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Business Environment > Flascards > Flashcards

Flascards Flashcards

1
Q

What is Cost Accounting?

A

Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet for
o Direct Materials
o Direct Labor
o Work in Process
o Finished Goods

Cost Accounting also records for the Income Statement

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2
Q

What is the difference between Cost Accounting and Managerial Accounting?

A

Cost Accounting - External Focus- GAAP

Managerial Accounting - Internal Focus- Not GAAP

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3
Q

What are Product Costs (aka Inventory Costs)?

A

Prime Costs

Conversion Costs

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4
Q

What are included in Prime Costs?

A

Direct Material USED - Have become part of the product or had a direct impact on the product

Direct Labor Used - Employees who worked on product and had direct impact

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5
Q

What is Factory Overhead?

A

All factory costs except for DM and DL used in production- including Spoilage (except for abnormal spoilage- which is a period cost and not included in OH).

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6
Q

What is included in Fixed Factory Overhead?

A

FFO : Estimated Costs / Normal Capacity

Uses Normal Activity

Examples of Fixed Factory OH: Depreciation (SL)- Utilities- Taxes

Under/Over-applied Fixed OH always goes to COGS

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7
Q

What is included in Variable Overhead?

A

VO : Estimated Activity / Actual Activity

Uses Actual Activity

Examples of Variable Factory OH: Deprecation (Units of Prod)- Indirect materials (supplies & insignificant items)- Indirect labor (factory foreman- janitors- machine maintenance)

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8
Q

Where is Under/Over-applied Variable OH recorded?

A

If Immaterial - Goes to COGS

If Material - Goes to WIP- Finished Goods- or COGS- based on their Ending Balance

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9
Q

Where is Under/Over-applied Fixed OH recorded?

A

It always goes to COGS

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10
Q

What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?

A

Under-applied overhead.

If it’s Fixed OH- under-applied goes to COGS.

If it’s Variable OH- under-applied goes to COGS if immaterial- but is allocated to WIP- FG or COGS based on ending balances.

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11
Q

What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?

A

A credit balance indicates over-applied overhead.

If Fixed overhead- it is corrected from COGS.

If Variable overhead- it is corrected through COGS if immaterial- but if material overage is allocated to WIP- FG or COGS based on ending balances.

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12
Q

Which variables are used to calculate Direct Material balances?

A

Beginning Balance DR Net purchases (plus freight-in)CR Direct Materials Used
: Ending balance (goes to BS)

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13
Q

What variables are used to calculated Work in Process (WIP)?

A

Beginning Balance (End Bal of Previous WIP)DR Direct Materials UsedDR Direct Labor Used (Conversion Cost)CR COGMDR Factory Overhead Applied (Conversion Cost)
: Ending Balance (Goes to BS)

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14
Q

What variables are included in Finished Goods calculations?

A

Beginning BalanceDR COGM
: COGAS (Cost of Goods Avail for Sale)
CR COGS
: Ending Balance (Goes to BS)

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15
Q

How does Freight In affect Cost Accounting calculations?

A

Inventory (Product) Cost

Part of DM Purchases

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16
Q

How does Freight Out affect Cost Accounting?

A

Selling (Period) Cost

Not part of inventory

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17
Q

When is Job-Order Costing used?

A

Used when costs are easily connected to a specific product or product line

Can also be applied to services

Calculation is the same as normal cost accounting - just use your T Accounts
- DM to WIP to FG to COGS
- You’re likely going to be solving for the last job in the queue

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18
Q

What is the Direct Method for allocating service department costs?

A

No services allocated between service departments- even if they serve each other. Only allocate to product(s)

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19
Q

What is the Step Method for allocating service department costs?

A

Services can be allocated to both other service departments and the product(s)

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20
Q

Under process costing- how are the units shipped calculated?

A

Beginning Inventory+ Units Started- Ending Inventory
: No. Units Shipped

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21
Q

Which two inventory methods are used under Process Costing?

A

FIFO

Weighted Average

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22
Q

What is another name for Process Costing?

A

Equivalent Units of Production

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23
Q

How will Equivalent Finished Units under FIFO compare to EFU under the Weighted Average method?

A

EFU FIFO will always be LESS than EFU Weighted Avg (unless Beginning Inventory is Zero)

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24
Q

How are Direct Materials calculated under the Weighted Average Method?

A

Beginning Inventory + Current Costs / EFU WA

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25
Q

How are Conversion Costs calculated under Weighted Average Method?

A

Beginning Inventory + Current Costs / EFU WA

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26
Q

How are Equivalent Finished Units calculated for Direct Materials?

A

Units Shipped + EI x % Complete DM
: EFU (Weighted Average Method)

  • Beginning Inventory x % Complete
    : EFU (FIFO)
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27
Q

How are Equivalent Finished Units calculated for Conversion Costs?

