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TEST PLANNING TABLE FOR CHAPTER 8
Learning Objective Easy: Moderate: Challenging:

Knows Basic Understands Applies Principles
Terms and Concepts and
Facts Principles
8-1: Define accounting 1, 14, 15, 94, 2, 3, 4, 5, 6, 7, 8, 9, 95, 100, 104, 105,
and describe how 96, 101, 102 10, 11, 12, 13, 108, 186, 187, 188,
accounting infor- 16, 17, 18, 97, 189
mation is used by a 98, 99, 103, 106,
variety of stake- 107
holders
8-2: Identify the purpos- 20, 21, 22, 30, 19, 23, 24, 25, 27, 28, 109, 110, 190,
es and goals of 111, 113, 116 26, 29, 112, 191
generally accepted 114, 115
accounting princi-
ples
8-3: Describe the key 31, 36, 41, 42, 34, 38, 39, 43, 32, 33, 35, 37, 40, 50,
elements of the ma- 47, 48, 54, 55, 44, 45, 46, 49, 57, 117, 122, 123,
jor financial state- 56, 118, 119, 51, 52, 53, 58, 124, 131, 133, 135,
ments 121, 125, 129, 59, 120, 126, 136, 138, 143, 145,
134, 137, 140, 127, 128, 130, 152, 192, 193, 194
147 132, 139, 141,
142, 144, 146,
148, 149, 150,
151
8-4: Describe several 61, 62, 67, 60, 64, 65, 66, 63, 69, 163, 164, 165,
methods stakehold- 155, 156, 158, 68, 153, 154, 195
ers can use to ob- 159, 160, 166 157, 161, 162
tain useful insights
from a company’s
financial statements
8-5: Explain the role of 70, 72, 73, 74, 75, 76, 77, 82, 71, 79, 80, 81, 170,
managerial account- 78, 167, 168, 173, 177 174, 176, 178, 196,
ing and describe the 169, 171, 172, 197, 198, 199
various cost con- 175
cepts identified by
managerial ac-
countants
8-6: Explain how the 83, 86, 87, 88, 84, 85, 91, 180, 92, 93, 179, 185, 200
budget process can 89, 90, 181, 184
help managers plan, 182, 183
motivate and evalu-
ate their organiza-
tion’s performance
321
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
True/False questions are in plain text.
Multiple choice questions are in bold text.
Essay questions are in bold underlined text
The answers are displayed:

ANS: B DIF: Easy REF: Page 7 OBJ: 8-1 NAT: BUSPROG: Communication
TOP: The Economic Environment KEY: Bloom’s Comprehension
ANS: Answer is B
DIF: Difficulty Level - Easy
REF: Page number of the book where the answer can be found
OBJ: Learning Objective 1 in chapter 8
NAT: Tier 1 Standards (Interdisciplinary Learning Outcomes)
TOP: Topic – A Head/B Head of where the answer can be found
KEY: Bloom’s Taxonomy Tags
322
Chapter 8: Accounting: Decision Making by the Numbers
TRUE/FALSE
1. Accounting is a system for recognizing, recording, organizing, analyzing, summarizing, and

reporting information about the financial transactions that affect an organization.
ANS: T DIF: Easy REF: Page 115 OBJ: 8-1

NAT: BUSPROG: Communication TOP: Accounting: Who Needs It--and Who Does It?
KEY: Bloom’s Knowledge
2. A variety of business stakeholders rely so heavily on accounting information that it’s sometimes
called the “backbone” of business.
ANS: F DIF: Moderate REF: Page 115 OBJ: 8-1

NAT: BUSPROG: Analytic TOP: Accounting: Who Needs It--and Who Does It?
KEY: Bloom’s Analysis
3. The accounting profession is seldom concerned with the interpretation of financial information.

4. Recording financial transactions is an accounting function.
ANS: T DIF: Moderate REF: Page 115 OBJ: 8-1

5. As an employee of Boca Bowling, you have no need to review or understand the company’s
accounting information.

NAT: BUSPROG: Communication TOP: Accounting: Who Uses It?
KEY: Bloom’s Comprehension
6. The managers of a company are the only stakeholders of a company that have a legitimate interest
in its accounting information.

NAT: BUSPROG: Analytic TOP: Accounting: Who Uses It?
7. Some key users of a corporation’s accounting information include managers, government

agencies, and stockholders.

323
324 Chapter 8: Accounting: Decision Making by the Numbers
8. Accounting systems are utilized by companies for several reasons, but they have little value when
it comes to making economic decisions.

9. Mary is an employee and stockholder for the McNeely Company. Mary is considered a primary
user of her firm’s accounting information.
ANS: T DIF: Challenging REF: Page 115 OBJ: 8-1

NAT: BUSPROG: Reflective Thinking TOP: Accounting: Who Uses It?
KEY: Bloom’s Synthesis
10. Public accountants provide a variety of accounting services for clients on a fee basis.

NAT: BUSPROG: Communication TOP: Accounting: Who Does It?
11. Management accountants and public accountants do the same type of work but have different
qualifications.
ANS: F DIF: Moderate REF: Pages 115-116

OBJ: 8-1 NAT: BUSPROG: Analytic TOP: Accounting: Who Does It?
12. Management accountants work for private citizens who are not part of a firm, while public
accountants work internally for publicly traded companies.

13. Management, internal, and government accountants are business titles used by certified public
accountants.

14. Management accountants work within a business organization, preparing reports and analyzing
financial information for the company that employs them.
ANS: T DIF: Easy REF: Pages 115-116

OBJ: 8-1 NAT: BUSPROG: Communication
TOP: Accounting: Who Does It?
Chapter 8: Accounting: Decision Making by the Numbers 325
15. Internal auditors are also known as certified public accountants.
ANS: F DIF: Easy REF: Page 116 OBJ: 8-1

16. Through additional preparation, an accountant may become a certified management accountant
(CMA), certified public accountant (CPA), and/or certified internal auditor. These certifications
signify advanced preparation in the accounting field.

17. Internal auditors are private accountants responsible for verifying their company’s internal
accounting procedures.

18. Most accountants become CPAs because the preparation to become a CMA is much more
rigorous.

NAT: BUSPROG: Analytic TOP: Accounting: Who Does It?
19. Financial accounting is the branch of accounting that prepares financial statements for use by
external stakeholders such as owners, creditors, suppliers, and other stakeholders.

NAT: BUSPROG: Communication
TOP: Financial Accounting: Intended for Those on the Outside Looking In
20. The Financial Accounting Standards Board (FASB) is the private, self-regulating board
established to develop and enforce the generally accepted accounting principles that guide the
practice of financial accounting.

TOP: Role of the Financial Standards Accounting Board
21. FASB is an acronym that stands for Federal Accounting Systems Board.

22. Generally accepted accounting principles (GAAP) are a set of accounting standards used in the
preparation of financial statements.

23. The rules governing the practice of financial accounting are established and enforced by the
Federal Accounting Standards Commission (FASC).

24. GAAP is the policy board that establishes the rules known as the FASB of accounting.

NAT: BUSPROG: Analytic
25. The purpose of GAAP is to specify the procedures used in managerial accounting to prepare
budgets and cost reports.

26. Two of the goals underlying GAAP are to ensure that the statements prepared by financial
accountants are relevant and to ensure that they are consistent.

27. FASB responsibility for enforcing accounting standards only extends to the U.S. and does not
include working with other nations.
ANS: F DIF: Challenging REF: Page 117 OBJ: 8-2

NAT: BUSPROG: Reflective Thinking
28. The FASB and IASB are working together to reduce confusion and provide external stakeholders
with accurate and consistent financial statements worldwide.

29. Since it deals strictly with numbers, the practice of accounting is free from ethical considerations.

NAT: BUSPROG: Analytic TOP: Ethics in Accounting
30. As a result of the accounting scandals of the early 21st century, many states have imposed new
ethics-related requirements on certified public accountants.

NAT: BUSPROG: Communication TOP: Ethics in Accounting
31. Assets = Liabilities + Net Income

TOP: The Balance Sheet: What We Own and How We Got It
32. Ralph owns some stock in the Lottadoe Corporation, and wants to know whether this company
earned a profit over the most recent year. This information would be available in the company’s
balance sheet.

KEY: Bloom’s Evaluation
33. The Taylix Company’s balance sheet showed $18,000,000 in assets and $10,000,000 in liabilities.
Taylix Company’s owner’s equity = $6,000,000.

34. A balance sheet is a financial statement reporting the financial position of a firm at a particular
point in time by identifying and reporting the value of the firm’s assets, liabilities, and owners’
equity.

35. Bernie is calling his accountant to determine how much he owes his supplier of raw materials by
the end of the month. Bernard should ask the accountant to provide him with a balance sheet.

36. According to the accounting equation, Assets – Expenses = Net Income

37. Bernard’s business checking account seems to be short on cash. He is calling his accountant to
determine if he was profitable last month. The income statement is his best source of information
concerning his cash position.

TOP: The Income Statements: So, How Did We Do?
38. Assets are the tangible and intangible resources of value owned by a firm.
ANS: T DIF: Moderate REF: Pages 118-119

OBJ: 8-3 NAT: BUSPROG: Analytic
39. Expenses are listed on the asset side of a balance sheet.

40. Rosalyn owns stock in Munnymacher Inc. and just received her annual report from this company.
If she wants to see the total value of Munnymacher’s assets, she should look at the company’s
balance sheet.

41. Current liabilities are debts that will come due within a year of the date on the balance sheet.

42. The owners’ equity section of the balance sheet indicates the claims a firm’s owners have against
their company’s assets.

43. Liabilities could include bank loans and current payments owed to suppliers.

44. Balance sheets reflect three accounts: assets, liabilities, and cost of goods sold account.

45. The accounting equation is based on the fact that the value of a firm’s assets is, by definition,
exactly equal to the financing provided by creditors and by owners of the firm.

46. A company’s balance sheet will “balance” even if it is on the verge of bankruptcy.

47. An income statement is the financial statement that reports revenues, expenses, and net income
resulting from a firm’s operations, over a given period of time.
ANS: T DIF: Easy REF: Pages 120-121

48. Net income is the difference between the revenue a firm earns and the expenses it incurs in a given
time period.

NAT: BUSPROG: Communication TOP: The Income Statements: So, How Did We Do?
49. The accounting entity approach is an accounting method that recognizes revenue when it is earned
and matches expenses to the revenues they helped produce.

NAT: BUSPROG: Analytic TOP: The Income Statements: So, How Did We Do?
50. A college student registers for classes and pays the tuition with a credit card. Because it uses
accrual-basis accounting, the college will recognize the payment as revenue as soon as the
transaction turns into cash in the school’s bank account.

