D196 Flashcards
Accounting
quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decision
4 key components of accounting
1) Quantitative - relates to numbers
2) Financial - Accounting focuses on just the financial dimension.
3) Useful -accounting exists only because it is useful.
4) Decisions - it impacts decisions about the future.
Decision making process
1) Identify issue
2) Gather information
3) Identify alternatives
4) Select best option
What do accountants do in a business?
1) measure and report
2) Advise
2 primary areas of accounting
1) Managerial Accounting - Gathering and analysis of INTERNAL decision making
2) Financial Accounting - Used EXTERNALLY such as investors and creditors
Internal reports
used by those who direct the day-to-day operations of a business enterprise.
Management accounting
focuses on the information needed for planning, implementing plans, and controlling costs
Financial accounting summarized into 3 financial statements
1) Balance sheet
2) income statement
3) statement of cash flows
Balance sheet
A summary of the financial position of a company at a particular date.
Income statement
Reports the amount of net income earned by a company during a period.
The statement of cash flows
Reports the amount of cash collected and paid out by a company in the following three types of activities: operating, investing, and financing.
Key External users
Lenders
Investors
FASB
Financial Accounting Standards Board
Maintains its influence as the accounting standard setter for the United States.
Private group
GAAP
Generally Accepted Accounting Principles
Authoritative guidlines that define accounting practice at a particular time in the united states
SEC
Securities and Exchange commission
regulate U.S. stock exchanges.
CPA
Certified Public Accountant
CPA label guarantees that the person has received substantial accounting training and achieved a certain level of competence in accounting.
A CPA firm is a company that performs accounting services, just as a law firm performs legal services.
IRS
Internal Revenue Service
IASB
International Accounting Standards Board
develop international accounting standards
GASB
Government Accounting Standards Board
sets the accounting and financial reporting standards for state and local governments following GAAP.
What are the role of ethics in accounting?
Accountants have a moral and an economic incentive to be ethical and to conduct themselves ethically. Their product is information, and the value of that information is related to the confidence that users have in its relevance and reliability.
purpose of the accounting cycle
to help you see how the accounting process (including the recording) turns transactions into financial statements. Begin with business transactions, which are then analyzed and input into the financial accounting system.
Steps of the accounting cycle
1) Analyze Transactions
2) Record the effects of transactions
3) Summarize effects (preparing journal entries, preparing trial balance)
4) prepare reports
Accounting equation
Assets = Liabilities + Owners Equity
Owners Equity
A method of financing resources that does not require repayment and represents ownership interests in the business
Liabilities
A method of financing resources that requires repayment
account
a specific accounting record that provides an efficient way to categorize similar types of transactions. Thus, we may designate in the accounting records accounts for assets, liabilities, and owners’ equity.
The 3 primary financial statements
1) Balance Sheet
2) Income Statement
3) Statement of Cash flows
What is the balance sheet
- Resources and claims on those resources at a specific point in time
- What we own or control (Assets)
- What we owe (Liabilities)
- Owners share (Equity)
What is an income statement
- One measure of a company’s performance
- Measure of a company’s economic performance for a specific period of time
Statement of Cash flows
measures how cash changed from beginning to end of the period
what is the Securities and Exchange Commission (SEC)
The U.S. government agency charged with regulating financial markets and ensuring the availability of reliable financial information
Which resource or tool is used to identify unique companies in the SEC’s 10-K filing database?
Central Index Key (CIK)
Assets
Assets are economic resources that are owned or controlled by a company.
Owners equity equation
Equity = Assets - Liability
the amount leftover after liabilities have been paid off
Income statement equation
Revenues - expenses = net income
Revenue
amount of assests created from the sale of goods or services
expenses
amount of assets consumed through business operations.
Net Income
sometimes called earnings or profit, is an overall measure of a company’s performance. Net income reflects the company’s accomplishments (revenues) in relation to its efforts (expenses) during a particular period of time:
What is a gain?
Making money from an activity outside the normal activities of a business
what does the statment of retained earnings portray?
A statement of retained earnings portrays the accumulated profits or losses of a company at a point in time.
3 categories of cash flow
1) Operating activities
2) Investing activities
3) Financing activities
what are operating activities?
activities that are part of the day-to-day business of a company.
what are investing activies?
activities associated with buying and selling long-term assets—primarily the purchase and sale of land, buildings, and equipment.
what are financing activities?
activities whereby cash is obtained from or repaid to owners and creditors. For example, cash received from owners’ investments, cash proceeds from a loan, or cash payments to repay loans would all be financing activities.
four categories of financial statements
1) Summary of significant accounting policies
2) Additional information about the summary totals found in the financial statements
3) Disclosure of important information that is not recognized in the financial statements
4) Supplementary information
What is the purpose of a classified balance sheet?
A classified balance sheet distinguishes between current and long-term assets.
gross profit calculation
Sales − cost of goods sold
operating income calculation
Sales − cost of goods sold − operating expenses
What is the definition of financial statement analysis
Examining both the relationships among financial statement numbers and the trends in those numbers over time
How is a common-size income statement created?
