Final Exam Flashcards
The process of planning, recording, analyzing, and interpreting financial information and economic events and communicating them to interested parties
accounting
3 forms of business
sole proprietorship, partnership, corporation
a business owned and managed by a single individual; simple to establish and has tax advantages, but is subject to personal liabilities.
Sole Proprietorship
Business owned by two or more people; liable to personal loss, but encompasses broader skills and resources
Partenership
a company or group of people authorized to act as a single entity (legally a person) and recognized as such in law; easy to transfer ownership, easy to raise capital, no personal liability, but subject to double taxation.
Corporation
Users of financial information
internal and external users
managers, supervisors, and company officials who use financial info for internal reports and to plan, organize and run businesses.
internal/managerial accounting
investors, creditors, or regulators (IRS) that use financial info to make decisions on whether or not to buy or sell stock, or to loan a company money
external/financial accounting
enacted in response to the financial scandals to protect shareholders and the general public from accounting errors and fraudulent practices.
Sarbanes-Oxley act of 2002: (SOX)
3 types of economic events
Financing, investing, and operating
raising and obtaining money (creditors and issuing stock)
financing
purchase of assets needed to operate (delivery trucks and computer equipment)
investing
things that occur during day to day operations (electricity, employees, telephone service)
operating
Basic Accounting Equation
Assets = Liabilities + Stockholders’ Equity
resources owned by a business (cash, property, equipment)
Assets
amounts owed to creditors or suppliers (accounts/notes/bonds payable)
liability
The owners’ claim to assets (common stock, retained earnings)
Stockholders’ Equity
amounts received from issuing stock
common stock
net income retained in the business not paid out in dividends
retained earnings
amounts earned from sale of products or services performed; aka sales, service, or interest revenue
revenue
cash payments to stockholders; NOT expenses
Dividends
cost of assets consumed or services used; aka rent, utility, or interest expenses; cost of goods sold
Expenses
revenue > expenses
net income
revenue < expenses
net loss
4 financial statements
income statement, statement of retained earnings, balance sheet, statement of cash flows
reports money and expenses over a period of time
Income Statement
A financial statement that summarizes the amounts and causes of changes in retained earnings over a period of time.
Retained Earnings Statement
Reports on the assets, liabilities, and stockholders’ equity of the business as of a specific date.
balance sheet
A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time.
Statement of Cash Flows
components of an annual report
financial statements, management discussions of past, present, and future of company, notes to the financial statements, and an auditor’s report on fairness of statements
Short-term or long-term liabilities that a business promises to repay by a certain date; balance sheet
notes payable
assets that are owned and are used as needed; balance sheet
supplies
assents that are held, such as stocks and bonds; balance sheet
investments
income earned from performing a service, billed and unbilled; income statement
service revenue
asset sold to create revenue; balance sheet
inventory
an asset created by selling goods on account; balance sheet
Accounts Receivable
cost of inventory that is sold, therefore an expense; income statement
cost of goods sold
liability on a balance sheet
Wages Payable
revenue created by “making a promise” of a service after a payment, therefore a liability recorded on a balance sheet
Unearned Service Revenue
A financial statement that reports assets, liabilities, and owner’s equity on a specific date.
Balance Sheet
A balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections.
Classified Balance Sheet
categories of assets
current assets, investments, PPE, and intangibles
assets that a company expects to convert to cash or use within the year or operating cycle; listed by liquidity
current assets
The average time required to purchase inventory, sell it on account, and then collect cash from customers—that is, go from cash to cash; we’re using 1 year for class.
operating cycle
the ease with which an asset can be converted into the economy’s medium of exchange
Liquidity
stocks and bonds of other companies or in land and buildings not currently being used in operating activities (for future use)
investments
assets with relatively long useful lives that are currently used in operating the business; aka fixed assets, plant assets, or PPE.
Property, Plant, and Equipment
accounting method of allocating the cost of a tangible asset over its useful life and is used to account for declines in value; land is NOT depreciated
depreciation
assets without physical substance (goodwill and copyright)
intangibles
amount paid for an existing business above the value of its other assets
goodwill
categories of liabilities
current liabilities and long-term liabilities
liabilities due within a short time, usually within a year; listed in order of magnitude
current liabilities
obligations that a company expects to pay after one year
long-term liabilities
categories of equity
common stock and retained earnings
Term used to describe the total amount paid in by stockholders for the shares they purchase.
common stock
earnings retained in the business NOT paid out in dividends
retained earnings
Company’s share profits to the shareholders based on the corporation’s performance.
dividends
3 types of accounting ratios
profitability, liquidity, and solvency
free cash flow ratio
net cash provided by operating activities - capital expenditures - cash dividends
profitability ratio
Net income/ revenue
earnings per share (EPS)
(net income - preferred dividends) / average common shares outstanding
Liquidity Ratios
working capital and current ratio
working capital
current assets - current liabilities
current ratio
current assets/current liabilities
debt to total asset ratio
solvency ratio
total liabilities/total assets
Basic Accounting Equation
Assets = Liabilities + Stockholders’ Equity
a set of accounting standards that is used in the preparation of financial statements
Generally Accepted Accounting Principles (GAAP)
U.S. government agency that oversees securities transactions, activities of financial professionals and mutual fund trading to prevent fraud and intentional deception.