NAT: BUSPROG: Reflective Thinking TOP: The Income Statements: So, How Did We Do?
51. Business expenses are available resources that stakeholders control.

NAT: BUSPROG: Analytic TOP: The Income Statements: So, How Did We Do?
52. Accrual-basis accounting is the method that recognizes revenue when it is earned and matches
expenses to those revenues they helped produce.

53. Revenues represent increases in the amount of cash and other assets such as accounts receivable
resulting from the sale of goods, the provision of services, or other activities intended to earn
income.

54. The statement of cash flows shows the cash flowing in and out of the firm from three types of
activities: operations, investing, and financing.

TOP: The Statements of Cash Flow: Show Me the Money
55. A statement of cash flows is the financial statement identifying a firm’s sources and uses of cash
in a given accounting period.

56. Revenue, expenses, and net income are the key sections found on a statement of cash flows.

57. The cash flows received from operations reported in the statement of cash flows should be exactly
equal to the revenue the firm reports on its income statement.

58. The cash balance reported at the bottom of the statement of cash flows should equal the amount of
cash reported for a balance sheet prepared at the end of the same accounting period.

59. The statement of retained earnings shows how retained earnings have changed from one
accounting period to the next. By subtracting dividends paid to shareholders from net income,
managers will see changes in this statement over time.

TOP: Other Statements: What Happened to the Owner’s Stake?
60. U.S. securities laws require every private company in the United States to have an independent
CPA firm perform an annual external audit of its financial statements.

TOP: The Independent Auditor’s Report: Getting a Stamp of Approval
61. When an external audit doesn’t uncover any problems with the firm’s financial methods and
statements, the auditor will issue an unqualified opinion.

62. The Sarbanes-Oxley Act of 2002 included provisions designed to improve external auditing
procedures and enhance financial reporting for publicly traded firms.

63. Bryan’s company is going through its annual external audit. Since Bryan’s job is to catalog and
store the company’s supply inventory he needs to make sure his inventory records are accurate, so
the company will receive an unqualified opinion from the auditor.

64. An unqualified opinion and a clean opinion are the same thing.

65. Publicly traded firms may disclose additional information about the firm’s operations in notes to
the financial statements in the annual report.

TOP: Checking Out the Notes to Financial Statements: What’s in the Fine Print?
66. The SEC requires publicly traded corporations to provide comparative financial statements.

TOP: Looking for Trends in Comparative Statements
67. Horizontal analysis is an analysis of information in financial statements that involves expressing
various accounts as a percentage of some base amount.

68. Horizontal analysis compares the balance sheet in a given year to the income statement and
statement of cash flows in that same year to ensure that these three statements contain consistent
information.

69. Aaron and Abbey are evaluating three different telecommunications companies in order to
determine which one is the best investment. Horizontal analysis will allow them to make
comparisons over several years, in order to determine which company(s) has successfully grown
its profits.

70. Managerial accounting involves developing standardized reports according to a predetermined

schedule.

TOP: Inside Intelligence: The Role of Managerial Accounting
71. The CFO of Hawking Bros. Production asked accountant Artie Anderson to prepare a customized
report dealing with cost overruns at the company’s production facility in Florida. Artie is a
managerial accountant.

72. Managerial accounting is the branch of accounting that provides reports and analysis to managers
in order to help those managers make informed business decisions.

73. Cost is defined as the value of what is given up in exchange for something else.

NAT: BUSPROG: Communication TOP: Cost Concepts: A Cost for All Reasons
74. Explicit, implicit, fixed, and variable are all forms of cost concepts commonly used by managerial
accountants.

75. What a person pays out-of-pocket is often referred to as an implicit costs.

76. Explicit costs are not easy to measure since they do not involve a monetary payment.

NAT: BUSPROG: Analytic TOP: Cost Concepts: A Cost for All Reasons
77. Paying Meghan to assemble a computer in your warehouse is considered a direct cost.

TOP: Assigning Costs to Products: As (Not So) Simple as ABC?
78. Activity-based costing is a technique used by managerial accountants to assign product costs based
on links between activities that drive costs and the production of specific products.

79. Joe’s accountant has asked him to determine the company’s direct and indirect costs. Joe would
classify depreciation on the company’s copy machine and computers as an indirect cost.

80. The accounting department at Cathy’s Cupcakes has been asked to determine the company’s direct
costs. The accountants would need to look at what the company spent on baking supplies, muffin
pans and counter help.

81. Rapunzel has asked her accounting department to give her a detailed description of how her
indirect costs are related to the individual hair care products she produces. The best way of
allocating the costs would be to use the two-stage process of activity-based costing.
ANS: T DIF: Challenging REF: Pages 127-128

OBJ: 8-5 NAT: BUSPROG: Reflective Thinking
82. Activity based-costing (ABC) is a simple “one size fits all” method of all allocating costs.

83. Budgeting is a management tool that explicitly shows how a firm will acquire and use resources
needed to achieve its goals over a specific time period.

NAT: BUSPROG: Communication TOP: Budgeting: Planning for Accountability
84. A bottom-up approach to budgeting allows for lower level managers to participate in the
development of budgets.

TOP: Preparing the Budget: Top-Down or Bottom-Up?
85. The top-down approach to budgeting is best if the company wants to develop buy-in with first-line
supervisors and other lower level management.

TOP: Preparing the Budget: Top-Down or Bottom-Up?
86. Financial budgets are the budget documents that identify cash and other financial resources the
firm will acquire and use to finance operations and make planned investments in fixed assets.

TOP: Developing the Key Budget Components: One Step at a Time
87. Operating budget documents include the cash budget and the capital budget.

88. The master budget is a combined statement of an organization’s operational and financial budgets
that represents the firm’s overall plan of action for a specified time period.

89. The cash budget identifies short-term fluctuations in cash flow.

90. The master budget shows how all of the pieces fit together to form a complete picture.

91. The sales budget is the first operating budget created during the budgeting process, because the
costs included in other operating budgets depend on the firm’s level of sales.

92. BigBux, Inc. indicates the number of units of each product it expects to sell, the selling price, and
the total dollar value of sales in its cash budget.

93. Ted runs Green America, Inc., a nursery and landscape operation. Most of his business occurs in
the spring and early summer seasons, yet he makes most of his inventory purchases in the winter.
As such, he must be very careful about cash flow fluctuations. The capital expenditure budget
would be very helpful for Ted.

MULTIPLE CHOICE
94. _____ is a system for recognizing, recording, organizing, summarizing, analyzing, and reporting
information about the financial transactions that affect an organization.
a) Accounting
b) Bookkeeping
c) Managerial finance
d) Auditing
ANS: A DIF: Easy REF: Page 115 OBJ: 8-1
95. Which statement best defines accounting and those parties who exploit it?
a) Accounting is a system of recording and organizing the finances of a business. Bankers
use this system often.
b) Accounting is a system that provides a way for the financials of a business to be recorded,
organized and analyzed. It is used by accountants and managers.
c) Accounting is a system that provides a way for the financials of a business to be recorded,
organized and analyzed. It is used by stockholders, employees, suppliers, government
agencies, and managers.
d) Accounting is a system that provides a way for the financials of a business to be recorded
and analyzed. It is used for internal purposes by accountants and managers.
ANS: C DIF: Challenging REF: Page 115 OBJ: 8-1
NAT: BUSPROG: Reflective Thinking TOP: Accounting: Who Needs It--and Who Does It?
96. Bookkeepers encompass the routine procedures involved in reporting information about the
financial transactions that affect an organization, while _____ go further by analyzing and
interpreting this information and communicating the results to stakeholders.
a) managers
b) employers
c) auditors
d) accountants
ANS: D DIF: Easy REF: Page 115 OBJ: 8-1
97. Managers, stockholders, employees, and creditors are

