Formulas used on homework Flashcards
Payback period w/uneven net cash flow per year
original cost - each individual year. when reach point where cash flow exceeds remaining cost balance, divide the cost bal by cash flow for that year for integer. Total payback is # full years.integer from partial year
accounting rate of return
net income after tax / average investment
Note: average investment = (beg cost + end cost) / 2
payback period w/even net cash flow per year
cost of investment / net cash flow
note: net cash flow usually net income after tax + depreciation expense
net present value when cash flow is same amt each year
Step 1: find annual net cash flow (income+depreciation)
Step 2: Find PV of annuity of $1 % (found on chart: # useful years > % return needed)
Step 3: find present value of net cash flow = net cash flow (from 1) * PV of annuity of $1 (step 2)
Step 4: PV of annual net cash flow - cost of investment
NOTE: when calculating cash flow * PV, multiply the PV of 1 factor by each useful life year by income, multiply the salvage value (if applicable) by the last useful year’s PV rate
straight line depreciation
(cost of investment + salvage value) / # useful years
net present value when cash flow differs each year
Step 1: find annual net cash flow for each year (income+depreciation)
Step 2: Find PV of 1 for each year (found on chart: the year > % return needed)
Step 3: find present value of net cash flow = net cash flow (from 1) * PV of 1 (step 2) for each year
Step 4: sum the PV of annual net cash flow of all of the years
Step 5: sum total PV of annual net cash flows - cost of investment
NOTE: when calculating cash flow * PV, multiply the PV of 1 factor by each useful life year by income, multiply the salvage value (if applicable) by the last useful year’s PV rate
return on investment using invested assets and net income
net income / invested assets
residual income after hurdle on investments
net income - (invested amt * hurdle rate)
department that incurs costs, generates revenues, and is responsible for effectively using departmental assets is?
investment center
Cost centers are evaluated on their control of costs. Therefore, it is appropriate to prepare a departmental income statement to evaluate a cost center. True or false?
False. Because cost centers do not generate revenue, a performance report is prepared instead.
return on investment using investment turnover and profit margin
profit margin * investment turnover
How does a departmental contribution to overhead report show indirect expenses?
in total, but not allocated to departments.
What is transfer pricing?
setting of the price for goods/services transferred between controlled/related legal entities within an enterprise
Transfer prices should be set at?
market price if there is no excess capacity,
negotiated price if there is excess capacity
Costs incurred to produce or purchase two or more products at a time are what type of cost?
joint cost
Which report is most effective in evaluating the performance of profit center?
departmental contribution to overhead reports
profit margin formula
net income / sales
reflects a company’s ability to earn net income from sales.
PROFITABILITY ANALYSIS
OPERATING EFFICIENCY ANALYSIS
investment turnover formula
sales / average assets or investment
regardless of the system used in departmental cost analysis, between direct and indirect costs, which can be allocated?
indirect - yes
direct - no
gross profit
net sales - cogs
how to find contribution to overhead as percent of sales using sales, cost of goods sold, direct expenses, indirect expenses
sales - cogs - direct = overhead
overhead / sales = overhead as percent of sales
cash flow on total assets
cash flow from operations / total average assets
Note:
*Cash flow from ops is not same as overall cash flow. Do not include finance or investing cash flows.
**Total average assets is the average to the balance sheet figures presented
Which cash flow ratio identifies the risk for accounting improprieties?
operating cash flow to net sales
When this ratio substantially and consistently differs from the operating income to net sales ratio, the risk of accounting improprieties increases.
Which cash flow ratio measures a company’s adequacy for asset growth?
operating cash flow / cash outflow for plant assets
where a low ratio (less than 1) implies cash inadequacy to meet asset growth, whereas a high ratio implies cash adequacy for asset growth.
Which cash flow ratio helps assess whether operating cash flow is adequate to meet long-term obligations
Cash coverage of debt = Cash flow from operations ÷ Noncurrent liabilities.
A low ratio suggests a higher risk of insolvency; a high ratio suggests a greater ability to meet long-term obligations.