Security and Exchange Commission (SEC)
The primary accounting standard-setting body in the United States.
Financial Accounting Standards Board (FASB)
An accounting standard-setting body that issues standards adopted by many countries outside of the United States.
International Accounting Standards Board (IASB)
Issues auditing standards and reviews their performance of audit forms.
Public Committee Accounting Oversight Board (PCAOB)
it makes a difference to a financing user
Relevance
information that is complete, neutral, and free from error
Faithful Representation
Qualities of Useful Information
comparability, verifiable, understandability, consistency, timely
Assumptions in Financial Reporting
monetary unit, economic entity, periodicity, going concern
Image: Assumptions in Financial Reporting
An assumption that requires that only those things that can be expressed in money are included in the accounting records.
Monetary Unit Assumption
An assumption that every economic entity can be separately identified and accounted for.
Economic Entity Assumption
An assumption that the economic life of a business can be divided into artificial time periods.
Periodicity Assumption
The assumption that the company will continue in operation for the foreseeable future.
Going Concern Assumption
Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.
Full Disclosure Principle
dictates that companies record assets at their cost; only for assets that are actively traded
Historical Cost Principle
assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)
Fair Value Principle
Providing information is costly. The cost of gathering the information should be weighed against the benefits users will receive from it
The Cost Constraint
the process of identifying the specific effects of economic events on the accounting equation
transaction analysis
Order of financial statements
income statement, statement of retained earnings, balance sheet, statement of cash flows
A financial statement showing the revenue and expenses for a fiscal period.
income statement
A financial statement that summarizes the amounts and causes of changes in retained earnings for a specific time period.
retained earnings statement
A financial statement that reports assets, liabilities, and owner’s equity on a specific date
balance sheet
An assumption that the economic life of a business can be divided into artificial time periods
The Periodicity Assumption
The principle that companies recognize revenue in the accounting period in which the revenue is earned
The Revenue Recognition Principle
Expenses are matched with revenue
The Expense Recognition Principle
reporting income when it is earned and expenses when they are incurred
Accrual Basis Accounting
Reporting income when the cash is received and expenses when the cash is paid.
Cash Basis Accounting
Entries made at the end of an accounting period to ensure that the revenue recognition and expense recognition principles are followed; DO NOT FOLLOW CASH AND NEVER ADJUST THE CASH ACCOUNT
Adjusting entries
Adjusting entries for either prepaid expenses or unearned revenues.
deferrals
expenses paid in cash before they are used or consumed (equipment, prepaid insurance, supplies, depreciation)
prepaid expenses
liability created by receiving revenue in advance.
unearned revenue
asset that is deferred on an income statement or balance sheet
Prepaid Insurance
expense items that are deferred on an income statement or balance sheet
supplies
cost allocation, not valuation
depreciation
an account that is offset against an asset account on the balance sheet
contra-asset account
the total amount of depreciation expense that has been recorded since the purchase of a plant asset
Accumulated Depreciation
recognition of an expense or revenue that has been incurred or earned but has not yet been recorded; “building up” the expenses or revenue
accrual
revenue earned in one fiscal period but not received until a later fiscal period
accrued revenue
expenses incurred but not yet paid in cash or recorded
accrued expenses
Interest Formula
face value of note (P) × annual interest rate (R) × time in terms of one year (T) = interest
A report that accounts for the differences between the bank statement and a checkbook balance
bank reconciliation
a disbursement system that uses wire, telephone, or computer to transfer cash from one location to another
Electronic Funds Transfer (EFT)
A report of deposits, withdrawals, and bank balances sent to a depositor by a bank
bank statement
causes for a reconciliation
time lags and errors
adjustments to the bank balance
+ deposits in transit
- outstanding checks
+/- bank errors
deposits recorded by the depositor that have not been recorded by the bank
deposits in transit
checks issued and recorded by a company that have not been paid by the bank
outstanding checks
posting errors made by the bank that either incorrectly increase or decrease the bank balance
bank errors
Adjustments to the Book Balance
+ unrecorded receipts (EFTs)
- unrecorded payments (EFTs)
- NSF (bounced checks)
+/- company errors
receipts of cash earned that have been deposited in the bank
unrecorded receipts (EFTs)
errors in accounting made by the company that can either incorrectly increase or decrease the book balance
company errors
the status of a checking account that does not have enough money to cover transactions
NSF (bounced checks)
analysis only used for adjusting BOOKS
tabular analysis
a company that resells tangible products previously bought from suppliers; primary source of revenue is sales revenue
Merchandising Company
Income Measurement
sales revenue - cost of goods sold = gross profit - operating expenses = net income (loss)
the cost of the merchandise inventory that the business has sold to customers; expense
Cost of Goods Sold (COGS)
Companies use either a perpetual inventory system or a periodic inventory system to account for inventory.