a) auditors of the health and well-being of a company.
b) all employees of a corporation.
c) all users of accounting information to assess a company’s finances.
d) designated by the board of directors to review company documents.
ANS: C DIF: Moderate REF: Page 115 OBJ: 8-1
98. Stockholders would most likely use accounting information provided by their firm to
a) make capital budgeting decisions.
b) gauge whether the firm is generating a satisfactory return on their investment.
c) determine whether the firm can repay them for their stock.
d) obtain information needed to fill out their individual tax returns.
ANS: B DIF: Moderate REF: Page 115 OBJ: 8-1
99. Key users of accounting information include all of the following EXCEPT
a) managers
b) patent attorneys
c) creditors
d) suppliers
100. A number of groups—whether a company wants them to or not—might have interest in a firm’s
accounting information. Which of the following is most likely NOT one of those groups?
a) news media
b) politicians
c) competitors
d) unions
ANS: B DIF: Challenging REF: Page 115 OBJ: 8-1
NAT: BUSPROG: Reflective Thinking TOP: Accounting: Who Does It?
101. As a _____ you work within an organization, preparing reports and analyzing financial
information such as budgets and cost management.
a) public accountant
b) government accountant
c) management accountant
d) bookkeeper
ANS: C DIF: Easy REF: Pages 115-116
102. _____ accountants provide services such as tax preparation, external auditing, or management
consulting to clients on a fee basis.
a) Public
b) Management
c) Government
d) Private
ANS: A DIF: Easy REF: Pages 115-116
103. _____ perform or assist in a wide variety of tasks for the firms in which they work. These tasks
include budgeting, cost and asset management, and the preparation of reports for the firm’s
stakeholders.
a) Management accountants
b) Public accountants
c) Internal auditors
d) Government accountants
ANS: A DIF: Moderate REF: Pages 115-116
104. You recently were hired by SSC, Inc. It is your job to prepare reports and analyze financial
information related to SSC, Inc. Most likely you are a
a) certified bookkeeper.
b) forensic accountant.
c) management accountant.
d) public accountant.
ANS: C DIF: Challenging REF: Pages 115-116
105. Sally works in the financial department at Porsche. Her duties include preparing reports and
analyzing data specific to Porsche. She develops budgets for upcoming new models, appraises
financial performance, and verifies the accuracy and validity of Porsche’s internal records and
accounting procedures. What might her job title be, specifically?
a) bookkeeper
b) government internal auditor
c) CPA
d) management accountant and internal auditor
ANS: D DIF: Challenging REF: Pages 115-116
106. Candidates wishing to become certified public accountants must complete all of the following to
reach certification EXCEPT
a) must complete 150-semester hours (5 years) of college education with heavy emphasis on
accounting and business-related courses
b) must complete an accounting-related internship while in college
c) must pass a rigorous exam
d) must complete one year of direct work experience in the field of accounting
NAT: BUSPROG: Analytic TOP: Accounting: Who Does It?
107. _____ work for local, state, and federal agencies. They prepare government financial statements as
well as perform tasks similar to those carried out by their private sector counterparts.
a) Fiscal accountants
b) Recording accountants
c) Comptrollers
d) Government accountants
ANS: D DIF: Moderate REF: Page 116 OBJ: 8-1
108. El Duderino, as his clients call him, helps new companies design their accounting systems. He also
assists established companies with updates to their accounting procedures. What might be his job
title?
a) management accountant
b) internal auditor
c) CPA
d) general bookkeeper
NAT: BUSPROG: Reflective Thinking TOP: Accounting: Who Does It?
109. Greg is a recent graduate with this accounting degree. He has also sat for and passed the CPA
exam. At his new accounting position at Get With It.com, inc., he notices that depreciation
expense is not calculated in what he understands to be an acceptable accounting method. Greg has
decided to approach his supervisor and clarify what he believes to be a discrepancy in standard
practices. To make his case, he should refer to
a) GAAP
b) FASB
c) ACCP
d) apples to apples standard of comparing accounting methods
ANS: A DIF: Challenging REF: Page 116 OBJ: 8-2
110. The SEC has delegated the FASB with the task of establishing generally accepted accounting
principles (GAAP). Which of the following statements is NOT true?
a) The GAAP must be relevant, reliable, consistent, and comparable.
b) Many observers view the GAAP as cumbersome, in need of an overhaul.
c) The FASB consists of five FAF-appointed board members that serve a five-year term.
d) Bucking the SEC, the FASB has made a strong push in recent years to overhaul the
GAAP.
ANS: D DIF: Challenging REF: Page 116 OBJ: 8-2
111. _____ addresses the needs of the external stakeholders, including stockholders, creditors, and
government regulators.
a) Forensic accounting
b) Investigative accounting
c) Managerial accounting
d) Financial accounting
112. _____ would provide stockholders or creditors with information about the overall financial
performance of a firm, while _____ would provide information needed by a firm’s vice president
of marketing who wants to view changes in the marketing budget for a new product.
a) Internal auditors; financial accounting
b) Financial accounting; accrual accounting
c) Financial accounting; managerial accounting
d) Bookkeepers; auditors
113. _____ is the private, self-regulating, five-member board established to develop generally accepted
accounting principles used in the practice of financial accounting.
a) GAAP
b) FASB
c) NFASC
d) FARPA
ANS: B DIF: Easy REF: Page 116 OBJ: 8-2
114. The FASB has the responsibility of establishing the principles used to prepare financial statements.
A key goal of these principles is to
a) create a fair distribution of corporate income among various stakeholders.
b) ensure that the firm’s value is fairly assessed and that its taxes are fair but not excessive.
c) provide external stakeholders with relevant and reliable information about a firm’s
financial condition.
d) provide the company’s managers with access to sensitive proprietary financial information
while preventing competitors and other outsiders from obtaining this information.
115. To provide external shareholders with relevant, reliable, consistent, and comparable financial
information, the accounting profession has adopted _____ to guide the practice of financial
accounting.
a) generally accepted accounting principles (GAAP)
b) formal accounting rules and procedures (FARP)
c) standardized accounting procedures (SAP)
d) general accounting rules for financial statements (GARFS)
ANS: A DIF: Moderate REF: Page 116 OBJ: 8-2
116. The Financial Accounting Standards Board hopes to make the U.S. accounting practices
a) more consistent with those of other nations.
b) better than those of other nations.
c) less consistent with those of other nations.
d) isn’t concerned with how the U.S accounting practices compare to other nations.
117. Tiny Timber Tree Farms applied to United Bank for a business loan. Which financial statements
would the loan officer of the bank be most likely to request?
a) balance sheets, income statements, and cash flow statements
b) journals, ledgers, and trial balances
c) total debits and total credits
d) the prospectus, statement of retained earnings, and total liability statement
NAT: BUSPROG: Reflective Thinking TOP: Financial Statements: Read All About Us
118. The major output of financial accounting is a set of statements including the
a) balance sheet, income statement, and statement of cash flows.
b) general journal, cash budget, and capital budget.
c) dividend record, auditor’s opinion, and master budget.
d) annual report, social audit, and balanced scorecard.
NAT: BUSPROG: Communication TOP: Financial Statements: Read All About Us
119. The _____ summarizes a firm’s financial position at a specific point in time (i.e., a specific quarter
or year).
a) statement of cash flows
b) income statement
c) balance sheet
d) investment income statement
ANS: C DIF: Easy REF: Page 118 OBJ: 8-3
120. All of the following are assets EXCEPT

a) cash.
b) inventory.
c) salaries payable.
d) buildings.
121. _____ are valuable things owned by the firm.

a) Retained earnings
b) Owners’ equities
c) Liabilities
d) Assets
122. Lottadoe’s liabilities are $130,000, and its owners’ equity is $170,000. This means that Lottadoe’s:
a) total assets are $300,000.
b) net income is $40,000.
c) net income for the current year was $300,000.
d) net cash flow for the current year was $40,000.
KEY: Bloom’s Application
123. Sabiha is the small business loan officer at Regional National Bank. It is her job to approve loans
for small businesses so that the local economy will grow. One factor she looks at carefully when
making loan decisions is the amount of outstanding debt the firm already has. She can find this
information by looking at the firm’s
a) income statement.
b) balance sheet.
c) statement of cash flows.
d) cash budget.
124. The accounting equation shows us that the value of the firm’s assets must equal the value of the
firm’s
a) earnings at a point in time.
b) revenues minus expenses.
c) owners’ equity.
d) financing provided by owners and creditors.
125. What is the accounting equation?

a) assets = liabilities - owner’s equity
b) liabilities = assets + owner’s equity
c) assets = liabilities + owner’s equity
d) assets = liabilities + potential
126. Which of the following would be listed in the owners’ equity section of a balance sheet?
a) cash
b) accounts receivable
c) net income
d) retained earnings
127. Which of the following would be listed in the liabilities section of the balance sheet?
a) retained earnings
b) debits
c) wages payable
d) expenses
128. _____ normally is the first asset listed on a balance sheet.

a) Accounts receivable
b) Cash
c) Inventory
d) Equipment
129. _____ is/are what the firm owes its creditors.

a) Retained earnings
b) Owners’ equity
c) Liabilities
d) Assets
130. The two broad sources of financing for a firm are

a) owners and non-owners (lenders).
b) retained earnings and assets.
c) income and profit.
d) cash and credit.
131. Which assets on a balance sheet have a limited useful life and are subject to the subtraction of their
value via accumulated depreciation?
a) accounts receivable
b) accounts payable
c) buildings, machinery, equipment, and other long-term assets
d) inventory
132. By subtracting dividends paid to shareholders from the net income, managers are able to calculate
the
a) increase in net income.
b) decrease in profit margins.
c) change in the cash balance in the firm’s bank account.
d) change in retained earnings.
133. A firm’s current liabilities

a) are what it owes to its shareholders.
b) are due to lenders in less than a year.
c) do not have to be repaid on any specific date. Instead, repayment can be deferred as long
as the firm is willing and able to make the required interest payments.
d) must equal its current assets.
134. _____ is/are the claims owners have against their firm’s assets.
a) Loans payable
b) Owners’ equity
c) Liabilities
d) Assets
135. A business has two sources of funds: the owners and the non-owners. The financing provided by
owners is represented on the balance sheet as _____, and the financing provided by non-owners is
represented on the balance sheet as _____.
a) liabilities; retained earnings
b) dividends; interest
c) owners’ equity; liabilities
d) revenues; expenses
ANS: C DIF: Challenging REF: Pages 119-120
136. Which of the following statements is the rationale for the accounting equation?
a) What the firm owns minus what it owes creditors equals what it is worth to its owners.
b) A firm is worth its equity minus its assets.
c) The firm’s profit is equal to its revenue minus its expenses.
d) Assets must equal earnings minus expenses.
ANS: A DIF: Challenging REF: Pages 119-120
137. The _____ indicates whether a firm earned a profit or suffered a loss over the past accounting
period.
a) balance sheet
b) income statement
c) statement of cash flows
d) cash budget
138. On an income statement, which of the following is the profit or loss a firm earns in the time period
covered?
a) gross profit
b) net income
c) taxable income
d) net operating income
139. As the owner of 100 shares of Megabux Corporation’s stock, Elbert Treble wants to know whether
his company earned a profit or loss during the past year. He can find the answer to this by looking
at Megabux’s
a) master budget.
b) income statement.
c) statement of cash flows.
d) revenue report.
140. According to the _____ method of accounting, revenues are recognized when they are earned, and
payment is reasonably assured
a) accrual-basis
b) actuarial
c) managerial
d) LIFO
NAT: BUSPROG: Communication .
141. According to accrual-basis accounting, expenses are

a) listed on the firm’s balance sheet as liabilities.
b) recognized as soon as cash is paid.
c) not tax deductible.
d) matched with the revenues they help generate.
142. All of the following are liabilities EXCEPT

a) bank loans.
b) wages payable.
c) accounts payable.
d) cost of goods sold.
143. If a firm’s assets equals $6,000 and its liabilities equals $3,500, then owners’ equity equals
a) $6,000.
b) $2,000.
c) $2,500.
d) $4,500.
KEY: Bloom’s Application
144. Which of the following items would be listed on an income statement?

a) cost of goods sold
b) current liabilities
c) cash flows from operations
d) accounts receivable
145. A firm’s cost of goods sold is subtracted from the _____ on the _____ in order to compute the
firm’s _____.
a) total assets; balance sheet; net worth
b) revenue; statement of cash flows; cash balance
c) revenue; income statement; gross profit
d) liabilities; balance sheet; total profit
146. Which item would be listed first on the income statement?