Formula for total cash paid out using beginning bal, ending bal & total expense for period.
total expense + ending bal - beg bal
Which of the following items is reported on statement of cash flows under financing activities:
- declaration of cash dividend
- Payment of a cash dividend
- Declaration of a stock dividend
- Payment of a stock dividend
- Stock split
- payment of a cash dividend
The purchase of long-term assets by issuing a note payable for the entire amount is reported on the statement of cash flows in the:
- Operating activities
- Financing activities
- Investing activities
- Schedule of noncash financing and investing activities
- None of these as this is not reported on the statement of cash flows
Schedule of noncash financing and investing activities
Cash flows from selling trading securities are reported in the statement of cash flows as part of:
- Operating activities
- Financing activities
- Investing activities
- Noncash activities
- None of these as this is not reported in the statement of cash flows
Operating activities
The indirect method reports individual operating cash outflows and cash inflows by activity. True or False
false
current ratio
current assets / current liabilities
measures ability to honor debts, good range is 2:1
LIQUIDITY ANALYSIS
acid-test ratio or quick ratio
(cash + short term investments + current receivables) / current liabilities
reflects company’s liquidity, 1:1 is good range
LIQUIDITY ANALYSIS
accounts receivable turnover
net sales / net average accounts receivable
how frequently company converts receivables into cash
LIQUIDITY ANALYSIS
inventory turnover or merchandise turnover or merchandise inventory turnover
cost of goods sold / average inventory
how long company holds onto inventory before selling it
LIQUIDITY ANALYSIS
days’ sales uncollected
(net accounts receivable / net sales) * 365
days’ sales uncollected should not exceed 1⅓ times the days in its (1) credit period, if discounts are not offered or (2) discount period, if favorable discounts are offered.
LIQUIDITY ANALYSIS
days’ sales in inventory
(ending inventory / cost of good sold) * 365
formula estimates that its inventory will be converted into receivables (or cash) in X days.
LIQUIDITY ANALYSIS
average collection period
365 / accounts receivable turnover ratio
LIQUIDITY ANALYSIS
total asset turnover
net sales / average total assets
reflects a company’s ability to use its assets to generate sales and is an important indication of operating efficiency
LIQUIDITY ANALYSIS
OPERATING EFFICIENCY ANALYSIS
equity ratio
total equity / total assets
expresses total equity as a percentage of total assets
SOLVENCY ANALYSIS
debt ratio
total debt(aka liabilities) / total assets
expresses liabilities as a percentage of total assets
SOLVENCY ANALYSIS
debt-to-equity ratio
total liabilities / total equity
SOLVENCY ANALYSIS
times interest earned
(income before interest expense and income taxes) / interest expense
The amount of income before deductions for interest expense and income taxes is the amount available to pay interest expense.
reflects the creditors’ risk of loan repayments with interest.
The larger this ratio, the less risky is the company for creditors. One guideline says that creditors are reasonably safe if the company earns its fixed interest expense two or more times each year.
SOLVENCY ANALYSIS
return on total assets using net income and average total assets
net income / average total assets
PROFITABILITY ANALYSIS
return on total assets using profit margin and total asset turnover
profit margin * total asset turnover
PROFITABILITY ANALYSIS
return on total assets using net income, net sales, average total assets
(net income / net sales) * (net sales / average total assets)
PROFITABILITY ANALYSIS
return on common stockholders’ equity
(net income - preferred dividends) / average common stockholders’ equity
reflection of company’s ability to earn net income for owner’s
PROFITABILITY ANALYSIS
price-earnings ratio
market price per common share / earnings per share
indicator of the future growth and risk of a company’s earnings as perceived by the stock’s buyers and sellers
MARKET PROSPECTS ANALYSIS
dividend yield
annual cash dividends per share / market price per share
MARKET PROSPECTS ANALYSIS
working capital
current assets - current liabilities
Which of the following is not a characteristic of all fraud?
- It is done to provide direct or indirect benefit to the employee.
- It violates the employee’s duties to his employer.
- It costs the employer money.
- It is secret.