Flow of Costs
The amount of inventory on hand at the beginning of a fiscal period
Beginning Inventory
the actual count of merchandise at the end of a fiscal period
Ending Inventory
a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period
periodic inventory system
A detailed inventory system in which a company maintains the cost of each inventory item, and the records continuously show the inventory that should be on hand.
perpetual inventory system
a return of goods from the buyer to the seller for cash or credit
purchase return
a deduction made to the selling price of merchandise, granted by the seller, so that the buyer will keep the merchandise
purchase allowance
price that revenue is recorded at when taking inventory
selling price
cost that inventory is recorded at when taking inventory
Inventory Cost
an account that is offset against a revenue account on the income statement; prevents reductions of sales
contra revenue account
Gross Profit
net sales - cost of goods sold; profit SOLELY from sale of inventory
FIFO, LIFO, and average cost; systematic assumptions about the flow of inventory, used by companies to value their inventory; company must use its selected cost flow assumption consistently from one period; choose a cost flow assumption that clearly reflects periodic income
cost flow assumptions
the inventory costing method that identifies the cost of the specific item that was sold; used by low-volume, ^ $ sellers; inventory have specific ID #s (cars, antiques, jewelry)
Specific Identification
earliest (oldest) goods purchased are the first to be sold; follows physical flow of merchandise; reports lowest COGS and highest inventory net income (food, drinks)
FIFO (first in, first out)
latest (newest) goods sold first; excludes goods sold in piles; rarely coincides with physical flow of merchandise; reports lowest inventory net income and highest COGS (clothes, toys)
LIFO (last in, first out)
allocates cost of goods available for sale on the basis of weighted average cost; assumes inventory has about the same price;
Average cost
$ of goods available ÷ # of units in goods available
current asset that shows the amount of cash the a business expects to collect; doesn’t have to be receivables
net realizable value
Accounts receivable that cannot be collected, bad debts
uncollectible accounts
an expense account to record losses from extending credit;
Bad Debt Expense
bad debt expense = existing balance - estimate
A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible; PROBLEM: no matching of revenue and expenses, which misleads financial statement users
direct write-off method
A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period; estimate what will not be collected in period when sale was made; revenue and expenses match
allowance method
contra-asset account containing the estimated uncollectible accounts receivable; recorded as decreases in allowance for doubtful accounts and expense account
Allowance for Doubtful Accounts
net realizable value formula
accounts receivable - allowance for doubtful = net realizable value (total accounts receivable)
A method of estimating the amount of bad debt expense whereby management establishes a percentage relationship between the amount of receivables and the expected losses from uncollectible accounts.
Percentage-of-receivables basis
older uncollectibles are typically more likely to be uncollectible
aging
multi-step balance sheet
1) find gross profit
2) subtract income from operations
3) find net income
A non-operating activities section of the income statement that shows revenues and gains unrelated to the company’s main line of operations; interest revenue, dividend revenue, rent revenue, gain
other revenues and gains
A non-operating activities section of the income statement that shows expenses and losses unrelated to the company’s main line of operations; interest expense, casualty losses, loss of sale of PPE, loss from strikes of employees
other expenses and losses
Gross Profit Rate
gross profit/net sales (%)
profit margin
net income/net sales (%)
accounting used to provide information and analyses to managers inside the organization to assist them in decision making
Managerial Accounting
Management Function Categories
planning, directing, controlling
A management function that includes anticipating trends and determining the best strategies and tactics to achieve organizational goals and objectives.
planning
management function of directing human resources for the accomplishment of objectives
directing
a management function that involves establishing clear standards to determine whether or not an organization is progressing toward its goals and objectives, rewarding people for doing a good job, and taking corrective action if they are not
controlling
organizational chart of management
chart showing the flow of management in a business
The process of making a raw material into a finished product; especially in large quantities.
