Final Definitions Flashcards
Capital budgeting
Process of of making capital investment decisions
4 methods of capital budgeting
Payback period
Accounting rate of return
Net present value
Internal rate of return
4 steps of capital budgeting
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
3 factors that affect the time value of money
Principal amount
Number of periods
Interest rate
Using NPV and IRR:
Deciding whether to invest in capital assets
NPV: positive or negative
IRR: is more or less than required rate of return
Methods that ignore time value of money
Payback period
ARR
Methods that use the time value of money
NPV
IRR
Payback period highlights
Ignores any cash flows and residual occurring after payback period
Highlights risks of investments with longer cash recovery periods
ARR highlights
Focuses on accrual based operating income from investment
Measures average profitability of asset over its life
NPV highlights
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
IRR highlights
Computes projects unique rate of return
No additional steps needed when assets require different initial investments
Direct cost
Can be traced to cost object
Indirect costs
Relates to cost object but can’t be traced to it. Costs are allocated to cost objects
Product cost
Costs of manufacturing or purchasing products
Benefits of ABC costing
Higher for companies in competitive markets
Pinpoints opportunities for cost savings
Higher when risk of cost distortion is high
Discretionary fixed costs
Costs that companies have some control over
Cost volume profit assumptions
Sales price remains constant
Costs are always variable or fixed
Inventory levels won’t change
Mix of products offered for sale remains
Sensitivity analysis
A what if technique that asks what results will be if prices or costs change
Incremental analysis for special order decision
Revenue from order
- Variable expenses from order
- additional fixed expenses from order
= special order operating income
Budgets
Used to plan for the future and control the revenue and expenses related to those plans
Sales budget layout
Unit sales
X sales price for case
= Total revenue
Cash sales
+ credit sales
= Total revenue
DM budget layout
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
Manufacturing overhead budget layout
Units to produce
X variable overhead cost/unit
+ fixed MOH costs
= Total MOH
Calculation of DM used
Beg Raw Mat Inv \+ purchases of DM = Materials available for use - End Raw Mat Inv = DM used
Calculation of Cost of goods manufactured
Beg Work in process inv. \+ manufacturing costs (DM, DL, MOH) = Total manufacturing costs - End Work in process inv = COGM
Calculation of Cost of goods sold
Beg Fin goods inv \+ cost of goods manufactured = cost of goods available for sale - End Fin Goods Inv = COGS
Budgeted balance sheet
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
Planning
Setting goals and objectives and determining how to achieve them
Directing
Overseeing day to day operations
Controlling
Evaluating results against plan and making adjustments to try and achieve goals