- Can be intentional or unintentional.
- Can be intentional or unintentional.
The salary paid to the supervisor of an assembly line would normally be classified as:
- Direct labor.
- Indirect labor.2. Indirect labor.
- A period cost.
- A general cost.
- An assembly cost.
- Indirect labor.
Classifying costs by behavior involves:
- Identifying fixed cost and variable cost.
- Identifying cost of goods sold and operating costs.
- Identifying all costs.
- Identifying costs in a physical manner.
- Identifying both quantitative and qualitative cost factors
- Identifying fixed cost and variable cost.
A manufacturing statement has what four sections?
- Direct materials
- Direct labor
- overhead
- computation of cost of good manufactured
Cost of Goods Sold using beg & end finished goods inv cost of goods manufactured
Beg Fin Good Inv + COGM - End Fin Good Inv
Cost of Goods Manufactured
Direct materials + direct labor + overhead + beg Goods in Process Inv - end Goods in Process Inv
Activities such as selling and storing finished products are considered what type of activity?
sales activities
Activities such as using materials and labor to produce a finished product are considered what type of activity?
production
List following documents in order they are used for direct materials in job order cost accounting:
- Materials requisitions
- Receiving reports
- job cost sheets
- materials ledger cards
- receiving reports
- materials ledger cards
- materials requisitions
- job cost sheets
What is the predetermined overhead rate is based on what two factors?
- estimated overhead costs
2. activity base
Which of the following are characteristics of materials ledger cards?
- perpetual records
- considered a source document
- updated by the production manager
- used to records materials used in production
- used to record materials purchases
- perpetual records
- used to record materials used in production
- used to record materials purchases
Note: Receiving reports and requisitions are the source documents. Cards are updated by the materials manager.
List following documents in order they are used when recording indirect labor costs in job order cost accounting: A. time tickets B. factory payroll account C. clock cards D. factory overhead ledger
- Clock Cards (employee clocks in/out overall, determines labor cost)
- Factory payroll account (labor cost from clock cards is debited as expense to factory payroll)
- Time Tickets (an employee’s time/cost is allocated to indivudal jobs based on info from payroll)
- Factory overhead ledger
Cost per equivalent unit of production (EUP)
(beginning goods in process inventory + new materials costs) / EUP for materials
What is the journal entry to record the insurance on factory equipment?
debit factory overhead, credit prepaid insurance
What are the four steps involving analysis when accounting for a department’s activity?
- physical flow
- equivalent units
- cost per equivalent units
- cost assignment and reconciliation
Equivalent units of production (EUP) is used to compute the cost per equivalent unit and then to assign costs to which accounts?
Goods In Process Inventory and Finished Goods
What are the steps to finding EUP under FIFO method?
- Determine # units to account for (# beg inventory + additional)
- Find the total 100% complete (# units to account for - ending inventory)
- Find the # started & completed w/in the period (# completed - beg inventory)
- Find EUP (# beg * %work completed; # started & completed * 100%; # end bal * %completed, sum the three for EUP)
Steps to finding ending GIP with EUP, (non FIFO, non LIFO)
- Determine # units to account for (# beg inventory + additional)
- Find total # 100% complete (# units to account for - ending inventory)
- Find costs to account for (beg $ inv + added costs)
- Find EUP: (complete * 100% = # complete, end * % complete = partial; sum these = EUP)
- Find cost per unit (cost to acct for / EUP)
- Find ending GIP $ bal (ending GIP EUP * cost per unit)
The extent, or relative size, of fixed costs in the total cost structure is known as?
operating leverage
break-even point in $
fixed cost / cost margin ratio
cost margin ratio
(sales per unit - variable cost per unit) / sales per unit
What type of cost increases at a nonconstant rate as volume increases?