A

Units Shipped+ EI x % Complete CC
: EFU (Weighted Average)

  • Beginning Inventory x % Complete
    : EFU (FIFO)
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28
Q

How are Direct Materials calculated under the FIFO method?

A

Current Costs / EFU FIFO

Note: FIFO method uses Current Period costs only and ignores Beginning Inventory

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29
Q

How are Conversion Costs calculated under the FIFO method?

A

Current Costs / EFU FIFO

FIFO method uses Current Period costs only and ignores Beginning Inventory

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30
Q

How is WIP calculated?

A

Beginning balance (DM- DL- OH)+ Current Costs (DM- DL- OH)- COGM (Goes to Finished Goods)+ DM EFU x Cost per DM EFU+ CC EFU x Cost per CC EFU
: Ending WIP

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31
Q

How do period costs and product costs relate to net sales- gross margin and operating income?

A

Net Sales - Product Costs
: Gross Margin
- Period Costs
: Operating Income

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32
Q

What is the focus of Activity Based Costing (ABC)?

A

Focuses on eliminating non-value-added activities for poor quality and inventory and things customers don’t want or don’t care about

Inventory is expensive to store and storing something is not a value-added expenditure

Uses Cost Pools - Different departments can have different OH rates

Uses Several OH rates based on Activity - Cost Pool / Cost Driver

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33
Q

How do Cost Pools and Allocations compare under ABC versus traditional costing system?

A

Cost Pools and Allocations increase compared to a traditional costing system

34
Q

What is Backflush Costing?

A

Connected to Just-in-Time Production- which is part of Activity-Based Costing and Total Quality Management (TQM)

  • Works backward to flush out COGS
  • Mostly GAAP
35
Q

What are the characteristics of By-Products?

A

Usually immaterial and common costs aren’t allocated to them
Low Market Value
Can be valued at NRV
Can be treated as a contra expense and netted against COGS - Can be treated as a contra sale and netted against Sales
Recognition rules are very flexible with valuing and classifying by-products

36
Q

What are Cost Functions?

A

Measure how costs change relative to activity levels

High-Low Method

Change in Cost (High-Low pts) / Change in Activity (High-Low pts)

37
Q

What is Capital Budgeting? How is it used?

A

Managerial Accounting technique used to evaluate different investment options

Helps management make decisions

Uses both accounting and non-accounting information

Internal focus

GAAP is not mandatory

38
Q

What values are used in Capital Budgeting?

A

Capital Budgeting ONLY uses Present Value tables.

Capital Budgeting NEVER uses Fair Value.

39
Q

When is the Present Value of $1 table used?

A

For ONE payment- ONE time.

40
Q

When is the Present Value of an Annuity Due used?

A

Multiple payments made over time- where the payments are made at the START of the period.

41
Q

When is the Present Value of an Ordinary Annuity of $1 (PVOA) used?

A

Multiple payments over time- where payments are made at the END of the period.

Think A for Arrears.

42
Q

What is the calculation for the Present Value of $1?

A

1 / (( 1+i )^n)

i : interest rate
n : number of periods

43
Q

What is Net Present Value (NPV)?

A

A preferred method of evaluating profitability.

One of two methods that use the Time Value of Money
: PV of Future Cash Flows - Investment

44
Q

How is NPV used to calculate future benefit?

A

NPV : PV Future Cash Flows - Investment

If NPV is Negative- Cost is greater than benefits (bad investment)

If NPV is Positive- Cost is less than benefit (good investment)

If NPV : 0- Cost : Benefit (Management is indifferent)

45
Q

What is the rate of return on an investment called?

A

The Discount Rate.

46
Q

What does the Discount Rate represent?

A

The rate of return on an investment used.

It represents the minimum rate of return required.

47
Q

What are the strengths of the Net Present Value system?

A

Uses the Time Value of Money

Uses all cash flows- not just the cash flows to arrive at Payback

Takes risks into consideration

48
Q

What are the weaknesses of the Net Present Value system?

A

Not as simple as the Accounting Rate of Return.

49
Q

How do Salvage Value and Depreciation affect Net Present Value?

A

NPV includes Salvage Value because it is a future cash inflow.

NPV does NOT include depreciation because it is non-cash.

Exception - If a CPA Exam question says to include tax considerations- then you have to include depreciation because of income tax savings generated by depreciation.

50
Q

If multiple potential rates of return are available- which is used to calculate Net Present Value?

A

The minimum rate of return is used.

51
Q

What is the Internal Rate of Return (IRR)?

A

It calculates a project’s actual rate of return through the project’s expected cash flows.

IRR is the rate of return required for PV of future cash flows to EQUAL the investment.

Investment / After Tax Annual Cash Inflow : PV Factor

52
Q

Which rate of return is used to re-invest cash flows for Internal Rate of Return?

