Exam 1 ( ch 13, 14, 1, 2) Flashcards
Purpose of a cash flow statement
to get from the beginning cash balance to the ending cash balance
Order of 3 activities
Operating
Investing
Financing
Operating
- day to day profit making activities
- all things that affect net income (includes interest paid and received and dividends received)
Investing
buying or selling of long term assets
Financing
generate capital or pay it back (debt or equity)
Indirect method
- operating activities starts with net income and adjusts to cash flow
- most companies use this method
- (only operating section differs)
direct method
- calculate various items using income statement and balance sheet information
- recommended by FASB and IASB
- must present reconciliation using indirect method
- (only operating section differs)
Horizontal Analysis
- the difference between two years divided by a base year = % change
- percentage changes in comparative financial statements (year to year)
trend analysis
horizontal analysis over a longer period of time
Vertical Analysis
- shows relationship of each item to a base amount (which is 100%) on financial statements
- analysis that converts items on a financial statement to percentages of a base
Base for vertical analysis
- income statement: Net sales (total expenses + net income)
- balance sheet: total assets
Common size financial statements
used to compare companies with different levels of sales and assets
benchmark
- comparing a company to other similar companies or industry averages
- compare to itself over time
Current Ratio
- (current assets / current liabilities)
- measures the ability to pay current liabilities with current assets
- ratio of 2.0 generally considered strong
working capital
- (current assets - current liabilities)
- measures the ability to meet short term obligations with current assets
Debt Ratio
- (total liabilities / total assets)
- measures the ability to pay long-term debt
- the higher the ratio the higher the risk
return on net sales
- (net income / net sales)
- shows the percentage of each sales dollar earned as net income
- calculated previously in vertical analysis
ratio analysis
- a means of evaluating the relationships between key components of the financial statements
- the information needed can be found in the companies financial statements
Decision making
- occurs during planing, directing, and controlling
- managers responsibilities
Planning
- setting goals and objectives and determining how to achieve them
- report: budget
Directing
- implementing plans and overseeing daily operations
- report: Daily sales report
Controlling
- evaluating actual results against the plan and making adjustments as necessary
- report: budget performance
Managerial accounting purpose
- to help managers plan, direct, and control business operations and make decisions
Financial accounting puropse
- to help external users make investing and lending decisions
Managerial accounting reports and frequency
- management determines content and format
- as needed (daily, weekly, monthly, quarterly, annually)
Financial accounting reports and frequency
- GAAP determines content and format
- Emphasis on annual report; quarterly reports also prepared
Board of directors (BOD)
- Elected by stockholders to oversee a corporation
Audit committee
- subcommittee of the BOD
- oversees the internal audit function and the annual external audit
Chief Financial Officer (CFO)
- Hired by the CEO
- manage the companies financial activities
Controller
- responsible for general financial accounting, managerial accounting, and tax reporting
Treasurer
- responsible for raising capital and investing funds
Chief Executive Officer (CEO)
- Hired by the BOD
- manage the company
Chief Operating Officer (COO)
- Hired by CEO
- manage the operations of the company
Internal Audit function
- ensures company’s internal controls are working properly
- reports directly to the Audit Committee of BOC (may also report to the CFO or CEO
credentials available for management accountants
- CMA (certified management accountant)
- CPA (certified public accountants)
- CGMA (chartered global management accountant)
CMA
- certified management accountant
- designation typically command higher positions and salaries
CPA
- certified public accountants
- most recognized professional accounting credential
CGMA
- chartered global management accountant
- available to CPA’s that fill accounting positions in industry, government, or education (40% of all members)
IMA’s statement on ethical professional standards
- (institute of management accountants)
- 4 main principals:
Competence
Confidentiality
Integrity
Credibility
Competence
- maintain professional competence
- recognize and communicate professional limitations
- provide clear, accurate, and timely information
- perform in accordance with laws and regulations
Confidentiality
- do not disclose confidential information
- communicate responsibilities to subordinates
- do not us confidential information for unethical or illegal advantage
Integrity
- avoid conflicts of interest and advise others of potential conflicts
- refrain from conduct that would prevent you from carrying out duties ethically
- do not discredit profession
Credibility
- communicate information fairly and objectively
- Disclose all relevant information that could influence a users understanding
- Disclose delays and deficiencies in providing information
Service companies
- provide a service only
- no inventory
- ex. accountants, banks, doctors, barbers, lawn care
merchandising companies
- resell products purchased from suppliers
- one inventory account (merchandise inventory)
- ex. amazon, jc penny, target, sheetz
- retailers (sell to end users) wholesalers (sell to other businesses
Manufacturing Companies
- Use labor and other inputs to convert raw materials into finished products
- ex. general motors, dell, mylan
- 3 inventory accounts
Raw materials
Work in Progress
Finished Goods
Value Chain
activities that add value to products and services and cost money
Research and development
- Value Chain
- developing products or services and the processes to produce them
- expensed as incurred
Design
- Value Chain
- detailed engineering for the products and services and the processes to produce them
- expensed as incurred
production or purchases
- Value Chain
- resources used to produce a product or to purchase merchandise
- inventoried on balance sheet, expensed when sold
Marketing
- Value Chain
- promotion and advertising
- expensed as incurred
Distribution
- Value Chain
- delivery of goods and services
- expensed as incurred
consumer support
- Value Chain
- provided after the sale
- expensed as incurred
cost object
- anything for which managers want a separate measurement of cost
Direct cost
- can be traced directly to the cost object
- a main part of the object or someone working directly on it
- costs are traced
- ex. tires on a car
indirect object
- costs that relates to the cost object but cannot be easily traced to it
- costs must be allocated
- ex. production supervisors salary or screw in a car
Inventoriable product costs
- used for external reporting
- all costs incurred to produce a product (both direct and indirect costs)
- product costing stops when the product is completely finished and transferred to finished goods inventory
- Direct materials, Direct Labor, Manufacturing overhead
Period costs
- expensed in period incurred
- all costs along the value chain except “production or purchases”
- often called operating costs, or general, selling, and administrative costs
Product costs
- inventoried on balance sheet and expensed on income statement when sold
Manufacturing Overhead
- Indirect Materials
- Indirect Labor
- Other Manufacturing Overhead (or period)
Prime
Direct materials and Direct Labor
conversion
- Direct labor and Manufacturing overhead
- cost to “convert” raw materials into a finished product
Inventory Formula
Beginning Inventory \+ Additions -------------------------------- Cost Available - Ending Inventory -------------------------------- Cost transferred out
Cost behavior
- how costs change with changes in volume
- variable and fixed
Variable costs
- total variable costs change in direct proportion to changes in volume
- variable costs per unit are constant
- ex. direct materials, cost of goods sold for a merchandising company, cost of gasoline to drive your car
Fixed costs
- total fixed costs stay constant over a wide range of volume
- fixed cost per unit varies inversely with changes in volume
- ex. straight line depreciation, managers salary, insurance on your car
Total cost formula
TC = FC + VC (x)
Relevant Costs
- costs that differ between alternatives
- Differential costs
Irrelevant Costs
- costs that do not differ between alternatives
- Sunk costs
sunk costs
- costs that have already been incurred and cannot be changed
- ex. boyfriend breaks up with you. cant get that time back
- Irrelevant costs
Controllable costs
management can influence or change cost
Uncontrollable costs
- management cannot change or influence cost in the short run
- manager performance should not be measured based on costs that they cannot control
Cash
generally includes petty cash, checking accounts, and savings accounts
Cash Equivalants
- highly liquid assets that are readily convertible into cash
- ex. money market funds, certificates of deposit maturing less than three months, us treasury bills