a) revenue
b) cost of goods sold
c) net operating income
d) retained earnings
147. The _____ shows the cash flowing in and out of a firm through its operating, investing, and
financing activities.
a) retained earnings
b) statement of cash flows
c) income statement
d) operating budget
148. The amount of cash at the end of the period, as reflected on the statement of cash flows, should
match the
a) retained earnings for the same period.
b) cash on the current balance sheet.
c) liabilities for next accounting period.
d) retained earnings for the previous reporting period.
149. Profit is the difference between

a) retained earnings and cost of goods sold.
b) notes payable and accounts payable.
c) revenue and expenses.
d) assets and liabilities.
150. The _____ would provide stakeholders with information about how a firm obtained and used cash
in the most recent accounting period, as well as its cash balance at the end of the accounting
period.
a) cash budget
b) income statement
c) stockholders’ equity statement
d) statement of cash flows
151. Cash flows from _____ show the amount of cash received from the sale of fixed assets such as
land and building and other financial assets.
a) operating activities
b) financing activities
c) investing activities
d) net cash activities
152. What two pieces of information are arguably the most important to any business?
a) cash flow--how and why it changes
b) compliance with government regulators and the report of an independent auditor
c) retained earnings and disbursements
d) financing activities and operating activities
153. The notes to financial statements included in an annual report

a) often disclose information about changes in accounting practices and about any special
circumstances that had an impact on the firm’s financial performance.
b) cite the specific GAAP rulings applied by the auditor and explain the reasons for any
concerns the auditor has.
c) show the actual calculations used to derive all key figures reported in the financial
statement, thus enabling stakeholders to compare the results of different companies more
accurately.
d) are important to management, but usually have little significance to investors and other
external stakeholders.
154. In evaluating companies across industries, financial managers will often read the _____ as a means
of interpreting the statements correctly.
a) balance sheet
b) income statement
c) retained earnings statement
d) independent auditor’s report
TOP: Interpreting Financial Statements: Digging Beneath the Surface
155. The external audit process includes all of the following EXCEPT:
a) make sure accounting and booking staff have a clear understanding of GAAP.
b) review sales receipts an invoices.
c) check the accuracy of every transaction.
d) count the supplies in inventory.
156. The auditor’s _____ indicate(s) whether the firm’s financial statements are prepared and presented
in a way that is likely to fairly represent the firm’s financial condition.
a) letter to the CEO
b) footnotes
c) opinion
d) certification statement
157. You recently considered investing in a publicly traded Texas-based company InnRonn, Inc. You
decided not to buy shares in the company after reading the independent auditor’s report and
discovering the auditor offered a(n) _____ opinion of the company’s financial statements.
a) qualified
b) disinterested
c) unqualified
d) disparaging
158. A(n) _____ is issued if the external auditor does not find any problems with the way a firm
prepares and reports its financial statements.
a) qualified opinion
b) unqualified opinion
c) adverse opinion
d) no opinion
159. An auditor issuing a(n) _____ has uncovered serious and widespread problems with the
preparation of a firm’s financial statements.
a) qualified opinion
b) unqualified opinion
c) adverse opinion
d) untenured opinion
160. Investors are provided with _____ from the firms whose stock they own. These documents
provide additional information about the firm’s practices and operations.
a) profitability quotients
b) annual reports
c) vertical analysis
d) pro rata analysis
161. One of the purposes of the Sarbanes-Oxley Act of 2002 was to

a) ban firms from using the same CPA firm as a competitor firm.
b) develop new asset management techniques.
c) prevent relationships that created conflicts of interest between CPA firms and the firms
they audit.
d) encourage relationships between CPA firms and the firms they audit that included
strategic consulting to improve financial performance.
162. The Sarbanes-Oxley Act created the _____ to protect the interests of investors and further the
public interest in the preparation of fair and informative financial statements.
a) Public Company Accounting Oversight Board (PCAOB)
b) Securities and Exchange Commission (SEC)
c) Financial Accounting Standards Board (FASB)
d) Forensic Accounting Standards Commission (FASC)
163. Which of the following statements is true?

a) CPA firms will only audit companies in the private sector.
b) In order for CPA firms to provide legitimate audits, they need to make certain that the
firms always use MTM (mark to market accounting).
c) CPA firms will only audit publicly traded firms.
d) In order for CPA firms to provide audits with integrity, they must be independent of the
firms they are auditing.
164. According to the text, what is the most important thing for CPA firms with integrity to do when
auditing a firm?
a) Auditors must remain independent of the firms they audit.
b) Auditors must get to know the firms’ management in order to perform a fair audit.
c) Auditors should enter into lucrative consulting contracts with the firms they audit.
d) Auditors should overlook small discrepancies in order to protect the interests of the firms’
investors and of the public.
165. Radcliffe McCoy is the financial manager for his company. He is comparing income statements
from the past three years to see the trend (if any) in cost of goods sold and other expenses. He is
using:
a) vertical analysis.
b) horizontal analysis.
c) ratio analysis.
d) managerial analysis.
166. _____ compares information contained in a firm’s financial statements over a period of two or
more years.
a) Profitability analysis
b) Ratio analysis
c) Vertical analysis
d) Horizontal analysis
167. _____ provide reports, information, and analysis to managers to assist them with making better
informed decisions.
a) Auditors
b) Technological accountants
c) Financial accountants
d) Managerial accountants
168. Managerial accounting primarily serves the needs of a firm’s

a) suppliers.
b) customers.
c) managers.
d) investors.
169. While _____ is concerned with preparing financial statements for external stakeholders according
to a fixed schedule, _____ provides information to internal stakeholders on an “as needed” basis.
a) financial accounting; managerial accounting
b) managerial accounting; financial accounting
c) audit results; ratio analysis
d) a master budget; the three basic financial statements
170. In what key ways does managerial accounting differ from financial accounting?
a) Managerial accounting is a system of bookkeeping run by the managers of the accounting
pool.
b) Managerial accounting exclusively provides financial information.
c) Managerial accounting practices are subject to the GAAP, and it helps to summarize past
performance.
d) Managerial accounting is primarily focused inward for benefit of the company.
171. Accountants define cost as

a) actual expenditure of money or other resources.
b) opportunity given up to use as an asset in an alternative way.
c) the price of something.
d) the value of what is given up in exchange for something.
172. Out-of-pocket costs are also referred to as

a) implicit costs.
b) explicit costs.
c) direct costs.
d) indirect costs.
173. When managerial accountants assign costs to the production of specific products, the costs that are
easiest to assign are
a) property taxes and income taxes.
b) insurance premiums and depreciation expenses.
c) general maintenance expenses and direct labor.
d) direct labor and direct materials costs.
174. Pierre’s Gourmet Foods produces high-quality desserts and appetizers that are distributed by
upscale grocery stores. When assigning production costs to its various food products, the costs of
ingredients used to make a product are _____, the cost of the workers who prepare the product are
_____, and the cost of the rent and insurance on the building are _____.
a) direct costs; derived costs; fixed costs
b) tax-exempt costs; taxable costs; depreciable expenses
c) fixed costs; proportional costs; capital costs
d) direct materials costs; direct labor costs; overhead costs
175. _____ is a technique used by managerial accountants to assign product costs based on links
between activities that drive costs and the production of specific products.
a) Actual basis costing
b) Activity-based costing
c) Actuarial-based costing
d) Break-even analysis
ANS: B DIF: Easy REF: Pages 127-128
176. Small business owner Barry Shain has always paid all of his current bills on time. However, this
year he has more bills coming due than normal. Barry may want to explore a more recent method
of assigning costs to various products and services of his firm known as
a) activity-based costing.
b) managerial-based costing.
c) direct labor costing.
d) product costing.
ANS: A DIF: Challenging REF: Pages 127-128
177. Activity-based costing is a(n)

a) three-stage process dealing with direct costs.
b) “one size fits all” process.
c) two-stage process dealing with indirect costs.
d) systematic examination of how direct costs relate to individual goods.
ANS: C DIF: Moderate REF: Pages 127-128
178. Tiny Timber Tree Farms has decided to adopt activity-based costing. One likely reason the firm’s
accountants decided on this approach was to
a) provide a more meaningful way to assign overhead costs to specific products.
b) simplify the process of assigning costs to specific products.
c) base costing on the amount of direct labor used to produce each product.
d) move from a system that focuses on assigning costs to goods and services to a system that
assigns costs to activities.
179. Preparing a good budget is beneficial because

a) it fosters better communication and coordination among members of various departments
with direct responsibility for producing products and services.
b) it provides direction through the identification of goals and plans of action.
c) it provides an effective way to monitor progress.
d) All of these statements are benefits of budgeting.
NAT: BUSPROG: Reflective Thinking TOP: Budgeting: Planning for Accountability
180. In its sales budget, BigBux Inc. indicates that in the second quarter it expects to sell 64,000 units
of a product at $4.00 each. What is the projected sales revenue for this product?
a) $200,000
b) $16,000
c) $256,000
d) $164,000
181. The process of developing the operating budget begins with the
a) sales budget.
b) income statement.
c) production schedule.
d) capital expenditure budget.
182. The _____ budget brings together all of the firm’s budgeting documents to provide a unified plan
for the a specific budget period.
a) operating
b) master
c) fiscal
d) A-level
183. The _____ budget deals with the firm’s plans for investing in major fixed assets and long-term
projects
a) strategic
b) long-term
c) capital expenditure
d) operating
184. The financial budget of a firm includes

a) both the capital expenditure budget and cash budget.
b) the sales budget, marketing budget, and tax budget.
c) both the revenue budget and cost budget.
d) all of the budget documents developed for a given fiscal period.
185. As a financial manager for his firm, Martin Meyer is worried about possible cash shortages his
firm might face over the next few months. The _____ budget would help him identify periods
when cash might be very tight.
a) revenue
b) sales
c) liquidity
d) cash
ESSAY
186. Define the term accounting, and explain how accounting information is used by a variety of
stakeholders.
ANS:
Accounting is a system for recognizing, recording, organizing, summarizing, analyzing, and
reporting information about the financial transactions that affect an organization. This system
provides its users with relevant, timely information that allows them to make sound economic
decisions. In fact, accounting is so important, that it’s sometimes called the language of business.
DIF: Challenging REF: Page 115 OBJ: 8-1

TOP: Accounting: Who Needs It--and Who Does It?
187. List and describe at least three users of a firm’s accounting information.
ANS:
Students will most probably draw from the key users discussed in the text.
Managers: Marketing managers, for instance, need information about sales in various regions and
for various product lines. Financial managers need up-to-date facts about debt, cash, inventory,
and capital.
Stockholders: As owners of the company, most stockholders have a keen interest in its financial
performance, especially as indicated by the firm’s financial statements. Has management
generated a strong enough return on their investment?
Employees: Strong financial performance would help employees make their case for nice pay
raises and hefty bonuses. But if earnings drop—especially multiple times—many employees
might decide to polish their résumés!
Creditors: Bankers and other lenders want to know that a company has the financial resources
needed to pay back what it borrows.
However, note that other stakeholders could also be correctly listed, including government
regulators, competitors, and the media.

