Financial Terminology - COMPLETE Flashcards
1
Q
What are (3) accounting methods?
A
- Cash-Basis Accounting
- Accrual Accounting
- Modified Accrual Accounting
2
Q
What is cash-basis accounting?
A
- revenue and expenses are recognized at the time they are RECEIVED or incurred.
- used my frequently by Sole Proprietors
- can be tracked easily with a checking account
3
Q
What is accrual accounting?
A
- revenue and expenses are recognized at the time they are EARNED or incurred (whether or not cash exchanges hands)
- provide better picture of long term firm health
- ideal for large corporations
- required by IRS of firms above a certain size
4
Q
What is double entry book-keeping?
A
- keeps track of transactions chronologically in a journal, which is then posted to a ledger and grouped by accounts
- used in accrual accouting
5
Q
What is Modified accrual accounting?
A
- combination of both cash-basis and accrual accounting.
- most typically used by architecture firms
- revenue is based only on invoiced fees and expense amounts billed or invoiced (as opposed to earned)
6
Q
What is a cash Flow statement?
A
- depicts inflows and outflows of cash
- necessary in order to ensure that payroll can be paid
7
Q
What is a project progress report?
A
- shows the sum of direct labor hours and labor costs for each phase of a project for the current reporting period and the total costs to date in order to compare with estimated project labor costs
8
Q
What is office earnings report?
A
- summarizes each of a firm’s projects with respect to revenue generated, expenses incurred, percent complete, and profit or loss to date
9
Q
What is a time analysis report?
A
- lists each employee with number of hours spent on direct labor, indirect labor, vacation time, sick leave, and holidays. used to calculate an employee’s utilization rate
10
Q
What is a profit plan?
A
- document used to determine what is financially possible for the coming year.
- considers the current year revenue, backlog, and known future events
- used to develop projections for revenue, direct labor, indirect labor, indirect expenses
11
Q
What is revenue?
A
- income, before expenses are taken into account
- use salaries, utilization rates, and the target multiplier to set typical billing rates
12
Q
What is direct labor?
A
- this is the labor that is involved in the production of services and is billed to a project.
- use salaries and the target utilization rate to project direct labor expenses
13
Q
What is indirect labor?
A
- this is the labor that is NOT involved in the production of services for a project
- use salaries and target utilization rate to project indirect labor expenses
14
Q
What is indirect expenses?
A
- expenses that are incurred to operate the cost of the business and are not associated with a specific project.
- difficult to estimate, typically 48-52% net operating revenue
15
Q
What is a profit and loss statement?
A
- lists the income and expenses of a business for a period of time, typically monthly or yearly
16
Q
What is a mattox format?
A
- unique format for easy understanding of firm financial health
- 4 components:
revenue
direct labor
indirect expenses
miscellaneous revenue and expenses - seven indicators:
utilization rate
overhead rate
break even rate
net multiplier
profit to earnings ratio
net revenue per employee
aged accounts receivable
17
Q
What is an annual budget?
A
an expanded version of the profit and loss statement that provides every known transaction
18
Q
What are the four sections of an annual budget?
A
- net operating revenue
- fixed expenses
- variable expenses
- miscellaneous revenue and expenses
19
Q
What is a net operating revenue?
A
- sum of fees billed, reimbursable expenses billed, outside of consultant fees, project related expenses
20
Q
What is fixed expenses?
A
- sum of direct and indirect labor, payroll benefits, non-discretionary benefits, office lease, office expenses, business insurance, taxes
21
Q
What is variable expenses?
A
- remaining indirect expenses that vary year to year.
- difficult to estimate, take the average of the last three years of each line item if possible
- includes reimbursement, equipment, marketing, etc
22
Q
What is miscellaneous revenue and expenses?
A
- line items related to daily operations and interest earned, among other miscellaneous items
23
Q
What is utilization rate & equation?
A
- measures the efficiency of labor use.
- expressed as ratio of:
direct labor (hours billed to projects)/
total labor (hours billed to projects + hours not billed to projects )
=
60-65% (firm average)/
75-85% (tech staff)
24
Q
What is overhead rate & equation?
A
- measures the cost of operations not directly attributable to a project
- expressed as ration of:
Total Indirect Expenses ($ outside of salaries or expenses related to projects)/
Total Direct Labor costs (employee salaries)
= 1.3 - 1.5
If you have an Overhead Rate of 1.3, $1.30 is being spent ‘to keep the doors open’ for every $1.00 spent on salary. It is typical for indirect expenses to exceed direct labor costs
25
What is break even rate & equation?
- measures the total cost of operations for every dollar spent on labor.
- multiply the break even rate by employee salaries to determine hourly rate that their work should be billed out for
Overhead Rate + 1 = 2.3-2.5
26
What is the net multiplier & equation?
- measures the revenue generated for every dollar spent on Direct Labor.
- must be greater than the break even rate in order to make a profit
- net operating revenue ($)/total direct labor costs ($) = -3.0
27
What is profit to earnings ratio?
- measures firm's effectiveness in generating a net profit
- answer to simple question: for every dollar we bring in, how much are we taking home as profit after all of our expenses?
- net profit $/net operating revenue $ = 20%
28
What is net revenue per employee?
- measures revenue earnings per employee
- how much revenue does each employee bring in the door?
- annual net operating revenue $/total number of employees $ = -$100K
29
What are aged accounts receivable?
- measures the average time integral in days between the date of outstanding invoices and the date payment is received.
- average annual accounts receivable $/(net operating revenue $/365 days) = 60-90days
30
What are four indicators to summarize the financial position of a business?
1. Solvency (current ratio)
2. Liquidity (Quick Ratio)
3. Leverage
4. Return on Equity
31
What is solvency?
- measures a firms ability to pay their current debt
- total current assets $/total current liabilities $ = -1.5 (1.0 min)
32
What is liquidity?
- measures a firms ability to convert assets to cash
- (cash + accounts receivable + revenue earned, not billed)$ / total current liabilities $ = >1
33
What is leverage?
-measures a firms ability to manage debt effectively
- total liabilities $/total equity $ = <-35%
34
What is return on equity?
measures accumulated amount of money returned on stockholder's investments
- (total net operating revenue $ - expenses $)/(total assets $ - total liabilities $) = > -20%
35
What is direct personnel expense?
- cost of paying taxes and benefits on top of an employee salary
- Salary $ + additional compensation $ + taxes $
