Final Definitions

Question 1

Capital budgeting

Answer 1

Process of of making capital investment decisions

Question 2

4 methods of capital budgeting

Answer 2

Payback period
Accounting rate of return
Net present value
Internal rate of return

Question 3

4 steps of capital budgeting

Answer 3

Identify capital investments
Estimate investment’s future net cash inflows
Analyse investments using the four methods
Perform post audits and compare estimated with actual cash flows

Question 4

3 factors that affect the time value of money

Answer 4

Principal amount
Number of periods
Interest rate

Question 5

Using NPV and IRR:

Deciding whether to invest in capital assets

Answer 5

NPV: positive or negative
IRR: is more or less than required rate of return

Question 6

Methods that ignore time value of money

Answer 6

Payback period

ARR

Question 7

Methods that use the time value of money

Answer 7

NPV

IRR

Question 8

Payback period highlights

Answer 8

Ignores any cash flows and residual occurring after payback period

Highlights risks of investments with longer cash recovery periods

Question 9

ARR highlights

Answer 9

Focuses on accrual based operating income from investment

Measures average profitability of asset over its life

Question 10

NPV highlights

Answer 10

Indicates whether an asset will earn minimum required rate of return

Shows excess or deficiency of assets present value of cash flows over cost of investment

Question 11

IRR highlights

Answer 11

Computes projects unique rate of return

No additional steps needed when assets require different initial investments

Question 12

Direct cost

Answer 12

Can be traced to cost object

Question 13

Indirect costs

Answer 13

Relates to cost object but can’t be traced to it. Costs are allocated to cost objects

Question 14

Product cost

Answer 14

Costs of manufacturing or purchasing products

Question 15

Benefits of ABC costing

Answer 15

Higher for companies in competitive markets

Pinpoints opportunities for cost savings

Higher when risk of cost distortion is high

Question 16

Discretionary fixed costs

Answer 16

Costs that companies have some control over

Question 17

Cost volume profit assumptions

Answer 17

Sales price remains constant
Costs are always variable or fixed
Inventory levels won’t change
Mix of products offered for sale remains

Question 18

Sensitivity analysis

Answer 18

A what if technique that asks what results will be if prices or costs change

Question 19

Incremental analysis for special order decision

Answer 19

Revenue from order
- Variable expenses from order
- additional fixed expenses from order
= special order operating income

Question 20

Budgets

Answer 20

Used to plan for the future and control the revenue and expenses related to those plans

Question 21

Sales budget layout

Answer 21

Unit sales
X sales price for case
= Total revenue

Cash sales
+ credit sales
= Total revenue

Question 22

DM budget layout

Answer 22

Units to produce
X quantity of DM per unit
= Amount of DM needed
\+ des. End. Inv. Of DM
- Beg. Inv. Of DM
= Quantity DM to purchase
X cost per pound 
= Total cost of DM purchases

Question 23

Manufacturing overhead budget layout

Answer 23

Units to produce
X variable overhead cost/unit
+ fixed MOH costs
= Total MOH

Question 24

Calculation of DM used

Answer 24

Beg Raw Mat Inv
\+ purchases of DM
= Materials available for use
- End Raw Mat Inv
= DM used

Question 25

Calculation of Cost of goods manufactured

Answer 25

Beg Work in process inv.
\+ manufacturing costs (DM, DL, MOH)
= Total manufacturing costs
- End Work in process inv
= COGM

Question 26

Calculation of Cost of goods sold

Answer 26

Beg Fin goods inv
\+ cost of goods manufactured 
= cost of goods available for sale
- End Fin Goods Inv
= COGS

Question 27

Budgeted balance sheet

Answer 27

Assets: cash, accounts receivable, inventory, prepaid taxes and insurance, property and equipment

Liabilities: accounts payable, income tax, stockholders equity, total liabilities and stock holders equity

Question 28

Planning

Answer 28

Setting goals and objectives and determining how to achieve them

Question 29

Directing

Answer 29

Overseeing day to day operations

Question 30

Controlling

Answer 30

Evaluating results against plan and making adjustments to try and achieve goals