TOP: Accounting: Who Uses It?
188. Discuss the career opportunities available to accountants.
ANS:
Students might list several of the following types of accounting careers:
Management accountants work within an organization, analyzing financial information and
preparing reports and statements for that organization.
Internal auditors are private accountants who play an important role by verifying the accuracy of
their firm’s internal records and the validity of its accounting procedures.
Public accountants provide a broad range of accounting and consulting services to clients on a fee
basis. They may help clients set up accounting systems or assist in tax preparation.
Government accountants work for a wide variety of government agencies at the local, state, and
federal levels. In general, they perform tasks similar to those of public and private accountants.
Forensic accountants combine in-depth knowledge of accounting with training in law and
investigative techniques to help detect and investigate white-collar crimes, such as tax evasion,
embezzlement, money laundering, and securities fraud.
DIF: Challenging REF: Pages 115-116 OBJ: 8-1

189. Discuss the duties and responsibilities of several types of accountants.
ANS:
· Management accountants: Many accountants work within an organization, preparing reports

and analyzing financial information specific to that organization. These private accountants
perform a wide variety of tasks, including budgeting, cost and asset management, the
preparation of reports for managers, and the preparation of financial statements for owners and
other stakeholders. While most private accountants work within profit-seeking businesses,
many work for nonprofit organizations, such as charities, private schools, and churches.
· Internal auditors: Internal auditors are private accountants who are responsible for verifying
the accuracy of their organization’s internal records and the validity of its accounting
procedures. They can identify areas where mismanagement, waste, and fraud may exist.
· Public accountants: Public accountants provide a broad range of accounting and consulting
services to clients on a fee basis. These clients may be individuals, corporations, nonprofit
organizations, or government agencies. Typical public accounting services include income tax
preparation, external auditing services, and consultation on a variety of accounting issues and
problems. Public accountants often help new companies design their accounting systems and
procedures. They also update and improve accounting systems for mature companies.
· Government accountants: As their name implies, government accountants work for a wide
variety of government agencies at the local, state, and federal levels. In general, they perform
tasks similar to those of public and private accountants. The IRS, the Securities and Exchange
Commission, the FBI, and other government agencies involved in law enforcement and
regulation employ forensic accountants, who combine knowledge of accounting with
investigative skills. Forensic accountants can help detect and investigate white-collar crimes
such as tax evasion, embezzlement, money laundering, and securities fraud. They’re often
called on to serve as expert witnesses in court cases involving these crimes.

190. Identify the four goals of Generally Accepted Accounting Principles (GAAP).
ANS:
Generally accepted accounting principles (GAAP) are rules that govern the practice of financial
accounting. The goal of these rules is to ensure that financial statements are:
Relevant: They contain information that helps the user understand the firm’s financial
performance and condition.
· Reliable: They provide information that is objective, accurate, and verifiable.
· Consistent: They provide financial statements based on the same core assumptions and
procedures over time; if a firm introduces any significant changes in how it prepares its
financial statements, GAAP requires it to clearly identify and describe these changes.
Comparable: They present accounting statements in a reasonably standardized way, allowing

users to track the firm’s financial performance over a period of years and compare its results with
those for other firms.

191. Define the purpose of the Financial Accounting Standard Board (FASB).
ANS:
The Financial Accounting Standards Board is a private, self-regulating board that oversees the
practice of financial accounting in the United States. One of its most important functions is the
development and interpretation of generally accepted accounting principles (GAAP). Through
GAAP, the FASB aims to ensure that financial statements are:
Relevant: They contain information that helps the user understand the firm’s financial
performance and condition.
Reliable: They provide information that is objective, accurate, and verifiable.
Consistent: They provide financial statements based on the same core assumptions and procedures
over time; if a firm introduces any significant changes in how it prepares its financial statements,
GAAP requires it to clearly identify and describe these changes.
Comparable: They present accounting statements in a reasonably standardized way, allowing
users to track the firm’s financial performance over a period of years and compare its results with
those for other firms.

192. What are the major financial statements? Describe the key elements of those financial statements.
ANS:
The major financial statements are the balance sheet, income statement, and statement of cash
flows. The balance sheet shows the firm’s financial position at a specific point in time by
identifying and reporting the value of its assets, liabilities, and owners’ equity. The income
statement shows the net income (profit or loss) the firm earns over a stated period of time by
deducting expenses from revenues. The statement of cash flows shows the inflows and outflows of
cash that result from a firm’s operations, its financing activities, and its investing activities during
a given time period. This statement also shows the net change in cash and the total amount of cash
on hand at the end of the time period.

TOP: Financial Statements: Read All About Us
193. What is a balance sheet? What is the accounting equation? Define each term in the accounting
equation.
ANS:
The balance sheet summarizes a firm’s financial position at a specific point in time. It is organized
to reflect the most famous equation in all of accounting, so famous that it is usually referred to
simply as the accounting equation:
Assets = Liabilities + Owners’ Equity
What does each term in the accounting equation mean? And what is the logic of the relationship it
represents?
Assets are things of value that the firm owns, such as its cash, inventory of goods available for
sale, land, machinery, equipment, and buildings. Accounts receivable, which indicates the amount
of money credit customers owe to the firm, is another asset found on many balance sheets.
Liabilities indicate what the firm owes to non-owners or, put another way, they represent the
claims non-owners have against the firm’s assets. The amount a firm owes to a bank when it takes
out a loan is an example of a liability. Accounts payable, what the firm owes suppliers when it
buys supplies on credit, is another example of a liability.
Owners’ equity refers to the claims the owners have against their firm’s assets. In a corporation,
one of the key owners’ equity accounts is common stock, which represents the shares of ownership
investors have in a business. Retained earnings, which are the earnings that have been reinvested
in the company (rather than distributed to owners), are also included in owners’ equity.

194. Describe the purpose of an income statement. Give the equation that illustrates the logic that
explains the way the income statement is organized, and define each one of the equation’s terms.
ANS:
The income statement shows the net income (profit or loss) the firm earns over a stated period of
time. We can use a simple equation to illustrate the logic behind the way the income statement is
organized:
Revenue – Expenses = Net Income
In this equation:
· Revenue represents the increase in the amount of assets (such as cash and accounts
receivable) the firm earns in a given time period as the result of its ongoing operations. A firm
normally earns revenue by selling goods or by charging fees for providing services (or both).
· Expenses indicate the cash a firm spends or other assets it uses up to carry out the normal
business activities necessary to generate its revenue. Many of the expenses on an income
statement are referred to as costs.
· Net income is the profit or loss the firm earns in the time period covered by the income
statement. As our equation indicates, it’s the difference between the amount of revenue the
firm earns and its expenses. If the difference is positive, the firm has earned a profit. If it’s
negative, the firm has suffered a loss. Net income is often called the “bottom line” of the
income statement because it is such an important measure of the firm’s operating success.

195. Explain the Sarbanes-Oxley Act of 2002. Include in your response purpose of this legislation as it
refers to accounting practices. Provide some history as to why this act became necessary.
ANS:
Sarbanes-Oxley Act of 2002 is a law that created the Public Company Accounting Oversight
Board (PCAOB), a private-sector, nonprofit corporation. It contains provisions to improve
external auditing practices. One of its main purposes is to deter conflict of interest between a client
firm and its CPA (outside auditor) firm. It states that if CPA firms are to maintain integrity, they
must remain independent of client firms. In the early 1990s, some major CPA firms became
consultants to their clients. The CPA firm’s consulting services were in conflict with the CPA
firm’s auditing arm.

196. Discuss the purpose of each of the following activities performed by managerial accountants:
(1) product costing
(2) role in management decision making
(3) budgeting
ANS:
Managers must have an accurate measure of the costs incurred to produce their firm’s goods and
services in order to set prices and evaluate efficiency.
Managerial accountants play a role in management decision making by analyzing financial

information and seeing the opportunity to use an asset in an alternative way, for example, if two
lawyers form a partnership and set up their office in a building that one of the partners already
owns, they feel good about their decision because they are saving on rent. A managerial
accountant might point out that they are still incurring an implicit cost because they are forgoing
the opportunity to rent the building to another business. They can also help detect internal
problems such as waste, mismanagement, embezzlement and employee theft.
A budget facilitates planning by translating goals into measurable quantities and requiring
managers to identify the specific resources needed to achieve them. A firm’s management
accounting system helps managers throughout an organization measure costs and assign them to
products, activities, and even whole divisions.

197. Explain how financial accounting and managerial accounting differ.
ANS:
Table 1: Comparison of Financial and Managerial Accounting

Financial Accounting: Managerial Accounting:
1. Primarily intended to provide information to 1. Primarily intended to provide information to
external stakeholders such as stockholders, internal stakeholders such as the managers
creditors, and government regulators. of specific divisions or departments.
2. Prepares a standard set of financial 2. Prepares customized reports designed to deal

statements. with specific problems or issues.
3. Focuses almost exclusively on financial 3. Provides both financial and nonfinancial

information. information.
4. Presents financial statements on a 4. Creates reports upon request by management

predetermined schedule (usually quarterly rather than according to a predetermined
and annually). schedule.
5. Summarizes past performance and its impact 5. Provides reports dealing with past
on the firm’s present condition. performance, but also involves making
projections about the future when dealing
with planning issues.
6. Governed by a set of generally accepted 6. Uses procedures developed internally and is

accounting principles (GAAP). not required to follow GAAP.

198. Define out-of-pocket and implicit costs.
ANS:
Out-of-pocket costs (also called explicit costs): are usually easy to measure because they involve
actual expenditures of money or other resources. The wages a company pays to its workers, the
payments it makes to suppliers for raw materials and the rent it pays for office space are examples.
Implicit costs: Accountants realize that not all costs involve a monetary payment; sometimes what
is given up is the opportunity to use an asset in some alternative way. For example, suppose a
couple of lawyers form a partnership and set up their office in a building one of the partners
already owns. They feel good about their decision because they don’t have to make any out-of-
pocket payments for rent. But a good managerial accountant would point out to the partners that
they still incur an implicit cost, because by using the building themselves they forgo the
opportunity to earn income by renting the office space to someone else.

TOP: Cost Concepts: A Cost for All Reasons
199. Define activity-based costing and describe the two-stage process.
ANS:
Activity-based costing (ABC). It is a sophisticated way to allocate costs. This approach is more
complex and difficult to implement than the direct labor method.
It involves a two-stage process. The first stage is to identify specific activities that create indirect
costs and determine the factors that “drive” the costs of these activities.
The second stage is to tie these cost drivers to the production of specific goods (or other cost
objects). Once the relationships between cost drivers and specific products are identified, they can
be used to determine how much of each indirect cost is assigned to each product.
Clearly ABC is much more complex to implement than a system that assigns costs based on a
simple “one size fits all” rule, such as the direct labor method. However, it’s likely to provide
more meaningful results because it is based on a systematic examination of how indirect costs are
related to individual goods.