A

Cash flows are re-invested at the rate of return earned by the original investment.

53
Q

How does the rate used for Internal Rate of Return (IRR) compare to that used for Net Present Value (NPV)?

A

Rate of return for IRR is the rate earned by the investment.

Rate of return for NPV is the minimum rate.

54
Q

What are the strengths and weaknesses of the Internal Rate of Return system?

A

Strengths: Uses Time Value of Money- Cash Flow emphasis

Weakness: Uneven cash flows lead to varied IRR

55
Q

When is NPV on an Investment positive?

A

When the benefits are greater than the costs.

IRR is greater than the Discount Rate

56
Q

When is NPV on an Investment Negative?

A

When Costs are greater than Benefits

IRR is less than the Discount Rate

57
Q

When is NPV Zero?

A

When benefits equal the Costs

IRR : Discount Rate

58
Q

What is the Payback Method? How is it calculated?

A

It measures an investment in terms of how long it takes to recoup the initial investment via Annual Cash Inflow

Investment / Annual Cash Inflow : Payback Method

Compare to a targeted timeframe; if payback is shorter than target- it’s a good investment. If payback is longer than target- it’s a bad investment.

59
Q

What are the strengths of the Payback Method?

A

Takes risk into consideration

2 year payback is less risky than a 5 year payback

60
Q

What are the weaknesses of the payback method?

A

Ignores the Time Value of Money

Exception: Discount payback method

Ignores cash flow after the initial investment is paid back

61
Q

What is the Accounting Rate of Return?

A

An approximate rate of return on assets

ARR : Net Income / Average Investment

Compare to a targeted return rate; if ARR greater than target- good investment. If ARR less than target- bad investment.

62
Q

What are the strengths of the Accounting Rate of Return (ARR)?

A

Simple to use

People understand easily

63
Q

What are the weaknesses of the Accounting Rate of Return (ARR)?

A

Can be skewed based on Depreciation method that is used.

Ignores the Time Value of Money.

64
Q

What is an Expected Return?

A

An approximate rate of return on assets.

65
Q

What is the primary duty of the board of directors?

A

To monitor management behavior.

66
Q

What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?

A

Oversees the board

Responsible for hiring new CEO

67
Q

What is the responsibility of the audit committee of the board of directors?

A

The audit committee appoints and oversees the external auditor.

68
Q

What is the duty of the compensation committee of the board of directors?

A

The compensation committee handles the CEO’s compensation package.

69
Q

What does the NYSE and NASDAQ require of the board of directors?

A

They require the board to be independent.

70
Q

What is the main goal in an executive compensation package?

A

The package should ensure that the goals of management should match those of the shareholders.

71
Q

How can an executive compensation package ensure that goals of management align with those of shareholders?

A

Executive compensation should create an incentive for management to govern in a shareholder-friendly way that doesn’t sacrifice the long-term success of the enterprise for short-term gain.

72
Q

Which influences help mold the direction that management takes?

A

They range from internal (Board of Directors- Audit Committee- Internal Control) to external (Creditors- SEC- IRS)

These influences should not be tainted by undue influence from management or have financial ties to management such as compensation-related duties

73
Q

What is shirking?

A

When management doesn’t act in the best interest of shareholders.

It can be alleviated by tying compensation to stock performance or company profit.

74
Q

What requirements are imposed on a public company under Sarbanes-Oxley?

A

Management must submit a report on the effectiveness of Internal Control in the 10K.

Management must disclose significant Internal Control deficiencies.

CEO/CFO must certify that the financial statements comply with securities laws and fairly present the financial condition of the company.

75
Q

What characteristics are promoted by the COSO framework on Internal Control?

A

Reliable financial reporting

Effective and efficient operations

Compliance

76
Q

What are the elements of the control environment?

A 
Integrity & Ethics
Competence
The Board of Directors & Audit Committee
Management's Operating Style
Organizational Structure
Authority & Roles of Responsibilities
HR Policies
77
Q

What are control activities?

A

A component of Internal Control that includes actions being taken to promote the control environment.

78
Q

What are the basic elements of Internal Control?

A 
Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring
79
Q

What is the significance of the Information and Communication aspect of Internal Control?

A

Management must have access to relevant and timely information to make good decisions.

80
Q

How does Monitoring affect Internal Control?

A

Internal Control activities must be constantly monitored and evaluated for effectiveness.

81
Q

What activities does the COSO framework for enterprise risk management include?

A 
Identifies Risk Factors
Promotes Risk Response Decisions
Compares Management Risk vs. Shareholder Goals
Aids in evaluating opportunities
Promotes Quicker Capital movement

Does NOT eliminate all risk

82
Q

What are possible responses to risk under the COSO framework for enterprise risk management?

A

Avoid or Reduce

Share or Accept

Business Environment (12 decks)

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