Manufacturing
Raw materials that can be physically and directly associated with manufacturing the finished product.
Direct Materials
Small items of material such as glue and nails that may be an integral part of a finished product, but whose costs cannot be easily or conveniently traced to it.
Indirect Materials
the work of factory employees that can be physically and directly associated with converting raw materials into finished goods
Direct Labor
The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products.
Indirect Labor
all manufacturing costs except direct materials and direct labor
Manufacturing Overhead
product cost
direct materials + direct labor + manufacturing overhead
period cost
selling expenses + administrative expenses
The income statement for a manufacturer is similar to that of a merchandiser except for the cost of goods sold section
Manufacturer Financial Statements
the manufacturing costs associated with the goods that were finished during the period
Cost of Goods Manufactured
The sum of direct materials, direct labor, and manufacturing overhead incurred in the current period.
Total Manufacturing Costs
Trends in managerial accounting
- customer orientation
- global economy
- e-commerce
- service economy
- lean practices
- value chain
a company objective based on the premise that the firm should measure itself primarily according to whether it meets its customers’ needs
customer orientation
economic activity that crosses national borders
global economy
Web-based economic activities
e-commerce
where the majority of people earn their living by providing a service rather than manufacturing a product
service economy
Methods of doing business that facilitate cost reductions, cycle-time efficiencies, & inventory turn increases
Lean Practices
The set of activities through which a product or service is created and delivered to customers.
value chain
inventory method that lowers the cost of inventory
just in time inventory
a comprehensive approach - led by top management and supported throughout the organization - dedicated to continuous quality improvement, training, and customer satisfaction
Total Quality Management
a combination of performance measures directed toward the company’s long and short term goals and used as the basis for awarding incentive pay
Balanced Scorecard
The study of the effects of changes in costs and volume on a company’s profits.
Cost-Volume-Profit Analysis
The activity that causes changes in the behavior of costs.
Activity Index
costs that vary directly in total with changes in the activity level. (Ex. direct materials, direct labor)
variable cost
costs that remain the same in total regardless of changes in the activity level. (Ex. depreciation, property taxes, insurance, rent, salaries)
fixed costs
Costs that contain both a variable- and a fixed-cost element and change in total but not proportionately with changes in the activity level; uses the high-low method
mixed costs
a method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity levels
High-Low Method
Assumptions underlying CVP analysis
- Selling price is constant throughout the entire relevant range
- Costs are linear over the relevant range
- In multi-product companies, the sales mix is constant
- In manufacturing firms, inventories do not change (units produced = units sold)
Image: Assumptions underlying CVP analysis
classifies costs as variable or fixed and computes a contribution margin
CVP income statement
contribution margin
Sales - Variable Costs
net income
contribution margin - fixed costs
OR
required sales - variable costs - fixed costs
Unit Contribution Margin (UCM)
unit selling price - unit variable cost
the quantity at which total revenue and total cost are equal
break-even point (BEP)
break-even point in dollars
fixed costs / contribution margin ratio
OR
BEP in units x unit selling price
Contribution Margin Ratio
unit contribution margin/sales price per unit
The number of items or products or services sold by a business over a period of time.
sales volume
The income objective set by management.
Target net income
contribution margin technique for target net income
(fixed cost + target net income)/unit contribution margin
difference between your actual or expected profitability and the break even point
margin of safety
Margin of Safety in Dollars
Actual (Expected) Sales - Break-Even Sales
Margin of Safety Ratio
Margin of Safety in Dollars / contribution margin ratio
A formal written statement of management’s plans for a specified future time period, expressed in financial terms; presented by accountants, managed and taken care of by management
budget
important basis for performance evaluation once adopted
Control Device
Benefits of Budgeting
- requires managers to plan
- coordination and communication
- benchmark for evaluating actual performance
- creates early warning system
- motivates personel
principles of effective budgeting
- Depends on a sound organizational structure with authority and responsibility for all phases of operations clearly defined
- Based on research and analysis with realistic goals
- Should be accepted by all levels of management
- May inspire higher levels of performance or discourage additional effort
- Invite each level of management to participate;
“Participative Budgeting” - Risk of unreliable budgets greater when they are “top-down”
- “Budgetary Slack”
A budgetary approach that starts with input from lower-level managers and works upward so that managers at all levels participate.
participative budgeting
the budgeted amounts for the coming year are literally imposed on middle and lower level managers
top-down budgeting
occurs when managers intentionally understate expected revenues or overstate expected expenses so that budget goals are easier to meet
budgetary slack
The intervals of time (usually 12 months, budgeting is short-term) into which a project period is divided for budgetary and funding purposes; must provide attainable goals and minimize seasonal or cyclical fluctuations while making reliable estimates.
