Financial Terminology - COMPLETE

Question 1

What are (3) accounting methods?

Answer 1

1. Cash-Basis Accounting
2. Accrual Accounting
3. Modified Accrual Accounting

Question 2

What is cash-basis accounting?

Answer 2

• 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

Question 3

What is accrual accounting?

Answer 3

• 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

Question 4

What is double entry book-keeping?

Answer 4

• keeps track of transactions chronologically in a journal, which is then posted to a ledger and grouped by accounts
• used in accrual accouting

Question 5

What is Modified accrual accounting?

Answer 5

• 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)

Question 6

What is a cash Flow statement?

Answer 6

• depicts inflows and outflows of cash
• necessary in order to ensure that payroll can be paid

Question 7

What is a project progress report?

Answer 7

• 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

Question 8

What is office earnings report?

Answer 8

• summarizes each of a firm’s projects with respect to revenue generated, expenses incurred, percent complete, and profit or loss to date

Question 9

What is a time analysis report?

Answer 9

• 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

Question 10

What is a profit plan?

Answer 10

• 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

Question 11

What is revenue?

Answer 11

• income, before expenses are taken into account
• use salaries, utilization rates, and the target multiplier to set typical billing rates

Question 12

What is direct labor?

Answer 12

• 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

Question 13

What is indirect labor?

Answer 13

• 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

Question 14

What is indirect expenses?

Answer 14

• 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

Question 15

What is a profit and loss statement?

Answer 15

• lists the income and expenses of a business for a period of time, typically monthly or yearly

Question 16

What is a mattox format?

Answer 16

• 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

Question 17

What is an annual budget?

Answer 17

an expanded version of the profit and loss statement that provides every known transaction

Question 18

What are the four sections of an annual budget?

Answer 18

1. net operating revenue
2. fixed expenses
3. variable expenses
4. miscellaneous revenue and expenses

Question 19

What is a net operating revenue?

Answer 19

• sum of fees billed, reimbursable expenses billed, outside of consultant fees, project related expenses

Question 20

What is fixed expenses?

Answer 20

• sum of direct and indirect labor, payroll benefits, non-discretionary benefits, office lease, office expenses, business insurance, taxes

Question 21

What is variable expenses?

Answer 21

• 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

Question 22

What is miscellaneous revenue and expenses?

Answer 22

• line items related to daily operations and interest earned, among other miscellaneous items

Question 23

What is utilization rate & equation?

Answer 23

• 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)

Question 24

What is overhead rate & equation?

Answer 24

• 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

Question 25

What is break even rate & equation?

Answer 25

• 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

Question 26

What is the net multiplier & equation?

Answer 26

• 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

Question 27

What is profit to earnings ratio?

Answer 27

• 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%

Question 28

What is net revenue per employee?

Answer 28

• measures revenue earnings per employee
• how much revenue does each employee bring in the door?
• annual net operating revenue $/total number of employees $ = -$100K

Question 29

What are aged accounts receivable?

Answer 29

• 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

Question 30

What are four indicators to summarize the financial position of a business?

Answer 30

1. Solvency (current ratio)
2. Liquidity (Quick Ratio)
3. Leverage
4. Return on Equity

Question 31

What is solvency?

Answer 31

• measures a firms ability to pay their current debt
• total current assets $/total current liabilities $ = -1.5 (1.0 min)

Question 32

What is liquidity?

Answer 32

• measures a firms ability to convert assets to cash
• (cash + accounts receivable + revenue earned, not billed)$ / total current liabilities $ = >1

Question 33

What is leverage?

Answer 33

-measures a firms ability to manage debt effectively
- total liabilities $/total equity $ = <-35%

Question 34

What is return on equity?

Answer 34

measures accumulated amount of money returned on stockholder’s investments
- (total net operating revenue $ - expenses $)/(total assets $ - total liabilities $) = > -20%

Question 35

What is direct personnel expense?

Answer 35

• cost of paying taxes and benefits on top of an employee salary
• Salary $ + additional compensation $ + taxes $