Financial Accounting

Question 1

Financial vs Managerial Accounting

Answer 1

Financial Accounting: External reporting to investors and regulators; follows strict rules (GAAP/IFRS).
Managerial Accounting: Internal decision making; flexible reporting aids planning and control.
Importance of rules: Financial rules ensure consistency for external reporting; managerial rules provide flexibility for internal decisions and planning.

Question 2

Business value and management decision making

Answer 2

Business value influences decision making by aligning actions with goals that enhance profitability or competitive advantage

Question 3

Planning, Control, and Decision making functions

Answer 3

Planning sets objectives, control monitors performance against goals and decision making adjusts strategies based on outcomes.

Question 4

Defining core values of an organization

Answer 4

Core values define organizational culture, guiding behaviors and decisions towards ethical and strategic consistency.

Question 5

CMA and CFM designations by IMA

Answer 5

CMA (Certified management accountant) and CFM (Certified Financial Manager) designations validate expertise in financial management and accounting practices.

Question 6

Operating, Capital, and Financing Budgets

Answer 6

Operating budgets forecast daily expenses, capital budgets plan investments, and financing budgets manage funding sources.

Question 7

Comparing Costing Methods: Job Order, Process and ABC

Answer 7

Job order costing suits custom products, process costing fits mass production, and activity-based costing assigns costs based on activities

Question 8

Absorption vs Direct Costing Techniques

Answer 8

Absorption costing allocates all manufacturing costs to units, while direct costing includes only direct costs, affecting profit reporting.

Question 9

Innovations in product management and information systems

Answer 9

ERP integrates business processes, B2B facilitates online transactions, RFID tracks inventory, and M2M enables machine communication

Question 10

Inventory management concepts: JIT and EOQ

Answer 10

JIT (Just in Time) minimizes inventory waste, while EOQ (Economic Order Quantity) optimizes ordering quantities to balance cost

Question 11

Controller and CFO Job duties

Answer 11

Controllers manage financial reporting and compliance, while CFOs oversee financial strategy and risk management

Question 12

Purpose of Setting Standards and Monitoring Deviations

Answer 12

Standards set benchmarks for performance, and monitoring deviations ensures alignment with goals and continuous improvement.

Question 13

Balanced Scorecard

Answer 13

A balanced scorecard measures organizational performance across financial, customer, internal process, and learning/growth perspectives

Question 14

Total Quality Management (TQM) and Theory Of Constraints

Answer 14

TQM focuses on continuous quality improvement, while TOC identifies and resolves bottlenecks to improve efficiency

Question 15

Strategy, Positioning, and Budgets in planning

Answer 15

Strategy defines long-term goals, positioning shapes market identity,

Question 16

Three costs incurred by a manufacturing concern

Answer 16

Manufacturing concerns typically incur direct materials, direct labor, and manufacturing overhead costs in their production processes

Question 17

Direct vs Indirect Material

Answer 17

Direct labor involves employees directly involved in production (eg raw materials in a car), while indirect materials support production but are not easily traceable (lubricants)

Question 18

Direct vs indirect labor

Answer 18

Direct labor involves employees directly involved in production (e.g assembly line workers), while indirect labor supports production indirectly (e.g, supervisors)

Question 19

Costs in manufacturing overhead

Answer 19

Manufacturing overhead typically includes indirect materials, indirect labor, factory rent, utilities, depreciation, and other indirect costs not directly tied to specific units of production

Question 20

Prime and Conversion Costs

Answer 20

Prime costs consist of direct materials and direct labor directly attributable to production. Conversion costs include direct labor and manufacturing overhead, representing the costs to convert raw materials into finished goods

Question 21

Differentiate between variable cost, fixed cost, and mixed cost.

Answer 21

Variable costs change with production level, fixed costs remain constant regardless of production, and mixed costs contain both variable and fixed components.

Question 22

Nature of variable costs (aggregate and per unit)

Answer 22

In aggregate, total variable costs increase with production volume. Per unit, variable costs remain constant regardless of production level.

Question 23

Nature of fixed costs (Aggregate and per unit)

Answer 23

In aggregate, total fixed costs remain constant regardless of production volume. Per unit, fixed costs decrease as production volume increases.

Question 24

Concept of Economies of Scale

Answer 24

Economies of scale occur when increasing production leads to lower per-unit costs due to spreading fixed costs over more units and operational efficiencies

Question 25

Relevant Range

Answer 25

Relevant range refers to the production levels within which cost assumptions (fixed and variable) are valid. Costs may change outside this range

Question 26

Specific types of fixed costs - Committed and Discretionary

Answer 26

Committed fixed costs are long-term and difficult to change (eg lease agreements). Discretionary fixed costs are easier to modify or eliminate (e.g, advertising budgets)

Question 27

Nature of Step Costs and Business Strategy

Answer 27

Step costs remain fixed over a range of activity levels but jump to a higher amount once the range limit is exceeded. Strategies include careful capacity planning and cost management

Question 28

Nature of a Mixed (semi variable) Cost

Answer 28

Mixed costs have both fixed and variable components. They increase with production but not in direct proportion