200. Describe a static budget and its weakness.
ANS:
Static budget: It is based on a single assumed level of sales. Static budgets are excellent tools for
planning, but they have weaknesses when they are used to measure progress, evaluate performance
and identify problem areas that need correcting.
The problem with a static budget is that real-world sales can (and often do) vary considerably from
their forecasted value—often for reasons that aren’t under the control of the firm’s management.
The collapse of the U.S. economy into a deep recession beginning in late 2007, caused sales to
drop sharply and unexpectedly even in many well-managed companies.
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parish contained six hundred and eighty-four families, with one
thousand nine hundred and ninety-eight adults, in the year 1809;
many being breeders of cattle, others agriculturists.
The Rio Grande, whose original name is not known, and for
which the present one was substituted, in consequence of the
ridiculous and prevailing custom in the Brazil of designating many
large rivers, of various districts, by the term of Rio Grande, (Large
River,) thereby creating a confusion of names, has fifty leagues of
course, and originates in the serra of Paranan, near the register of
St. Domingos, about five leagues from the source of the Guara, a
branch of the Correntes. After flowing a considerable way, the
Mosquito joins it, and five leagues lower the Femeas, which rises
fifteen miles from Serra Tabatinga; twelve miles further it is entered
by the Ondas, which originates eight miles from the preceding, and
nearer the Sobrado, an arm of the Tucantines, and runs rapidly
through a gold and diamond country. Fifteen miles below, it receives
the Branco, navigable to the situation of Tres Barras, so called in
consequence of the union with it of the Riachao and the Janeiro,
which enter in front of each other; seventy miles lower also on the
left, the Preto joins, which is one of its largest tributaries, and rises in
the skirts of the Serra Figuras, which is a continuation of that of
Mangabeiro, from whence issue the other branches mentioned,
excepting the Riachao. Its first name is the river of Doirados, and its
current of clear water is rapidly impelled through a winding bed,
edged with steep margins. It passes near the village of Formoza,
which has a hermitage of Senhor do Bom Fim, and by the parish of
St. Ritta, which is forty miles below the other, and the same distance
above the mouth of the river. The Rio Grande, which enters the St.
Francisco fifty miles below the confluence of the Preto, is navigable
to the mouth of the Ondas, and without falls to the Branco, passes
the parish of St. Anna de Campo Largo, which is thirty-five miles
above the embouchure of the Preto; it is well stored with the sorubin,
crumatan, large doirados, the piranha, piau, martrinchan, and other
sorts of fish. Its water has a very different colour from the river which
receives it, and remains unchanged for a considerable distance after
entering the St. Francisco.
The towns of this ouvidoria are,
Barra do Rio Grande
Santa Maria
Flores
Pilao Arcado
Assumpçao
Symbres.
The town of Barra do Rio Grande is at the northern angle of the

