compare financial statement data across years for any particular firm.
Q2) Healy and Wahlen state that one type of earnings management occurs when managers use judgement in financial reporting to alter financial reports in order to mislead some stakeholder about the economic performance of the company.Earnings management is a consequence of a judgement by management which results in lower economic information content of the financial reports. Discuss four reasons that discourage managers from practicing earnings management.
Q3) As transitory components become a more important part of a firm's reported earnings,the reported earnings:
A) are more quality enhanced.
B) become a more reliable indicator of sustainable cash flows.
C) are a less reliable indicator of sustainable cash flows.
D) are a more reliable indicator of fundamental value.
Q4) Quality accounting information should be informative as to both the __________________________________________________ of the current period's earnings and the long-run sustainability of profits.
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Chapter 7: Financing Activities
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Q1) Which is the first date when employees can exercise their stock options?
A) vesting date
B) grant date
C) exercise date
D) liquidating date
Q2) Discuss the method of accounting for employee stock options.In your answer discuss the how the accounting has changed during recent years.
Q3) One criterion that must be satisfied for a firm to recognize an obligation is that the transaction or event giving rise to the obligation has already
Q4) When firms use derivatives effectively to manage risks,the net gain or loss each period should be relatively ____________________.
Q5) Gains and losses on cash flow hedges affect earnings ____________________ than those on fair value hedges.
Q6) Why can exercising stock options create cash flow problems for managers at the exercise date? What is an alternative to this problem?
Q7) The first date at which employees can exercise their stock options is termed the _________________________.
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Chapter 8: Investing Activities
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Q1) When certain kinds of assets are built that require public welfare and safety expenditures at the end of the asset's life:
A) these asset retirement costs are expensed when asset retirement occurs.
B) a liability simultaneously arises.
C) these estimated future expenditures are added to the carrying value of the asset.
D) this fact is only reported in the financial statement footnotes.
Q2) Expenditures included in the cost of a long-lived asset are:
A) intangible.
B) charged off.
C) expensed.
D) capitalized.
Q3) Unrealized holding gains and losses from investments classified as available for sale are reported in _____________________________________________.
Q4) Held-to-maturity securities are accounted for at __________________________________________________.
Q5) Securities that are purchased in order to take advantage of short-term changes in market value should be classified as ____________________ securities.
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Chapter 9: Operating Activities
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Q1) Accountants use reserve accounts for various reasons,for each of the scenarios below describe a specific account example that matches the scenario.
1.The use of a reserve account in order to match expense with revenues.
2.The use of a reserve account in order to keep expense out of the income statement.
3.The use of a reserve account in order to revalue an asset,but delay the income recognition effect.
Q2) All of the following are most likely to change the FMV of pension plan assets during a given period except:
A) Employer cash payments are made to the plan trustee.
B) Changes in Internal Revenue Service regulations for future tax deductible amounts of contributions.
C) Actual returns on invested plan assets.
D) Retirement benefits paid.
Q3) ____________________ differences result from including revenues and expenses in income before taxes in a different period than those items affect taxable income.
Q4) Deferred tax assets result in future tax ____________________ when temporary differences reverse.
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Chapter 10: Forecasting Financial Statements
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Q1) The authors set forth a seven-step forecasting game plan for preparing pro forma financial statements.Discuss the seven steps necessary to prepare the three principal financial statements.
Q2) A firm in transition from the high growth to the mature phase of its life cycle,or a firm with significant technological improvements in its production processes,might expect increases in ______________________________ but decreases in sales prices per unit.
Q3) Based on the following statement from the text-"to develop forecasts of individual operating assets and liabilities,you must first determine the underlying operating activities that drive them"-explain what those underlying activities are.
Q4) To ensure that the financial statements articulate,it is important that the change in the cash balance on the balance sheet each year agrees with:
A) the cash collections from sales in the projected income statement.
B) the cash provided by or used by operations on the projected statement of cash flows.
C) the net change in cash on the projected statement of cash flows.
D) the net change in working capital from period to period.
Q5) Realistic expectations are ____________________ and ____________________.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) Provide the rationale for using expected dividends in a valuation model.
Q2) When deriving the equity value of a firm,an analyst forecasts the real dividends expected to be paid in the future.In this case,which discount rate should be used?
A) The nominal rate of return
B) The real rate of return
C) The risk-free rate of return
D) The risk adjusted rate of return
Q3) Explain the theory behind the dividends valuation approach.Why are dividends value-relevant to common equity shareholders?
Q4) Implementing a dividend valuation model to determine the value of the common shareholders' equity requires an analyst to measure three elements.What are the three elements that the analyst needs to measure?
Q5) Dividends measure the cash that ____________________ ultimately receive from investing in an equity share.
Q6) One criticism in using the CAPM to calculate the cost of equity capital is that ______________________________ and the
are quite sensitive to the time period and methodology used in their computation.
Page 13
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Q1) Financial liabilities include all of the following except:
A) mortgages payable
B) current maturities of long-term debt
C) accrued taxes
D) bonds payable
Q2) Steady-state growth in ___________________________________ could be driven by long-run expectations for growth attributable to economy-wide inflation,general economic productivity,the population,or long-run growth in industry's sales.
Q3) If an analyst wants to value a potential investment in the net operating assets of a division of another firm,the relevant cash flows the analyst should use are:
A) free cash flow from operations.
B) free cash flows for all debt and equity capital stakeholders.
C) free cash flows to common equity shareholders.
D) cash flow from operations.
Q4) A disadvantage of the free cash flow valuation method is:
A) The terminal value tends to dominate the total value in many cases.
B) The projection of free cash flows depends on earnings estimates.
C) The free cash flow method is not rigorous.
D) The free cash flow method is not used widely in practice.
Page 14
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Chapter 13: Valuation: Earnings-Based Approaches
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Q1) Which of the following is probably the least likely reason for acquirers to pay too much in an acquisition?
A) Overbidding
B) Over optimistic appraisal of market potential
C) Over estimation of synergies
D) Overuse of conventional financial statements
Q2) In theory,all three valuation models,when correctly implemented with internally consistent assumptions,will produce the same estimates of value.However,in practice,which of the following errors can result in different value estimates?
A) Incomplete or inconsistent earnings and cash flow forecasts
B) Inconsistent estimates of weighted average costs of capital
C) Incorrect continuing value computations
D) All of these errors result in different value estimates.
Q3) Over sufficiently long periods,_________________________ equals free cash flows to common equity.
Q4) Over the life of a firm,the capital invested in the firm by the shareholders plus the income of the firm will reflect the ______________________________ to the shareholders.
Q5) What is meant by the term clean surplus accounting?
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Chapter 14: Valuation: Market-Based Approaches
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Q1) The differences in industry market-to-book ratios may be the result of differences in growth,ROCE relative to RE,as well as differences in _______________________________________________________.
Q2) Trading on the equity is likely to be a good financial strategy for stockholders of companies having:
A) Cyclically high and low amounts of reported earnings.
B) Steadily declining amounts of reported earnings.
C) Volatile fluctuations in reported earnings over short periods of time.
D) Steady amounts of reported earnings.
Q3) Valuation using market multiples captures:
A) absolute valuation per dollar of book value or per dollar of earnings.
B) dollar of book value or dollar of earnings per dollar of common equity.
C) relative valuation per dollar of book value or per dollar of earnings.
D) intrinsic valuation per dollar of book value or per dollar of earnings.
Q4) A company with a PEG ratio of less than one would be interpreted as having a stock price that is low relative to ______________________________.
Q5) To estimate security's risk-neutral value we can use the _____________________________________________ and risk-free rates of return.
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