By dividing all income statement amounts for a given year by sales for that year
What is the purpose of performing horizontal analysis of financial statements?
To highlight trends that may be occurring in the company over time
Cash Budget
- A short term schedule of expected cash inflows and outflows during a period of time
- First step in developing a cash budget.
- Allows you to anticipate financial needs.
What factors below contribute to a company’s pattern of cash collections?
Industry, firm size, and the firm’s credit policies
In what way does a cash budget allow a manager to take action now?
It allows the manager to identify cash shortages in advance.
According to a company’s cash budget, when can management plan to repay the company’s loans?
When excess cash is available
What are the principal sources of a company’s cash inflows?
Cash sales and the collection of cash from prior credit sales
Master budget
an integrated group of detailed budgets that outline the overall operating and financing plans for a specific period, usually one year.
Budgeting process
1) start with the sales budget or sales forecast.
2) Know how much beginning inventory is on hand.
3) production budget drives the direct materials, direct labor, and manufacturing overhead budgets
4) These budgets are then combined to determine what the cash budget will be.
5) a budgeted income statement and balance sheet (called pro forma financial statements) can be prepared that show what these financial statements will look like at the end of the period if the budget is met.
Sales Budget
A scale of projected sales over the budgeted period, which often includes a measure of revenue earned and cash collected from customers.
Production Budget
projected sales volume for the period, the desired amount of ending inventory, and the amount of inventory already on hand in the beginning inventory.
Manufacturing overhead budget
includes all production costs other than those for direct materials and direct labor.
The sales and administrative expense budget includes which expenses?
All expenses besides production-related expenses
The manufacturing overhead cost budget includes which manufacturing costs?
Both fixed and variable manufacturing overhead costs
The production budget supplies the information required for which other budget in the master budgeting process?
Direct materials budget
Responsibility accounting
a system in which managers are assigned and held accountable for certain costs, revenues, or assets.
Cost Center
any organizational unit in which the manager of that unit has control only over the costs incurred.
The manager of a cost center has no responsibility for revenues or assets, either because revenues are not generated in the center or because revenues and assets are under the control of someone else
Profit Center
has responsibility for both costs and revenues.
Profit centers are usually found at higher levels in an organization than are cost centers.
What is the segment margin?
The difference between segment revenue and direct segment costs; a measure of the segment’s contribution to cover indirect fixed costs and provide costs; in effect, the operating profit created by the segment.
What is an indirect cost?
A cost that a segment manager cannot control
What is capital budgeting?
Planning for the acquisition of property, plant, and equipment
What label is given to a business unit in which the manager is responsible for costs, revenues, and assets?
Investment center
What is the correct sequence of budgets in a manufacturing business?
Sales, production, direct labor
When can management determine the amount of direct materials, direct labor, and manufacturing overhead needed during the period?
Only after production quantities are known
What problem can occur if inventories are too high?
Excessive storage costs
What is a cost variance?
The amount by which the actual cost differs from the budgeted cost
Purpose of financial accounting
satisfy the needs of outside investors, creditors, and regulators for fair and consistent reports of financial position and operations.
Decision making process
Planning, Evaluating and controlling
Primary users of managerial accounting
Managers. It is not shared with people outside the company
Panning
involves a process of recognizing problems or opportunities, identifying alternatives, analyzing alternatives, then choosing and implementing the best alternative(s)
Controlling
“Analyzing results, rewarding performance, and identifying problems.”
Evaluating
involves analyzing results, providing feedback to managers and other employees, rewarding performance, and identifying problems.
Manufacturing business
any organization whose main economic activity involves using components or raw materials to make finished goods for sale to customers. A manufacturer constructs physical products such as machines, refrigerators, and furniture.
Service Business
any organization whose main economic activity involves producing a nonphysical product that provides value to a customer. A service organization provides customers with a nonphysical product, such as a new marketing plan or a cleaner house. A law firm and an architecture firm are examples of service businesses.
Merchandise business
a business that purchases finished goods for resale
Which types of costs does a merchandiser have?
Both product and period costs
Which types of costs does a manufacturer have?
Both product and period costs
Types of manufacturing costs
Direct materials
Direct labor
Manufacturing overhead
Direct materials
include the cost of raw materials that are used directly in the manufacture of products and are kept in the raw materials warehouse until they are moved from the warehouse and placed in the manufacturing process.
Direct labor
includes the hourly wages and other payroll-related costs and expenses (as mandated by federal and state payroll rules and regulations) of factory employees who work directly on products.
Manufacturing overhead
includes all manufacturing costs incurred during the manufacturing process that are not classified as direct materials or direct labor. In the factory manufacturing laptop computers, manufacturing overhead costs include miscellaneous materials used in production, such as glue or screws; wages for the factory supervisors and the manufacturing controller; utility costs; Etc.
What is the sequence of the flow of costs through a manufacturing operation?
1) Purchase raw materials, 2) transfer raw materials to production, 3) add direct labor and manufacturing overhead costs, 4) transfer the cost of completed goods to finished goods inventory, 5) sell goods and transfer cost to cost of goods sold.
What is work-in-process inventory?
