Accounting Flashcards

1
Q

What are the two straight line depreciation methods?

A

Straight line and units of production.

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2
Q

What are the two accelerated depreciation methods?

A

Sum of the year’s digits, declining balance.

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3
Q

What are the characteristics of goodwill?

A

It is an intangible asset and it is not amortised, instead it is tested annually for impairment.

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4
Q

What are the characteristics of natural resources as an asset?

A

Total cost is charged to depletion expenses over the useful period.

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5
Q

What is unearned revenue?

A

When a costumer pay for services or products before delivery. It is a current liability.

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6
Q

What is the advantage of long term debt?

A

It is tax deductible.

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7
Q

What is financial leverage?

A

The difference between ROI and ROE

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8
Q

How does Bonds Premium and Discount affect BS?

A

Bonds discount is recorded as a contra liability, bond premium is recorded as a addition to liabilities. (Bonds premium when the r offered by the bond is higher than the market r)

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9
Q

What is APIC?

A

The excess of the amount received from the sale of preferred or common stock over par. It is a part of stockholders equity.

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10
Q

What is preferred stock?

A

It has no voting rights, but receives priority over common stock on dividend payments.

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11
Q

What are stocks dividends?

A

When dividends are paid in form of additional shares. They do not affect the par value of the stock or stockholder’s equity. Stockholders retain percentage ownership in the company. Reduces per share market value.

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12
Q

When is revenue earned vs realized?

A

Revenue is realised when a product or service has been exchanged for cash. It is earned when a firm has completed or substantially completed the activities it must to be entitled the revenue benefits.

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13
Q

What is the gross profit ratio?

A

The profit expressed as a percentage of the total sales.

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14
Q

How can you use the desired gross profit ratio to set the selling price?

A

P = Cost of product /(1- Desired Ratio)

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15
Q

What are the main operating expenses?

A

Selling expenses, general admin expenses, R&D expenses.

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16
Q

What is operating income ?

A

The difference between gross profit and operating expenses.

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17
Q

How do you calculate earning per share?

A

Net income/Avg. n of shares of common stock outstanding during the year

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18
Q

What are the difference in single and multiple step presentation of the income statement?

A

Single step goes from net sales straight. to profit, while multiple step differentiates between gross profit and income from operations.

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19
Q

What does the statement of cash flows show?

A

Why and how cash and cash equivalents changed by reporting changes in operating activities, investing activities, financing activities.

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20
Q

What are the different ways to present the statement of Cash Flows?

A

Direct and Indirect. Direct method starts cash received, while indirect start from net income.

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21
Q

What happens to depreciation and amortisation in the Cash Flow?

A

They get added to net income as they do not affect cash.

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22
Q

What are the ratios for profitability?

A

Working capital = CA-CL
Current Ratio = CA/CL
Acid-Test Ratio = (cash+Ar)/CL

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23
Q

What are the ratios for activity?

A

Turnover
AR Turnover

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24
Q

What are the ratios for profitability?

A

ROI
ROE
P/E ratio
DIv Yield

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25
Q

What are the ratios for financial leverage?

A

Debt Ratio
Debt/Equity ratio
Times interest earned

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26
Q

What is the current ratio useful for?

A

Judging a company’s current bill-paying abilities. A ratio of 2.0 onwards is considered adequate.

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27
Q

What is the acid test or quick ratio for ?

A

To inform about the worst case scenario, if a firm is not able to sell any of its inventories how much of its debt can it pay off. A ratio of 1.0 is considered adequate.

28
Q

What is turnover usually calculated for?

A

Accounts receivable, inventory, plant and equipment.

29
Q

What is the DuPont Model?

A

Net Income/Sales x Sales/Average total assets. It is a way of calculating return on investment.

30
Q

Why is return on equity always higher than return on asset?

A

Because assets are always higher than SE.

31
Q

What does Price earning ratios show?

A

The expectation of investors

32
Q

What is leverage?

A

How much debt the company uses to finance its assets.

33
Q

What is corporate governance?

A

The process by which companies are directed and controlled

34
Q

What are the two types of board of directors?

A

One-tier board: Executive boards = board of directors (US)
Two-tier board: Executive board(daily management of company) and board of directors(taking care of interest of shareholders) (EU)

35
Q

What are internal auditors?

A

Professionals that who perform the same function as external auditors but on a smaller scale.

36
Q

What are the objectives of the internal control system?

A

Effective and efficient operations
Reliable financial reporting
Compliance with applicable laws and regulations

37
Q

What is included in an independent auditors’s report?

