Learning Questions and Answers for Financial Accounting, Lesson 1.2—Expert Level

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(1Q1) - What is meant by the term “financial accounting?”

(1A1) - Financial accounting is the communication of financial information about an organization so that parties (usually outside parties) can make wise decisions about the organization. By reporting the organization’s past and present, financial accounting enables decision makers to anticipate the organization’s future.

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(1Q2) – In general, when a decision maker studies financial accounting information in order to make a wise decision about an organization, what is that party interested in discovering?

(1A2) - Financial accounting provides information that helps decision-makers judge the financial health and future prospects of an organization. Often, the decision-maker hopes to anticipate how the value of the organization will change over time. Will the size and value increase and, if so, how quickly? Or, to put the question in another way, which organizations will be able to grow the fastest?

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(1Q3) – What are the two most likely decisions that outsider parties make about an organization after studying financial accounting information?

(1A3) – First, some decision-makers study an organization to decide whether either partial or complete ownership is a wise idea. Should ownership shares be bought or sold or retained? Second, other decision-makers want to know whether to provide credit such as giving a loan or selling goods to the organization on credit. Will you ever need to make such decisions? The answer is, “Probably, yes.”

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SUGGESTION: Do the first Test Yourself question in Section 1.1 of your Financial Accounting textbook (Version 3.1 by Hoyle, Skender, and Kratz). (The question starts, “James Esposito is...”) These questions are included at key points in the textbook to provide you with a chance to practice what you have read. Read the answer carefully to make sure you understand.

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(1Q4) – What is the difference between financial accounting and managerial accounting?

(1A4) – Financial accounting provides financial information about an organization as a whole. Most of those decision makers are outside of the company. They are trying to decide whether to (a) hold or obtain ownership shares or (b) provide a loan or credit. Managerial accounting provides information to address individual decisions made by people inside the organization. With managerial accounting, there is no limit to the number of possible questions: what to pay workers, what to charge for a product, etc.?

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SUGGESTION: Take a moment to do the second Test Yourself question in Section 1.1. (It starts, “Jane Winestone is…”) Read the question carefully and come up with your answer. Then read the answer and explanation. If you are correct, move on. If you miss the question, read the explanation carefully to understand what you missed and why.

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(1Q5) – Ms. Smith works for a company that owns and operates 23 donut shops in two states. The company is in the process of introducing a new type of chocolate donut to the market. Ms. Smith is assigned to set the sales price for these donuts. Is she more interested in receiving financial accounting information or managerial accounting information?

(1A5) – This decision is being made within the organization by an employee and is about one element of the operations and not the overall business entity. She should receive and use managerial accounting information to help her make the best possible internal decision on the pricing of the new donut. The managerial accounting information might be gathered for her alone because she is the person charged with this decision.

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(1Q6) – Mr. Thomas holds 100 ownership shares of the Delightful Donut Corporation. He purchased these shares for $18 per share two years ago. They are now selling for $61 per share on the New York Stock Exchange. He is trying to decide whether to buy more ownership shares or sell some or all of the shares he holds. Is he most likely to rely on financial accounting information or managerial accounting information?

(1A6) – Mr. Thomas is an outside party who is making a decision about this organization as a whole. For example, is the business financially healthy? What are its future prospects? Will the company pay dividends in the future? What will happen to the price of the stock? These answers will help him make a decision about stock ownership. He needs financial accounting information.

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Within Section 1.1, you will find a subsection titled “Financial Accounting and Wise Decision Making.” In that area of the textbook, you will find a link to a short video titled, “Why Study and Learn Financial Accounting?” Write down the two or three most important pieces of information you discover in this video.

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