Financial & Managerial Accounting - Definitions/Equations Flashcards
Business Entity Principle
Each separate economic entity or business of the owner must keep accounting records apart from those of the owner and any other company owned by the owner
Cost Constraint
The benefits of providing information need to justify the costs incurred in reporting financial statement information to external users.
Going Concern Assumption
Financial statement users can safely assume that the statements reflect a business that is going to continue its operations at least 12 months into the future unless clearly notified
Historical Cost (Financial Measurement)
Requires that all transactions be recorded based on the actual cash amount received or paid.
Revenue Recognition Principle
Revenue be recorded at the time that it is earned (generally triggered when the service is performed or product has been delivered), regardless of whether cash or another asset has been exchanged.
Separate Entities Principle
States that activities of the business can be separated from actives of the owners of that business
Unit-of-Measure Assumption
Accounting information measures only those transactions that are capable of being measured in monetary terms
Gross Profit/Margin (Definition/Equation)
Net Sales - Cost of Sales
Cash Basis (Revenue Recognition)
Revenue is recorded when cash is received, expenses are recorded when cash is paid
Accrual Accounting
Assets, liabilities, revenues, and expenses should be recognized when the transaction that causes them occurs, not necessarily when cash is paid or achieved
Statement of Changes in Shareholders Equity
Measures and reports on changes in the equity position of a business over the reporting period
[Beginning Equity + Net Earnings - Declared Dividends +/- other components = Net Ending Equity]
Statement of Cash Flows
Describes the sources and uses of cash for a reporting period. Commonly made up of a company’s major activities: operating, investing and financing.
[Change in Cash (assets) = Cash from Operating Activities + Investing + Financing]
Profit Margin
The company’s ability to earn profit from a sale. The higher the profit margin, the better
(Profit/Net Sales or Revenue)
Current Ratio
A company’s ability to meet its current obligations
[CR = Current Assets/Current Liabilities]
Debt-to-Assets Ratio
The percentage of assets financed by debt
A higher ratio means a greater financing risk.
[DTA=Total Liabilities/Total Assets]
Quick Ratio
A company’s capacity to pay its current liabilities without needing to sell its inventory or obtain additional financing
[QR=Current Assets + Inventory + Prepaid Expenses/Current Liabilities]
Contribution Margin
The amount by which a product’s selling price exceeds its total variable cost per unit
CM=Sales - Variable Costs
Contribution Margin Ratio
The percentage of a unit’s selling price that exceeds total unit variable costs
[CM Ratio=Contribution Margin/Sales]
Break Even Point
The dollar amount (total sales dollars) or production level (total units produced) at which the company has recovered all variable and fixed costs.
[BEP=Total Fixed Costs/Contribution Margin per Unit]
Sensitivity Analysis
Is used to understand the effect of a set of independent variables on some dependent variable under certain specific conditions
Job Order Costing
An accounting system that traces the individual costs directly to a final job or service, instead of to the production department
Process Costing
An accounting system used when the manufacturing process is continuous, so it is difficult to establish how much of each material is used and exactly how much time is invested in each unit of finished product.
Prime Costs
Costs that include the primary (or direct) product costs: direct materials and direct labor.
Conversion Costs
Costs that include the expenses necessary to convert direct materials into a finished product: direct labor and manufacturing overhead.
Period Cost
A cost tied to a specific time period, such as a month, quarter, or year, instead of being associated with a particular job order.
Direct Method (Service Costs)
The direct method allocates costs of each of the service departments to each operating department based on each department’s share of the allocation base
Step Method (Service Costs)
This method allocates service costs to the operating departments and other service departments in a sequential process.
Reciprocal Method (Service Costs)
The reciprocal method allocates services department costs to operating departments and other service departments.
Budget
A detailed quantitative plan for acquiring and using financial and other resources over
a specified forthcoming time period
Master Budget
Consists of a projected income statement (planned operating budget) and a projected balance sheet (financial budget) showing the organization’s objectives and proposed ways of attaining them
Operating Budget
The operating budget helps plan future revenue and expenses and results in a projected income statement.
Top-Down Budget
Management must devote attention to efficiently allocating resources to ensure that expenses are not padded to create budgetary slack
Bottom-up Budget
A method of preparing budgets in which managers prepare their own budget estimates for the Leadership committee.
Rolling Budget
A 12-month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed.
Zero-Based Budgeting
A method of budgeting in which managers are required to justify all costs as if the programs involved were being proposed for the first time.