curvilinear cost
break even point in composite units (formula & steps)
formula: FC / composite CM
steps:
1. find the CM of each product line (CM = sales price per unit - variable cost per unit)
- find the sales mix ratio of each product line to the total # of overall units (product A / product B)
- multiply the individual ratio to CM for that line (if sales mix of product A to product B is 2:1, then 2*CMforA)
- Sum total of product line results for step3 for the composite contribution margin
- break even: FC / comp contribution margin
Degree of leverage
CM * units produced / pre-tax income - fixed costs
or
CMunits produced / CMunits produced - fixed costs
result indicates a specified % change in sales would would produce a higher change in operating profit:
ex: a 25% change in sales volume would produce a DOL1.33 x 25% = 33% change in operating profit.
formula for effect on profits of sales % change using degree of leverage
% change in sales * DOL = % change in profits
weighted contribution margin per composite unit (steps)
- find contribution for each product line
- find ratio fraction of each product line to overall # products produced (ex: 2/3 product 1, 1/3 product 2)
- multiple CM by line * ratio fraction per line
- add each line’s total above
What is the first step in planning the master budget?
preparing the sales budget
Benchmarking involves comparing actual results against either past performance of budgeted/expected performance. Which is considered superior?
budgeted/expected
estimating future purchases
1: Find ending inventory: Estimated next period’s sales * estimated COGS * desired ending inventory
2. Find overall COGS: each period(s) sales * COGS rate
- Estimate purchase:
Ending inventory + COGS - beginning inventory
manufacturing budget includes what three areas:
- direct labor
- direct materials
- factory overhead
inventory to produce for next quarter including safety stock
of safety stock + this month’s budgeted sales in units - # units in inventory on hand
the process for planning and evaluating plant asset expenditures is what type of budgeting?
capital
the standard overhead applied is based on what level of activity, which is multiplied by the predetermined overhead rate?
actual level of activity
materials cost & quantity variance chart
AQ * AP (actual cost) …… AQ * SP…… SQSP (standard cost)… LEVEL DOWN
(AQAP) - (AQSP) = price variance
(AQSP) - (SQ*SP) = quantity variance
LEVEL DOWN
price variance - quantity variance = cost variance
labor rate & efficiency variance chart
AHAR (actual rate) …… AHSR …… SHSR (standard rate) LEVEL DOWN
(AHAR) - (AHSR) = rate variance
(AHSR) - (SH*SR) = efficiency variance
LEVEL DOWN
rate variance - efficiency variance = total direct labor variance
A company have budgeted fixed overhead of $8750, and applied overhead of $9250. Is the volume variance favorable or unfavorable?
Favorable.
If the applied is greater than the budgeted, than this means they produced more than they planned,leading to higher income. Remember, OH is partially variable.
What are the four steps of the budgetary control process in order?
- develop budget
- compare actual results to budgeted amounts
- take action
- set new plans
controllable variance formula
actual overhead costs incurred - budgeted overhead costs from flex budget
The layout for a flexible budget follows what type of margin format?
contribution margin
Formula for finding total standard quantity of materials
actual units produced * standard quantity of material per unit
what type of standard is the quantity of material required if the process if 100% efficient with no waste or loss?
ideal
what is the type of standard for the quantity of material required under normal conditions?
practical
overhead cost variance formula
actual overhead incurred - standard overhead applied
variable overhead efficiency variance
(actual allocation base * standard variable rate) - applied variable overhead
fixed overhead spending variance
actual fixed overhead expense incurred - budgeted fixed overhead expense.
An unfavorable variance means that actual fixed overhead expenses were greater than anticipated.
Variable Overhead Spending Variance formula
variable production overhead expense incurred - standard variable overhead expenditure.
fixed overhead volume variance
amount of fixed overhead actually applied to produced goods based on production volume - amount that was budgeted to be applied to produced goods.
Make or buy analysis
1: sum total incremental costs for making item (dl + dm + applicable oh)
2. find diff between incremental for making, and cost for buying
total manufacturing costs formula:
direct labor + direct materials + factory overhead
cost of goods manufactured formula
beginning gip + total manufacturing costs - ending gip
NOTE: total manufacturing cost = DL + DM + FOH
Manufacturing costs for manufacturing statement formula
COGM - Beg GIP +End GIP
COGS
beg finished goods + COGM - ending finished goods