A

Intro paragraph- general description of the FSs
Scope paragraph- describes nature and extent of the auditors work
Opinion Paragraph - evaluates the work done by the internal auditor
Paragraph on the effectiveness of the company -

38
Q

What is CSR?

A

Corporate Social Responsibility

39
Q

What are ESGs?

A

Environmental, social and governance factors that determine sustainability.

40
Q

What are the main variable costs? The main fixed costs?

A

Raw Materials, Direct labour, factory utilities, sales commissions, shipping costs.

Property Taxes, Insurance, supervisory salaries, depreciation expense, advertising.

41
Q

What are the two assumptions with the determination of cost behaviour pattern?

A

The behaviour pattern is truly within a relevant range of activity
Variable cost behaviour pattern is assumed to be linear within the relevant range.

42
Q

What is the high -low method?

A

First you find the highest and lowest periods in terms of output within a given range of time (e.g. high and low months in a year). Then, you divide the difference in total cots by the difference in activity. This gives the variable rate per unit.
Then, you can calculate the fixed costs from the difference between the total and variable costs (use the variable rate per unit you just found).

43
Q

What is the contribution margin?

A

The amount there is left after taking variable cots away from revenue to pay fixed expenses and operating income.

44
Q

What is the contribution margin ratio?

A

1 - variable cost ratio

45
Q

What is the formula for breakeven quantity?

A

fixed costs/(price - variable costs)
or in other words, fixed costs divided by contribution margin.

46
Q

How can you calculate the volume of unit you need to sell for a desired level of operating income?

A

(Fixed expenses + Desired operating income) / contribution margin per unit

47
Q

What is the margin of safety?

A

Total Sales - Breakeven sales

48
Q

What is a cost object?

A

Any organisational reference where a need to understand a cost exists.

49
Q

What is the difference between indirect and direct costs?

A

Direct costs can be easily traced to a unit of production or other cost objects, and would not be incurred if the product or activity were discounted. Indirect costs cannot easily be traced, and would still be incurred if production stopped.

50
Q

What are period costs?

A

Period costs are costs that are not absorbed into the inventory and COGS, they are directly incurred as an expense in the income statement.

51
Q

What accounts does a manufacturing cost accounting system involve?

A

Raw Materials inventory
Work in process inventory
finished goods inventory

52
Q

What is the difference between absorption costing and variable costing?

A

In absorption costing the fixed manufacturing overhead is a product cost, whereas in variable costing fixed manufacturing overhead is a period cost.

53
Q

How do you calculate overhead application rate?

A

Estimated total overhead costs/estimated total labour hours

54
Q

What is activity based costing?

A

Identifying the activity that causes the incurrence of a cost, this activity is known as the cost driver.

55
Q

What are some examples of committed costs vs discretionary costs?

A

Committed costs are things such as manager’s salary and taxes.

Discretionary costs are things such as advertising and copy machine upgrades

56
Q

What should the budget be seen as?

A

As a guide that reflects the management’s best thinking at the time it is prepared.

57
Q

What are the two types of budgeting?

A

Top-down budgeting, where there is no input from lower levels of management with regards to the budget.
Participative budgeting where all levels of management have significant input.

58
Q

What is the difference between incremental budgeting and zero-based budgeting?

A

Incremental budgeting starts with performance from the current period.
Zero-based budgeting starts with a clean slate.

59
Q

What is the master budget?

A

The operating plan expressed in financial term. It is made up of all the budgets in the company.

60
Q

What is the hardest part of the budget to develop?

A

The sales forecast

61
Q

Which types of costs are relevant and which type of costs are irrelevant in decision making?

A

Differential costs and opportunity costs are relevant.
Sunk costs and allocated costs are not relevant.

62
Q

How do you calculate the target cost?

A

Market price - desired profit

63
Q

What is the rule for the make or buy decision?

A

The cost avoided must be greater than the outside supplier’s price to consider buying the component.

64
Q

What is the cost allocation death spiral?

A

When stopping the production of a product giving negative profits actually leads to even greater loss due to the lower contribution margin of other prodcuts. (they have to absorb the fixed cost of the discontinued products)

65
Q

What is the rule for allocation of limited resources in the short term?

A

Maximise contribution margin per hour or per common resource used.

66
Q

What are the 5 important equations to remember?

A

Q = S/n

Q = sqrt(SFb)

P = c + 1/bn

n = sqrt(S/Fb)

AC = nF/S + c