High-Low Method (Budget Estimation Technique)
A technique that separates fixed and variable cost components of mixed costs. y=mx+b
Scatter Graph (Budget Estimation Technique)
A scatter graph shows plots of points that represent actual costs incurred for various levels of activity. A trend line is used to identify the best fit for the pattern of dots.
Least-Squares Regression Analysis (Budget Estimation Technique)
Separates mixed costs into their fixed and variable components.
Static Budget
A budget designed for only the planned level of activity.
Flexible Budget
A budget that provides estimates of what revenues and costs should be for any level of activity within a specified range.
Standard Cost
An expected cost that a company usually establishes at the beginning of a fiscal year for prices paid and amounts used
Favourable Variance
Spending less, or using less, than the anticipated or estimated standard
Unfavourable Variance
Spending more, or using more, than the anticipated or estimated standard
Direct Labour Variance
Measures how efficiently the company uses labor as well as how effective it is at pricing labor. There are two components to a labor variance, the direct labor rate variance and the direct labor time variance
Direct Labour Rate Variance
Compares the actual rate per hour of direct labor to the standard rate per hour of labor for the hours worked.
Equation: (Actual Rate per Hour - Standard Rate per Hour) x Actual Hours Worked
Direct Labour Time Variance
Compares the actual labor hours used to the standard labor hours that were expected to be used to make the actual units produced
Equation: (Actual Hours Worked - Standard Hours Expected for the Units Produced) x Standard Rate
Balanced Scorecard
A measurement system that can be used to monitor and enhance performance. It consists of the following segments:
- Finance
- Customers
- Business Processes
- Learning & Growth
Cost Centre
An organizational segment in which a manager is held responsible only for costs.
In these types of responsibility centers, there is a direct link between the costs incurred and the product or services produced.
Discretionary Cost Center
An organizational segment in which a manager is held responsible for controllable costs when there is not a well-defined relationship between the center’s costs and its services or products.
Revenue Center
An organizational segment in which a manager is held accountable only for revenues
Profit Centre
An organizational segment in which a manager is responsible for both revenues and costs
Investment Centre
An organizational segment in which a manager is accountable for profits (revenues minus expenses) and the invested capital used by the segment.
Transfer Pricing
An artificial price used when goods or services are transferred from one segment to another segment within the same company.
Residual Income
A minimum level that all investments must attain in order to be accepted by management.
HR Metrics
They describe the efficiency and effectiveness of HR programs and their: Impact, Cost, and Speed
HR Audit
A review of HR policies, programs, processes, and documentation to identify opportunities to improve efficiency, effectiveness, customer satisfaction, and legal compliance.
Absenteeism (# of workdays missed due to illness)
Sick days/FTE
Human Capital ROI (Calculation)
Return for each dollar invested in employee pay and benefits.
Revenue - (Expenses - Comp and/or Benefits Costs)/(Comp and/or Benefits Costs)
Compa-Ratio
“Comparative Ratio”
Individuals Salary/midpoint of salary band
Stratified Sampling
A group of employees who represent the organization in some way (i.e. gender, department, location, occupation, etc.).
Criterion Measures
A system of metrics that defines what program and project success are and how they should be measured. Ensure that what is measured is whats important.
Criterion Relevance
Ensures the criteria are relevant to what we are trying to predict
Criterion Deficiency
When the criterion measure fails to include or under-represents important aspects of the criterion construct. When the necessary criteria is not assessed
Criterion Contamination
When irrelevant things are measuted
Nominal Scales
A list of variables that have no “value”
Ordinal Scales
A list of variables that have an order
Internal Scales
A scale that tells us the mathematical difference between two responses
Ratio Scales
A scale that shows the relationship between two variables
Content Validity
Ensures the measure accurately measures what it is supposed to.
Criterion Validity
Ensures that what is being measured is relevant.
Predictive Validity
Ensures that the measure can predict the dependent variable.
Construct Validity
Measures abstract constructs, such as IQ and Personality Type.
Concurrent Validity
When what is intended to be proven/shown is proven/shown by comparing it to a group/test that is known to be correct
5C Model of HR Metrics
Compliance Customer Satisfaction Culture Management Cost Control Contribution Compliance
Utility Analysis
A quantitative method that estimates the dollar value of benefits generated by an intervention based on the improvement it produces in worker productivity
Time-Series Analysis
A specific way of analyzing a sequence of data points collected over an interval of time. In time series analysis, analysts record data points at consistent intervals over a set period of time rather than just recording the data points intermittently or randomly.
