Financial & Risk Management Flashcards
What are the two broad categories of accounting?
- Basic accounting (general ledger accounting)
2. Project Cost Accounting
General ledger accounting
Keeping track of money flowing into and out of the business is needed for day-to-day operations, banking, taxes, and auditing.
This provides firm-wide statements about the overall financial status of the business so that firm owners can make decisions crucial to the firm’s profitability and survival.
Project Cost Accounting
Tracks revenue, expenses, and profit by individual projects.
It is vital for professional service businesses, especially in architecture. Firms depend on knowing how the amount of time spent on specific projects affects the financial health of the firm.
Firm principals need to be able to differentiate between projects that are making money and those that are losing money, and that goes beyond the scope of general ledger accounting.
Information from project cost accounting reports can help managers decide how to allocate resources, manage projects, and develop accurate proposals for new work.
Accounts payable
Amounts owed to the suppliers of goods or services (such as consultants, reproduction companies, or the utility company) that have not yet been paid.
Accounts receivable
Money that others owe to the business through invoices for services
Assets
Any type of tangible or intangible resource that can be measured in monetary terms, including current assets, fixed assets, and other assets.
Chart of accounts
A list of the various accounts a business uses to keep track of money, along with corresponding account numbers used for data processing
Current assets
Resources of a business that are converted into cash within one year
Direct labor
All labor of technical staff, principals, and support staff that is directly chargeable to projects.
Direct personnel expense
The expense of employee salaries plus the cost of mandatory and discretionary expenses and benefits such as payroll taxes and health insurance.
Discretionary distribution
Voluntary distribution of profits to owners and nonowners, such as performance bonuses, profit sharing, and incentive compensation
Fixed assets
resources that the firm uses and retains for a long period of time, such as equipment and property.
Gross revenue
All the revenue generated by a business during a stated period of time
Indirect labor
all labor not charged to a specific project or revenue-producing account, such as administration, general office time, and marketing
Liabilities
claims by people outside the business and claims by the owners of the business against the total assets of the business
Net operating revenue (or net revenue)
The money that remains from billing after deducting fees and expenses, reimbursable expenses, and non-reimbursable project-related expenses.
Other assets
Miscellaneous resources such as securities and copyrights
Overhead
Expenses incurred to keep a business operating whether or not any revenue is being generated, such as rent, software leases, and fees for power and telephone service.
What are the two basic accounting methods?
Cash accounting and accrual accounting
Cash accounting
revenue and expenses are recognized at the time the business receives the cash or pays a bill
Accrual accounting
revenue and expenses are recognized at the time they are earned or incurred, whether or not cash changes hands
What are the benefits of cash accounting?
Tracking actual cash flow.
It is often simple and used by single-person businesses and small businesses.
Accrual accounting has what advantages?
Gives a better picture of a business’s long-term financial status and provides information that is important for active financial management.
Typically for business above a certain size or that maintain inventory are required by the IRS to use this accounting method.
Modifies accrual basis method
a slight variation of the accrual method - records fee revenue, expenses billed to the client, and invoices to the firm by outside consultants
However, it does NOT include the amounts of fees that have been earned but not yet billed to the client
How are revenues and expenses organized in cash and accrual accounting?
Revenue and expenses are grouped into individual accounts for the purposes of auditing, review, tax preparation, management, and analysis.
What type of bookkeeping does the accrual accounting method use?
Double-entry bookkeeping - all transactions are listed chronologically in a journal.
They are then posted to a ledger where transactions are grouped into individual accounts.
Modern society uses accounting with computer programs, some designed specifically for architecture firms.
What are the more common accounting reports?
- Balance sheet
- Profit and loss statement (Income statement)
- Cash flow statement
What is a balance sheet?
Summarizes all assets and liabilities and shows the financial position of a business.
All assets listed must exactly equal all the liabilities listed.
What is net worth and why is it important?
The net worth, otherwise known as owner’s equity, is the money invested in a business by the owners or stockholders
Total assets must equal the total liabilities plus the net worth or owner’s equity. (on a balance sheet)
What is a profit and loss statement (or income statement)?
It lists all the income and expenses of a business for a certain period of time. The difference between all the income and all the expenses gives either the profit or the loss for that period
What is a cash flow statement?
Shows actual inflows and outflows of cash or cash equivalents.
Cash is defined as money, checks, or anything else accepted by banks.
What are cash equivalents?
Short-term invenstments that can be quickly converted into cash, such as short-term certificates of deposit.
They are important because a business’s month-to-month financial health depends on being able to meet payroll and pay bills
What does financial management entail?
Active planning, monitoring,and controlling of financial information as well as acting on that information.
What is the most fundamental equation for financial planning in any profit-oriented business?
Profit + expenses = revenue
BUT
Equation is often shown in the form of
Revenue - expenses = profit
In equation Revenue - expenses = profit, why is it often shown like this?
It suggests that profit is whatever may be left over after expenses are subtracted from revenue.
The other equation suggests that the business will make its targeted profit, and that the business must then control expenses and generate appropriate revenue to make the equation to work.
What is the source of highest percentage of overhead?
Indirect labor, personnel who do not directly work on projects
What is a project progress report?
More detailed, computer-generated version of the manually produced charts.
It shows the hours and labor costs for each phase of a project, both for the current reporting period and the total to date, and compares these numbers with the estimated hours and costs.
It also shows direct costs, such as for consultants, overhead allocations, and reimbursable expenses.
These reports give the project manager and firm management an accurate look at the status of a project and can be used to take corrective action as necessary.
Office earnings report
Summarizes each of the firm’s projects in terms of the amount of revenue it has generated, the expenses it has incurred, unbilled services, percentage of completion, and profit or loss to date.
It helps firm management find any projects that may be hurting overall profitability and need remedial action
Aged accounts receivable report
Shows the status of all invoices for all projects, whether or not they have been paid, and the “age” of each invoice, which is the time from the invoice date to the payment date, or the current date if still unpaid.
Generally any unpaid invoice more than 60 days old needs attention from the firm principal or whoever is responsible for collections.
What is the average collection period for architecture firms for invoices?
60-75 days