Budget Period
a set of interrelated budgets that constitutes a plan of action for a specific time period; operating + financial
master budget
individual budgets that result in the preparation of the budgeted income statement; establish goals for sales and production personnel (sales budget, production budget, DM budget, DL budget, MO budget, selling + admin. budget, budgeted income statement)
operating budgets
Individual budgets that focus primarily on the cash resources needed to fund expected operations and planned capital expenditures. (capital expenditure budget, cash budget, budgeted balance sheet)
financial budgets
derived from the sales forecast; represents the management’s best estimate of sales revenue for the budget period.
sales budget
shows the units that must be produced to meet anticipated sales; has no $ amounts
Production Budget
An estimate of the quantity and cost of direct materials to be purchased.
Direct Materials Budget
Shows both the quantity of hours and cost of direct labor necessary to meet production requirements; critical in maintaining a labor force that can meet expected production
Direct Labor Budget
An estimate of expected manufacturing overhead costs for the budget period; distinguishes between fixed and variable costs.
Manufacturing Overhead Budget
A projection of anticipated selling and administrative expenses for the budget period; distinguishes between fixed and variable costs.
selling and administrative expense budget
important for end product of the operating budgets; indicates expected profitability of operations; provides basis for evaluating company performance; prepared from info of all previous operating budgets.
budgeted income statement
- a budget that estimates cash anticipated cash receipts (inflows and outflows) during a particular period like a month or a quarter
- MOST IMPORTANT OUTPUT IN PREPARING FINANCIAL BUDGETS
- increases effective cash management
- indicates when excess cash will be available and allows for planning ahead to prevent disasters
- includes cash receipts (+), cash disbursements (-), and financing (+/-)
- shows beginning and ending cash balances
cash budget
- added to beginning balance on a cash budget
- includes expected receipts from principle sources of revenue
- usually cash and collections of credit, but also includes expected interest and dividend receipts, proceeds from planned sales of investment, PPE, and capital stock
cash receipts
- subtracted from total available cash on a cash budget
- includes expected cash payments for direct materials and direct labor, taxes, dividends, and PPE
cash disbursements
shows expected borrowed funds and interest
financing
a projected financial statement that forecasts the financial position at the end of the budgeted period; developed from the budgeted balance sheet from the preceding period (1 year) and budgets for the current year
budgeted balance sheet
The budget that presents the company’s plan for purchasing property, plant, equipment, and other long-term assets.
capital expenditures budget
shows the amount of goods to be purchased from suppliers during the period to reach the projected COGS
merchandising purchases budget
a tax based on a person’s earnings
individual income tax
changed rules as of 2018 that relate to individual income taxes
Tax Cuts and Jobs Act
Income Tax Model
Gross Income - Deduction of Adjusted Gross Income = Adjusted Gross Income - Standard Deduction/Itemized Deduction (whichever is greater) = taxable income × tax rates/tax tables = tax liability - credits and payments = refund/payment
the total amount of income from wages before any payroll deductions
gross income
5 filing statuses
single, married filing jointly, married filing separately, head of household, surviving spouse or qualifying widow
A stated amount that you may subtract from adjusted gross income instead of itemizing your deductions;
standard deduction
single - married filing jointly - married filing separately - head of household - surviving spouse/widow -
$12,000; 1,600 for old or blind (x2 for both)
$24,000; 1,300 if old or blind (x2 for both)
$12,000
$18,000
$24,000
allowable deductions other than those for AGI, subtracted only if they exceed the taxpayer’s standard income.
includes:
- mortgage interest on personal residence (limited)
- state/local income tax
- medical expenses
itemized deduction
the amount per unit of taxable item or activity
tax rates
an amount of money that can be offset against a tax liability. Examples include the AOC and the LLC.
tax credits
provides tax credits for first four years of postsecondary education, $2,500 per student if they are a dependent, and it phases out
American Opportunity Credit (AOC)
A tax credit for all years of college or graduate school. It also applies to working adults taking classes to improve their work skills; 20% credit up to $10,000
Lifetime Learning Credit
A $1,000 tax credit, subject to an AGI phase-out, for each qualifying child who is under age 17 at the end of the year and claimed as a dependent of the taxpayer.
Child Tax Credits
Helps families reduce their child care costs by allowing them to deduct up to $5,000 of these costs from their federal tax obligation
Child and Dependent Care Tax Credit
a refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children
Earned Income Credit
dates to file taxes
April 15th (October 15th if granted an extension)