All material on the factory floor that is not yet completed
Costs closely associated with the products or services offered are called:
product costs.
Which product costs are substantial in both a service company and a manufacturing company?
Direct labor and overhead
What is an important difference in the cost accounts of a merchandising company compared to a manufacturing company?
A merchandising company has no raw materials inventory or work-in-process inventory
Mixed costs
are variations of the basic fixed and variable cost behavior patterns. Specifically, mixed costs are costs that contain both variable and fixed components.
What is the relevant range?
The range of volume over which the variable cost per unit is expected to remain the same
Direct costs
costs that can be physically traced to a business unit or segment being analyzed. The unit may be a sales territory, product line, division, plant, or any other subdivision for which performance needs to be analyzed
Ex: Materials, labor, depreciation on equipment, salary of division manager.
Indirect costs
sometimes referred to as common costs or joint costs—are costs that are normally incurred for the benefit of several segments. Indirect costs can also be either fixed or variable, although they are nearly always fixed. Sometimes these costs are allocated in order to be assigned to a segment.
Ex: Corporate headquarters cost
Accounting for Manufacturing Overhead
1) before year begins, ESTIMATE the allocation activity,
2) During the year, RECORD ACTUAL manufacturing overhead,
3) During the year, RECORD APPLIED manufacturing overhead
4) At the end of the year, COMPARE ACTUAL AND APPLIED overhead balances and close out the difference
Actual manufacturing overhead
refers to manufacturing costs other than direct materials and direct labor—in other words, these are the indirect manufacturing costs that are not assigned to specific products
Estimated manufacturing overhead
amount of overhead costs that management has budgeted for the upcoming production period.
Applied manufacturing overhead
amount of the manufacturing overhead that is assigned to the goods produced. Applied overhead costs are entered as production takes place and are applied to work-in-process on the basis of a predetermined overhead rate.
Underapplied manufacturing overhead
means that the amount of actual overhead expenses incurred during the period exceeded the amount of overhead applied during the period.
Overapplied manufacturing overhead
The excess of applied manufacturing overhead (based on a predetermined application rate) over the actual manufacturing overhead costs for a period.
Why do companies allocate overhead costs based on estimated overhead numbers instead of actual numbers?
Because overhead costs must be allocated beginning the very first day of the period, but the actual numbers not available until the end of the period
Contribution margin
The difference between total sales and variable costs; the portion of sales revenue available to cover fixed costs and provide a profit.
contribution margin income statement
an income statement in which costs are separated by behavior (variable and fixed) instead of by functional classification (cost of goods sold, administrative expenses, and so forth).
CVP equation
Sales - Variable Costs - Fixed Costs = Profit
differential costs
future costs that change as a result of that decision.
Sunk costs
Costs that are past costs and do not change as a result of a future decision.
Out-of-pocket costs
require an outlay of cash or other resources.
Opportunity costs
the benefits lost or forfeited as a result of selecting one alternative course of action over another.
Contribution margin
the amount of revenue that remains to cover fixed costs and provide a profit for an organization.
Sales Revenue - Variable costs = Contribution margin
contribution margin ratio
The percentage of net sales revenue left after variable costs are deducted; the contribution margin divided by net sales revenue.
Job order costing
products are made based on specific customer orders and when each product produced is considered a separate job. With job order costing, production costs are tracked by job
In a job order costing system, how are factory supervisor wages classified?
Manufacturing overhead
Activity based costing
A method of attributing overhead costs to products based on measurable factors that relate to activities that create overhead costs.
First step in implementing ABC
do a detailed study of the production process to determine exactly which activities cause overhead costs.
Unit-level activities
Activities that take place each time a unit of product is produced.
Batch-level activities
Activities that take place in order to support a batch or production run, regardless of the size of the batch.
Product-line activities
Activities that take place in order to support a product line, regardless of the number of batches or individual units produced.
cost drivers
A numerical measure used to reflect the amount of a specific cost that is associated with a particular activity. A cost driver is a numerical measure used to reflect the amount of a specific overhead cost that is associated with a particular activity.
Cost pool
Total cost being generated by a specific overhead cost activity
Activity rate
The amount of the estimated cost pool divided by the estimated number of cost driver events
One important result of using an ABC system is more accurate product costing. What is another important result of using an ABC system?
Better decisions made
ABC involves identifying the activities that cause overhead costs and then estimating and allocating those costs based on those activities. The result is much more accurate product costing and better decisions being made
An ABC overhead allocation system is not always substantially better than a traditional system. When does a traditional overhead allocation system work well?
When the production process for each different product or project or process is basically the same
Process costing
a method of product costing whereby costs are accumulated by process or work centers and averaged over all products manufactured in a center or department during a production period.
The activities performed in each process center are identical for all units.
The units produced as a result of passing through the process centers are basically the same.
In an ABC system, what is a cost pool?
The collection of overhead costs associated with a specific overhead cost activity
There are three general types of overhead cost activities in an ABC system. What are those three general types of activities?
Unit-level, batch-level, and product-line
How is an activity rate computed in an ABC system?
Cost pool divided by number of cost driver events