Question 29

Using a scattergraph, method of least squares, and the high-low method to sort fixed/variable components of a mixed cost

Answer 29

1) Scattergraphs plot costs against activity levels to visualize the cost behavior
2)The method of least squares statistically determines the best-fitting line to separate fixed and variable components
3)The High-Low method uses the highest and lowest activity levels to estimate fixed and variable cost components

Question 30

Applying the mechanics of the high-low method

Answer 30

1)Identify the highest and lowest activity levels
2)Calculate the variable costs per unit:(Cost at highest activity - cost at lowest activity)/(Highest activity units - Lowest activity units)
3)Determine fixed costs: Total cost at either activity level - (Variable cost per unit * Number of units at that level)

Question 31

Define cost-volume-profit (CVP) analysis

Answer 31

CVP analysis studies how changes in costs and volume affect a company’s operating income and net-income

Question 32

Prepare a “Break-Even” Graph

Answer 32

A break-even graph shows total costs and total revenue at different levels of activity, indicating the break even point where total revenue equals total costs

Question 33

Define the contribution margin (Aggregate, per unit, ratio)

Answer 33

1)Contribution margin is a sales revenue minus variable costs.
2)Aggregate CM is the total CM for all units sold
3)Per Unit CM is CM per individual unit sold
4)CM ratio is CM divided by sales revenue, expressed as a percentage

Question 34

Understand the break even point and target income

Answer 34

1)Break-even point is where total revenue equals total costs, resulting in zero-profit
2)Target income is the level of sales needed to achieve a specific profit

Question 35

Perform break-even and target income computations

Answer 35

1)Break-Even Sales(Unit) = Fixed Costs/CM per unit
2)Break-Even Sales(Dollars) = Fixed Costs/CM ratio
3)Target income Sales (Unit) = (Fixed costs + target income)/CM per unit
4)Target Income Sales (Dollars) = (Fixed Costs + Target Income)/CM Ratio

Question 36

Applications for CVP analysis

Answer 36

CVP analysis helps in pricing decisions, product mix decisions, determining the impact of changes in costs, and planning for profit levels

Question 37

Understand the impact of operating changes on break-even and other CVP computations

Answer 37

Operating changes (like cost structures or sales volumes) alter break-even points and other CVP (cost-volume-profit) analyses by affecting total costs and revenue relationships

Question 38

Be available to adjust CVP calculations for changes in fixed and variable costs

Answer 38

To adjust CVP calculations for changes in fixed and variable costs, recalculate the break even-point and contribution margin using the new cost figures

Question 39

Understand the income impacts of per unit revenue shifts

Answer 39

Shifts in per unit revenue directly affect total income, impacting break-even points and profitability. Higher per unit revenue increases total income, while lower revenue decreases it

Question 40

Be able to apply CVP analysis to firms with multiple products

Answer 40

Use a weighted-average contribution margin for multiple products to conduct CVP analysis, considering the sales mix proportions

Question 41

Cite the assumptions of CVP modeling

Answer 41

1)Sales price per unit is constant
2)Variable costs per unit are constant
3)Total fixed costs are constant
4)All units produced are sold
5)For multiple products the sales is constant

Question 42

Break-even Point

Answer 42

The level of activity where revenues equals total expenses, producing a net zero income, also the point where the contribution margin is said to cover fixed costs

Question 43

Committed-Fixed Cost

Answer 43

Costs that arise from an organizations commitment to engage in operations, unavoidable elements like depreciation, rent, insurance, property taxes

Question 44

Contribution margin

Answer 44

Revenues minus all variable expenses, whether related to production or selling and administration (not to be confused with gross profit)

Question 45

Cost-Volume-Profit-Analysis

Answer 45

(CVP) Analysis focusing on the interplay of pricing, volume, variable and fixed costs, and product mix

Question 46

Discretionary fixed costs

Answer 46

Fixed costs resulting from yearly spending decisions; proper planning can result in avoidance of these costs as necessary (eg advertising and training)

Question 47

Economies of scale

Answer 47

Efficiencies associated with increases in volume

Question 48

Fixed Cost

Answer 48

A total cost that remains the same regardless of volume; total cost is constant and per unit cost decreases with volume increases

Question 49

High-Low Method

Answer 49

A simple means for separating costs into fixed and variable components, based upon the difference between costs at the highest and lowest observed levels of activity

Question 50

Method of least squares

Answer 50

A complex means of separating costs into fixed and variable components, based upon minimizing the variances between all observations and the resulting assumed cost function

Question 51

Mixed costs

Answer 51

A cost that has both fixed and variable components

Question 52

Relevant range

Answer 52

The level of activity for which assumptions underlying CVP are expected to hold true

Question 53

scattergraph

Answer 53

A simplistic mapping of observed data points, where a line is visually drawn to represent the estimated cost function

Question 54

Step Cost

Answer 54

A cost function that is fixed over a range , and then increases by a measured step to a new level at the next higher increment of activity

Question 55

Target income

Answer 55

A level of income that is to be obtained; CVP projects activity levels necessary to achieve this benchmark

Question 56

Variable Cost

Answer 56

A per-unit cost that is the same regardless of volume; total variable cost increases with volume increases