confluent which affords it the name, is in a state of mediocrity, well
supplied with meat and fish, and has some commerce. The church is
dedicated to St. Francisco das Chagas; and the number of its
inhabitants is included in one thousand and thirty-six families. The
passage of the St. Francisco, here a mile wide, is much frequented.
Pilao Arcado, created a town in 1810, is one hundred miles below
the preceding, and is well situated near a small hill upon the margin
of the St. Francisco, its only resource for water, and whose greatest
inundations always visit it with some injury. The church, dedicated to
St. Antonio, is new, and solidly built with bricks and lime. The houses
are generally earth and wood, and many of them covered with straw.
It has three hundred families, which are increasing, and, with those
of its vast district, comprise five thousand inhabitants, who cultivate
mandioca, maize, vegetables, good melons, and water-melons, upon
the margins of the river. The land around it is generally wild and
sterile, and alone appropriated to the breeding of cattle, which are
subject to the horrible mortality, produced by frequent droughts.
There are a great many small lakes, at various distances from the
river, all more or less brackish, and upon whose margins the salt,
formed by the ardent heat of the sun, appears like hoarfrost. The
water of these lakes (and even soft water) filtered through a
contiguous earth in wooden vessels, or leather finely perforated, and
exposed on boards to the weather, in eight days of heat crystallizes,
becoming salt as white as marine salt. Although in lands which have
proprietors, they are, like auriferous soils, reputed common to all
those who wish to benefit by them, and are a great resource for the
poor, almost all the salt here produced is transmitted to the centre of
Minas Geraes.
Villa Real de Santa Maria, situated upon an island three miles
long, and a great distance below the preceding, has the aspect of an
aldeia, with one hundred and sixty families, chiefly Indians, who are
hunters, fishermen, and agriculturists, and are exempt from tribute.
Their wives spin and weave cotton, and work in the manufactory of
earthenware, of which a considerable portion is exported.
The town of N. Senhora d’Assumpçao takes the name from the
patroness of its church. The inhabitants, comprising one hundred
and fifty-four families, are all Indians; they fish, hunt, and cultivate
mandioca, maize, water-melons, hortulans, and cotton. It is at the
western extremity of an island eighteen miles long, and the same
distance below the preceding town. In front of this island is the
middling arraial and julgado of Quebrobo, with a church of
Conceiçao, whose parishioners, about eighteen hundred and twenty-
seven families of all complexions, are mostly dispersed over its vast
district. Cotton and cattle are their productions.
Flores, erected into a town in the year 1810, is yet small and in
the vicinity of the river Pajehu. A filial chapel of the parish of
Quebrobo serves it for a church. The inhabitants draw their
subsistence from the breeding of cattle, and the culture of cotton.
Symbres, formerly Ororoba, is a small town of Chucuru Indians,
with some whites and mesticos, cultivators of cotton and the
provisions of the country. The wives of the first make earthenware
with considerable art, and spin and weave cotton. They utter great
lamentations when their husbands do not bring home game from the
woods. The church is dedicated to the Lady of the Mountain; and its
population consists of four hundred and eighty families.
The considerable arraial, julgado, and parish of St. Antonio, in the
district of Garanhuns, bordering upon the preceding, is of this
comarca, having been, with the latter one, dismembered from that of
the Recife. Its people grow cotton.
In this ouvidorship is also the parish of St. Anna do Sacramento
do Angical, dismembered from that of Campo Largo, from which it is
distant thirty miles, and ten from the margin of the Rio Grande.
Having concluded the description of the province, we will now
proceed to a consideration of its capital, commonly called
Pernambuco, (which name is a corruption of Paranabuco, by which
the Cahetes designated the port, where at the present day the
smallest class of vessels anchor,) and is understood to comprehend
two distinct places, the city of Ollinda and the town of Recife, (so
called from the reef in front of it,) with an interval of a league,
communicating by a narrow sand-bank from north to south, also by
an arm of the sea that enters the small river Biberibe, which runs
along the said sand-bank from one place to the other, and likewise
by a road on the main land, at no great distance from the western
margin of the same river.
Recife, which is the official designation of the capital, the
government documents being so signed, is large, populous, and
commercial, with tolerable houses, handsome churches, a convent
of priests of the congregation of Oratorio, another of Franciscans, a
third of slippered Carmelites, an alms and entertaining house of
Terra Santa, another of Italian Barbonios, a recolhimento of women,
an episcopal palace, and an hospital of Lazarettos. The Jesuits had
a college here, which now constitutes the palace of the governors.
This town is divided into three portions, or districts, by the river
Capibaribe, namely, Recife, St. Antonio, and Boavista. Each of these
forms a separate parish, and they communicate by two bridges; that
of Boavista, which is chiefly of wood, and paved, is three hundred
and twenty paces long; that of St. Antonio, two hundred and ninety
paces across, was in great part of stone, but having given way, the
remainder is imperfectly supplied with wood, not admitting of the
passage of a carriage, and has been allowed to remain for a
considerable time in this condition, so disreputable to the town. At
each end it has a stone arch of rather an elegant construction, above
which there are small chapels, niches, and saints, where mass is
celebrated. In the street, fronting the niches with saints, many of the
inhabitants prostrate themselves, at dusk, for some time in a posture
of devotion. The bridges are flat and not many feet above the level of
the sea.
The first part, or the Recife, occupies a peninsula, and is the
emporium of the town’s commerce, the stores of the merchants
being situated in it. The tongue of land, or sand-bank before
mentioned, which extends itself from Ollinda to the south between
the sea and the river Biberibe, terminates here. It is the site of the
custom-house, which of itself is an indifferent edifice. The Rua das
Cruzes is the best street, and although short is wide and neat; the
others are mostly paved, but are narrow and inelegant. Its church,
which is handsome, and commonly designated Corpo Santo, has for
its nominal patron St. Pedro Gonsalvez.
The second portion of the town, called St. Antonio, occupies
another peninsula, which is the northern extremity of the island,
formed by two arms of the Capibaribe. It was first planted with
cocoa-nut trees by Prince Nassau, the Dutch governor, who erected
Fribourg House for his own residence, and founded the town of
Mauritius upon it. It has better streets than the Recife, although
generally sandy, and not paved, with high footways laid with bricks.
Here is a small square, surrounded with neat houses, having only a
ground floor, with a piazza to the interior front, and may be
denominated a species of bazar, consisting solely of shops, where a
variety of articles are sold. The mother church is dedicated to SS.
Sacramento. The treasury and the governor’s palace are situated
here. The latter is not the residence of the governor, but contains
various public offices, and is used for a sort of levee, held upon
occasions of the birthday of any of the royal family.
The third part of the town, called Boavista, is the only portion
susceptible of any considerable increase, being situated on the
continent. It has advanced in magnitude with the others, but is
destitute of regularity, which may be attributed to the negligence of
the senate in not having marked out the streets in right lines at its
commencement. Its church is also dedicated to SS. Sacramento.
Here also the Dutch governor built the first house, which he called
Boavista, and, being a Portuguese name, the place has retained it.
These three portions, running in a line from east to west, form this
large and flourishing town, which, besides the governor, has an
ouvidor, a port admiral, a Juiz de Fora, each of them having various
inspections, and three royal professors of Latin, one of philosophy,
and another of eloquence and poetry. The usual junta, or council da
fazenda real, to decide upon all matters relative to the province, is
composed of the governor, the ouvidor, the Juiz de Fora, the
attorney-general, the port admiral, the chief of the treasury, and the
judge or comptroller of the custom-house, who hold their sittings at
the treasury. The suburbs are an extensive plain, with handsome
cocoa-nut tree groves, interspersed with sitios, or country-houses.
The inhabitants drink the water principally of the Biberibe, collected
into a reservoir at Ollinda, formed by a sort of barrier, denominated a
varadoiro, which impedes the further advance of the tide, and
accumulates the fresh water above. This bulwark, which also serves
as a bridge or passage over the river to Ollinda, is in part covered by
a handsome archway, below which the water passes through circular
spouts, and at the other parts by larger and square channels;
presenting altogether twenty-four mouths, from whence the water
issues in spray, forming many pleasing cascades. From hence it is
conveyed in covered canoes for the supply of the Recife. The water
of the Capibaribe is also brought in canoes from Monteiro.
The port of Recife, which is not deep enough for vessels of a
large class, is amongst the most wonderful works of nature. A recife,
or chain of reef, which extends itself from the entrance of Bahia to
Cape St. Roque, parallel with and at no great distance from the
shore, in no part appears so much like an operation of human art as
here. It is prolonged for the space of a league in a direct line with
and about two hundred yards from the beach, having the aspect of a
large flat wall, being always above the level of the sea, and at low
water six feet is discovered. This reef, which is perpendicular on the
land side, and gradually declining on the other, here suddenly
disappears opposite the most northern part of the Recife, having on
its extremity the fort of Picao, and forming a fine harbour, which must
have been the sole inducement for the foundation of the capital in
this situation. Vessels entering the port navigate as near as possible
to the internal side of the reef, where they require much depth till
they arrive at the most commodious place of anchorage. The
occasionally agitated ocean here finds its bounds, and dashes in
tumultuous and angry waves against the reef, the foaming spray not
disturbing the smooth water within, but affording a delightfully cooling
freshness, as well as an interesting spectacle, to the houses situated
upon the beach, and principally occupied in stores by the merchants.
Large ships anchor to the north of the fort of Picao, in a bay without
shelter, fronting the forts of Brun and Buraco, situated upon the
before-mentioned sand-bank. The fort of Brun, which the Dutch
commenced on the 25th of June, 1631, and gave it the name of a
maternal relative of their General Theodore, had for some time
among the Pernambucanans the appellation of Perreril.
This place, while yet of little consequence, was taken by the
Dutch in 1630, who retained it for twenty-four years, and did more for
it in public works during that time, as was candidly admitted to me by
a Portuguese gentleman holding a public situation here, than has
ever been done since. Among the monuments which attest the spirit
of improvement that marked the Dutch possession of this part of the
Brazil, there is (or was a few years ago) a stone of European marble
bearing the following inscription:
Op Gebouwt
onder
D’Hooge Regeringe
van
Præsidt en Raden,
Anno MDCLII.[40]
This stone was seen by several of the English merchants within
the last three years at the door of the church of Corpo Santo, among
the masonry work destined for the completion of this fine edifice; but
it certainly is not introduced into the walls of the building, nor could I
discover any trace of it.
The before-mentioned forts, and that of Cinco Pontas, at the
southern extremity of St. Antonio, are the principal ones that defend
the place; the two first are in good order.
A league to the south of Recife, near the southern arm of the
Capibaribe, is the arraial of Affogadas, which is increasing, and is
ornamented with three hermitages, of Nossa Senhora of Paz, of
Rozario, and of St. Miguel. There is here a wooden bridge
communicating with St. Antonio.
The city of Ollinda, which, as has been observed, constitutes a
part of Pernambuco, was burnt by the Dutch in 1631, and is
beautifully situated upon a cluster of eminences, which are the
commencement of a small cordillera, that extends itself towards the
interior of the continent. It was in former times rich, flourishing, and
powerful, and was erected into an episcopal city in the year 1676,
but continued to fall into decay, and is at present poor and thinly
inhabited, owing to the vicinity of the town of Recife, which has
deprived it of all its commerce. It is, however, a fine retreat for the
studious, convalescent, or misanthropical, who seek retirement from
the tumult and bustle of the world. It has a house of misericordia,
with its hospital, a recolhimento, or Magdalen house, a convent of
Franciscans, one of unslippered Carmelites, another of slippered
Carmelites, and a fourth of Benedictines; a palace in which the
governors in former times were obliged to reside six months in the
year; an episcopal palace, finely situated, but much deteriorated,
being unoccupied in consequence of the death of the bishop; a
seminary in the ex-Jesuitical college, with schools, and professors of
Greek, Latin, French, geography, rhetoric, universal history,
philosophy, drawing, ecclesiastical history, dogmatical and moral
theology, a great number of hermitages, and a garden of trees and
exotic plants, chiefly Asiatic, from whence the farmers can transplant
them into their own grounds. It has also the bread-fruit tree and
Otaheitan cane, and occupies an advantageous situation, but is not
kept in good order. This city is divided into two parishes, one of them
being of the cathedral, which is a magnificent edifice, with three
naves, dedicated to St. Salvador, and contains eight hundred and
eighty houses; the other has for parochial the church of St. Pedro
Martin, and comprises three hundred and fifteen houses.
The senate is rich; almost all the houses pay to it a testoon (three
hundred reas) of tax for each span of front. Almost all have large
gardens, but generally of little or no utility. The ground is
appropriated to the cultivation of fruitful trees, of which mangoes are
the principal.
The last donatory of this province affirmed that Ollinda, when it
was burned, had two thousand five hundred houses, which were
estimated to contain twenty-five thousand inhabitants.
The decay of Ollinda was considered by many of its inhabitants
as a punishment for the pride of its rich and leading persons, whose
libertinism had arrived at such a pitch, that an orator preaching on a
festival day in one of the parish churches, and energetically
declaiming against the vices prevailing in the country, some of the
principal people commanded him to be silent, and dragged him with
violence from the pulpit, without the auxiliary priests being able to
prevent the outrage.
The convents, which are handsome and well-built, occupy the
finest situations in Ollinda, generally upon the acclivity or summits of
the eminences, from whence the views are interesting. Some of
these religious establishments have now but few friars, and one of
them was occupied by a military detachment. The walls surrounding
the grounds of several, I observed, were broken down in many parts,
and in a state of dilapidation; and the enclosures, which would have
formed fine pleasure grounds, were barren, unplanted, and quite
neglected.
A MATUTO RETURNING FROM PERNAMBUCO.
On proceeding from hence by the sand-bank to the Recife, I was
suddenly startled at the appearance of a human skull and bones,
near a pillar or beacon situated between the two forts. Considerably
impressed by so unexpected a sight, and moving slowly forward with
such feelings as it was calculated to excite, not having any other
idea but that they were the remains of some murdered person, I
found myself in the midst of human bones, over-spreading the
summit of the sand-bank. I now began to surmise that it was the
cemetery of the blacks, which was confirmed on my arrival at the
Recife. The dead bodies of the negroes are wrapped up in a piece of
coarse cotton cloth, and being thinly covered with sand is the reason
of their remains soon becoming thus indecently exposed. I
understand that the white people were at one time also interred here.
The English have a burying-ground at St. Amaro, not far from
Boavista.
The roads branching off from Pernambuco into the interior are
very good for a few miles, although sandy, and in some parts deep.
They soon begin to contract into narrow bridle-ways, and are the
tracks of troops of horses coming from the certams with cotton
principally, and some other produce. The horses here are, from the
sandy nature of the roads, never shod, and those driven from the
interior by the mattutos[41] (inhabitants of the mattos, or woods) are
generally very miserable and poor, and seem almost to give way
under the burden of two bags of cotton, attached one on each side to
a rudely constructed pack-saddle. Cords are commonly used by
these persons for stirrups, into which they introduce the great toe.
Their dress, consisting of a coarse cotton shirt hanging loosely over
drawers, or trowsers, reaching to the calf of the leg, with a large
slouching straw or black hat, a gun occasionally borne over one
shoulder, and a sword in a wooden sheath, awkwardly suspended
from a leathern belt, gives them a singular appearance. Some of
these groups are rather of a superior order, being dressed in brown
leathern overalls, a jacket, and a low round hat of the same. Parties
of men and horses are thus continually arriving at and departing from
Pernambuco. The men exhibit a great variety of complexions, and
not one is to be seen that can be said to be of pure European
descent, all having a mixture of Indian and African physiognomy.
They are generally active and well formed. Few are Indians, more
are mesticos.
The cotton planters, as well as proprietors of sugar works, visit
the emporium of Pernambucan commerce in their gayest vestments,
with their horses caparisoned in all the trappings and paraphernalia
of Portuguese saddlery. The Brazilians generally, when they go from
home, are fond of external show, without regard to much neatness,
and upon those occasions they form a striking contrast to their
general disgusting appearance in their domestic circles. There the
men are usually seen with a dressing gown, or a shirt worn loosely
over drawers, without stockings, their breasts exposed, and
indulging inert and slovenly propensities. The females, having this
example before them, claim some allowance for their loose and
slatternly mode of dressing, when at home, and their worse habit of
generally expectorating, without regard to person, time, or place.
Young females are entitled to much consideration also, on account
of the illiberal system pursued in their education and manner of
bringing up. They are, it may be said, almost excluded from society;
and the suspicious treatment they experience from their parents
must tend to extinguish every liberal and moral sentiment; in fact, it
cannot be considered that those very parents themselves possess
much, or they would not subject them to an ungracious and
scrutinizing watch, by generally keeping them shut up, so that they
do not enjoy even the necessary exercise for health, to which their
Turkish mode of sitting on the ground or upon mats, is not very
congenial. If a family walk out, the daughters precede the father and
mother, and the negroes, frequently composing the whole
household, bring up the rear. Their grand opportunities for displaying
their persons are religious holidays and festivals, and the midnight
masses at the churches are said to be fully attended by the females.
The lady of General Rego, the governor, who is a very
accomplished woman, has endeavoured, very amiably but
ineffectually, to introduce a social intercourse amongst the families,
and particularly the females, of Pernambuco; and although this lady
succeeded in making a commencement, it was afterwards declined
by the families themselves, from the ridiculous excuse that it would
become expensive to have new dresses for every fresh visit. The
general also gave a public ball to the inhabitants, which was followed
by one on the part of the English merchants; but it would appear,
with the exception of some of the leading persons, that the
inhabitants, from their little intercourse with the world, are yet inimical
to any refined system of society.
The cotton planters, and senhors d’engenho in the interior, are
stated to be liberal and hospitable to strangers; and many of them,
who have been recently acquiring considerable property, live in a
comparatively comfortable style.
Apathy is a strong characteristic in the lower orders of Brazilians.
In my various excursions near Pernambuco, I have seen men, at all
hours of the day, stretched out upon tables, upon mats, or in redes,
(nets,) slumbering their time away. If this class of people can obtain
sufficient to satisfy the wants of the day, their views extend no
further, and industry is no where seen amongst them; besides, the
agricultural arm is paralysed nearly one-third of the year by holidays
and saint days.
I was very hospitably entertained during a portion of my stay at
Pernambuco by John Lempriere, Esq. the British consul, whose sitio
is at the Solidado, a small hamlet, in which is situated a palace,
formerly belonging to the bishop. It is a fine edifice, and built with
uniformity, but is now rapidly sinking into decay, which will not be
less accelerated by the use to which it is at present appropriated—
that of a barrack. I brought a letter of introduction to Mr. Cockshott,
when we immediately recognised each other as old acquaintances,
his family and mine having been upon the most intimate terms of
friendship for many years. I experienced great kindness from him, as
well as many of the English merchants residing here, and spent a
portion of my time at his country sitio, pleasantly situated at Ponta de
Cho, upon the margin of the Capibaribe, from whence I was
accompanied by Mr. Ray, the American consul, who also has a
house here, to visit many of the neighbouring places, and cannot
upon this occasion refrain from doing justice to my feelings, in
acknowledging his frank and spontaneous attention and liberality.
The rides from Recife to Ponta de Cho, by several roads, are
equally delightful, being partly bordered with lime hedges, and
fences formed of the cocoa branch, interspersed with verdant
foliage, and all the variety of fruit trees peculiar to the clime; groups
of the high towering cocoa-nut tree heighten the beauty of the
scenery, every where richly wooded.
The roads branching from Boavista, and meeting in one, about
half-way to Ponta de Cho, are adorned with some elegant white
houses, in a very excellent state of exterior repair, the grounds being
enclosed by lofty walls, and many of the front entrances, consisting
of a handsome portico, excelling any thing in this style near Rio de
Janeiro. Every hundred yards, places of this character are met with
to Ponta de Cho, where the river opens out and presents a very
pleasing scene, the road running for a short distance along its
margin, fronted by the residence of the governor, not very gracefully
ornamented with a chapel in the middle of the entrance court. From
hence the main road leaves the river, and for about two miles
presents many neat houses to the Poco de Panela, some of them
being the residences of English merchants.
In this interval the village of Casa Forte is passed, celebrated for
having been one of the scenes of contest between the Dutch and
Portuguese. The village of Poço de Panela is upon the left bank of
the river, and is enlivened with houses of much more taste and
neatness than a stranger would expect to see, with the impressions
made upon his mind on landing at Recife.
It must be observed, that although the environs of Pernambuco
have a fertilized appearance, in consequence of being well wooded,
the soil is in a miserable state of cultivation, and not rendered so
productive, by two-thirds, as it might be, being very generally
uncleared of the brushwood, and a great portion remaining in its
primeval condition. Proceeding from Ponta de Cho, by the Cruz das
Almas road, which leads to Ollinda, a great proportion of the
surrounding country is in a wild state; here and there are seen small
patches of mandioca, groves of cocoa-nut, and other fruit trees, but
the general aspect demonstrates the want of industry, for it would be
expected that every yard of ground so near to a commercial city, with
nearly one hundred vessels of different classes usually lying in its
port, would be in progress at least of agricultural improvement. It is
also remarkable, that between Recife and Ollinda, which latter city
was formerly the seat of government and the centre of commerce,
there is not a good road the whole way, parts of it for a considerable
distance assuming the appearance of a mere track. The present
governor has ordered a road to be commenced by a nearer route,
and in many places the germ of improvement in this essential point
is observable, new roads being partly made and staked out.
Intelligence and civilization is only diffused through a country by
facility of communication, and to General Rego, the
Pernambucanans are indebted for promoting this blessing; the roads
in the immediate vicinity of the town have been widened and
otherwise improved by his orders; and it is highly to be wished that
such a spirit, tending so much to the real benefit of the province, may
be encouraged. The revolution here, in 1817, is said to have
materially retarded improvement, as that measure was brought
about, not from any genuine sentiments of liberty, the four or five
persons at the head of it being only desirous of procuring their
individual aggrandizement; and it is said that such jealousy at last
existed amongst them, that they attended the council secretly armed.
They were men of no talent, and the principal actor, Senhor
Martyens, was a decayed Portuguese merchant, from London. They,
as well as many others, paid the forfeit of their lives for prematurely
attempting a change which they did not understand, but which the
lapse of a few years has, happily for the advancement of this
country, brought about.
STYLE OF HOUSES AT POCO DE FERNELLA.

NEGROES IMPELLING A CANOE WITH THE YARA & SCENERY AT PONTA
DECHO.
The new constitution of Portugal, already adopted at Para and

Bahia, was spontaneously acceded to by the governor, the different
public officers, and the people, without any effusion of blood, in the
month of January, 1821. The imprisonment at Bahia, since 1818, of
some of the first men of Pernambuco, arrested on suspicion of being
implicated in the revolution, will now no doubt have its termination.
That event brought upon Pernambuco a strict military government,
and at the corner of every street after dusk, the ear was assailed by
the military watch-word; under such a system, the inhabitants could
not have been more fortunate than in the selection of General Rego
for their governor, whose military experience was acquired with
much credit in the Peninsular campaign, and whose gentlemanly and
friendly conduct would tend to soften the rigours of a military
occupation of the town. To the ready assistance and attention of the
governor to all matters in which their interests are concerned, the
English merchants bear their united testimony.
During the Christmas holidays, and the hottest weather, Poço de
Panela, Ponta de Cho, and the neighbouring, and more distant
villages of Monteiro (the road to which partly leads by a bridle-way
through woods) and of Caxanga, (where there is a spring of
chalybeate water, approached also by a bye-way after crossing the
river,) are fully occupied by the families of Recife, in their gayest
attire and the ladies are frequently seen at the windows or at the
doors, the men devoting the days of the holidays to gambling, seated
in the verandas, playing at cards or backgammon. At this season the
roads are also enlivened with horsemen going their evening rounds
to these places of resort. Another very pleasing excursion to Ponta
de Cho, Poço de Panela, and Monteiro, is by the river Capibaribe,
whose winding banks are bordered with white cottages and houses,
some of a very superior appearance, also inhabited during this
period, and each having a bathing house rudely enough formed of
the branches of the cocoa-nut tree. Innumerable canoes are seen
gliding along the river, impelled with more velocity than by the oar or
the paddle, by two vara men, who are negroes dressed in white
cotton trowsers, exhibiting all the muscular movements of their
naked arms and bodies in the exertion of using the vara, which,
when well and regularly executed, is rather a graceful labour. A
whole family, with furniture, and all the et ceteras, are moved up the
river to their summer abode in this manner; and the ladies, in their
smart dresses, with French hats and white plumes nodding to the
river’s breeze, do not seem to regret that it is but transient liberty
they are going to enjoy, and which they indulge in by a more free
exhibition of themselves, and also by daily bathing in the river,
probably two or three times, remaining in the water an hour or an
hour and a half at once. They are said to be more expert divers and
swimmers than the men, and it is not rare to see parties of them
swimming about with much confidence, their hair being generally
neatly dressed and bound up. One evening, on approaching the
banks of the river beyond Monteiro, with Mr. Ray, some females
were bathing, and amongst them were an old gentleman and his
young wife, with whom Mr. R. was acquainted. We took off our hats,
and the compliment was very cordially returned by the whole party,
by a low dip in the water; on re-passing a considerable time
afterwards we observed them still enjoying this refreshing
amusement. Previously to my leaving Ponta de Cho, the premier
chuvas (first rains) were setting in, and the river already conveyed
many canoes with families and their furniture on the return. The
heaviest rains begin about March, when this part of the country is
partially inundated and forsaken till the dry season recommences.
There are various religious festivals during the holidays at different
churches, in honour of saints. Those that appeared to attract the
most attention were at the church of the Mount at Ollinda, at St.
Amaro, and the Poço de Panela; to the latter, the English subscribed
a certain sum each. Many people were assembled, and the houses
were dedicated to the purposes of gambling. The multitude seemed
to loiter about without any object, and there was a deadness and
want of spirit and gaiety in their general demeanor. The church was
open, which I entered in the midst of the ceremony of christening a
child; a large lighted wax candle was as quickly introduced into my
hand, and I was thus enlisted into the ranks. A band of music was
playing in the gallery, to dissipate the shrill notes of the youngster,
who was fingered rather roughly by the padre in the course of
various ceremonies he performed, and in which he applied a
considerable portion of salt. When the infant, after undergoing the
last form of having a silver crown placed upon its head, was returned
to its mother, it appeared quite exhausted; and a pretty general
round of embracing concluded the ceremony. The master of the
festa, and his wife and daughters were there: the females were
splendidly dressed, but the absence of the graces prevented these
adornments from having their due effect upon the imagination. The
fire-works supplied by the subscription, and which concluded this
festival, were, I understood, very indifferent.
THE HOUSE OF THE SENHOR D’ENGENHO DE TORRE. NEAR
PERNAMBUCO.
The Christmas holidays are deemed by the merchants a great

interruption to commerce, as no shipments can be made or business
transacted during that period. The English establishments here
amount to sixteen, and through their medium this province is
supplied with every species of English manufactures. They labour,
as has been previously stated, under considerable difficulties, in
consequence of the mal-operation of the pauta. The produce
shipped from hence, consists principally of cotton and sugar; of the
latter, about twenty-five thousand cases annually, nearly one-half to
England, and the remainder to Lisbon: the quantity of the former
averages about eighty thousand bags, sixty thousand being sent to
Great Britain, and the remainder principally to Lisbon. The
Pernambuco cotton is the best in the Brazil, arising in part from the
rigid inspection which it undergoes. A new inspection house was
erected here, upon the beach, called the Forte do Matto, in the year
1815. The cotton is bought by the merchant at a certain price, when
it is submitted to inspection and divided into three qualities; for the
second quality, which is permitted to pass with the first, the merchant
receives an allowance of five hundred reas per arrobe, from the
planter; the third quality is totally rejected. The bags are then
weighed for the merchant to pay the export duty, and as one bag is
only weighed at a time, there has been considerable delay in getting
the cotton through the inspection house for shipment. The present
governor attended here, and attempted to make arrangements for
weighing the cotton quicker, but matters shortly afterwards reverted
to their anterior state. Sugar is classed into nine different qualities,
and distinguished by the following marks, commencing with the
finest and continuing by gradations downwards.
B F Branco Fino.
R F Ridondo Fino.
B R Branco Ridondo.
Paying a shipping duty of sixty reas per arrobe.
R B Ridondo Branco.
B B Branco Baixo.
B I Baixo Inferior.
MM Muscovado Macho.
MR Muscovado Retame. Ditto of thirty reas per arrobe.
MB Muscovado Brame.
The sugar engenhos are some of them very considerable, and

the two accompanying plates are representations of the exterior and
interior of the Engenho de Torre not far from the right margin of the
Capibaribe. The owner, who has amassed a respectable property,
very politely allowed four gentlemen with myself to see this
establishment. The juice is extracted by the compressure of the cane
between three upright rollers, the centre one moving the other two,
and being itself constantly carried round by relays of mares, which
have a singular appearance from their ears being closely cropped.
The juice flows along a channel to a lower apartment in the building,
where it goes through the different processes of boiling, and when
completed is much inferior to the West-Indian sugar, and generally in
a very dirty state.

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Learning Objective Easy: Moderate: Challenging:

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1. Accounting is a system for recognizing, recording, organizing, analyzing, summarizing, and

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4. Recording financial transactions is an accounting function.

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7. Some key users of a corporation’s accounting information include managers, government

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15. Internal auditors are also known as certified public accountants.

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31. Assets = Liabilities + Net Income

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36. According to the accounting equation, Assets – Expenses = Net Income

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39. Expenses are listed on the asset side of a balance sheet.

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