initiate data input function

Question 1

What is accounting?

Answer 1

Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions.
Accounting is the ‘language of business.’

Question 2

Accounting assumptions (4)

Answer 2

Economic entity = financial activity of business separated from owner
Time period = economic info captured and communicated meaningfully over short periods of time
Monetary unit = dollar is most effective communicator
Going concern = continue operations into foreseeable future = if not selling assets then cost principle appropriate

Question 3

GAAP?

Answer 3

Generally Accepted Accounting Principles are the standards and general body of rules accountants understand and observe.

Question 4

Income statement: what? how? principles (2)? single vs multi?

Note: total comprehensive = includes additional gains and losses, etc.

Answer 4

What = report of expenses and revenues
How = revenues - expenses = profit or loss (over period of time)
Matching principle = expenses recorded in period Resources used to generate revenues
Revenue recognition principle = revenue recorded when resource earned
Single = TR - TE = Net Profits
Multi = groups of revenues and expenses + several subtotals (more information) = gross profit, before and after tax…

Question 5

Balance sheet: what? how? principles (1)? current Vs non-current?

Answer 5

What = a reflection of a companys assets, liabilities and equity at a given moment in time
How = (A = L + E)
Cost principle = assets to be recorded at cost of acquisition
Current = list in order of liquidity (A) and within one year (A and L)
Non-current (fixed)= after one year

Question 6

H analysis and V analysis? Trend analysis? common-Size statements?

Answer 6

H = % change of account prior to current
V = accounts % representation of base account
Trend analysis = use of H and Z to forecast future financial perfformance and identify problem areas.
common-size statements = IS/BS converted into percentages for comparative analysis with similar companies or across years

Question 7

SCE: what? how?

Answer 7

What = shows changes in a companys equity, particularly retained earnings. 
How = BRE +/- Net income/loss - Dividends = ERE

Question 8

CFS: what? how?

Answer 8

What = reports a business’s cash inflows and outflows and reveals level of solvency
How = Over period of time reflects cash flows from Operating, investing and financing activities.
Operating Cash Flows +/– Investing
Cash Flows +/– Financing Cash Flows = Net change in cash

Question 9

Information beyond the financial statements (3)?

Answer 9

What = textual and numerical information immediately following financial statements
Notes to the financial statements = disclose accounting methods + additional explanations + information not provided.
Auditors report = independent auditor review of GAAP use and fairness.
Management discussion/analysis = future + obligation satisfaction ability + companys results opinion

Question 10

Qualitative characteristics of accounting information (8)?

Answer 10

Understandability = understood by person with reasonable understanding of business
Relevance = capacity to make difference
Reliability = represent what purports to
Comparability = ability to compare with others
Consistency = same entity comparison over time
Conservatism = deal with uncertainty
Materiality = threshold for affecting decision making

Question 11

Accounting information system (4)? Dual nature?

Answer 11

A company’s accounting information system (pen/paper, excel books, etc.) identifies, records, summarises, and communicates the various transactions of a company.

Dual nature = money has a SOURCE and a USE = two accounts always affected.

Question 12

Steps in the accounting cycle (7)

Answer 12

1 Journalise and post accounting transactions.
2 Prepare an unadjusted trial balance.
3 Journalise and post adjusting entries.
4 Prepare an adjusted trial balance.
5 Prepare financial statements.
6 Journalise and post closing entries.
7 Prepare a post-closing trial balance.

Question 13

Deferred = ? Accrued =? Facts about adjusting (3)

Answer 13

Deferred = Cash first
Accrued = Cash later
Facts about adjusting entries = one IS account + 1 BS account + never involves cash.

Question 14

Internal control: what? components (5)? limitations? cash controls + memorandums(2)?

Answer 14

What = system of policies and procedures to ensure assets do not walk out of door, management instructions are carried out and the accounting records reflect all transactions that occurred and only those transactions.
Components = control environment, risk assessment, control activities, information and communication, Monitoring.
Limitations = human error, cost-benefit analysis.
(1) Bank reconciliation = bank to actual + company to actual and then actual to company. (DiT = deposited but not recognised by nap, OC = cheque distributed but not recognised by bank yet, DC = cheque banked but NSF so bank cant add funds to company)
Cmemorandum = addition to bank recorded cash (interest earned)
Dmemordanum = subtraction from bank recorded cash (service charges)
(2) Petty cash fun = set amount of easy$ for minor exp

Question 15

Cash equivalent? Cash analysis? Free cash flow?

Answer 15

Cash equiv = (1) convert within 3 months to (2) known amount
Cash analysis = H and V for cash activities to understand ability to pay debts, invest, etc.
Free cash flow = companies ability to invest beyond bills, capital expenditures, and shareholder payouts i.e. Cash flows from operating activities - capital expenditures - dividends = free cash flow

Question 16

Accounts receivable: classification? Sales discount? Sales returns and allowances? NRV why and what? Methods of accounting receivables (2)? Method of bad debt estimation (2)? Receivable turnover ratio + DRR + allowance ratio?

Answer 16

Classification = current asset
Sales discount = contra-revenue
Sales RandA = contra-revenue
NRV = net realisable value = following conservatism principle = gross receivables - amount expected to not receive.
Direct-write-off = expense recorded when deemed noncollectable and written off = two entries = 1st sale entry and then bad debt expense entry (write off) = allows earnings manipulation for tax negation + violates matching principle + bad estimate of AR effect on expected cash inflows = not usable for material transactions
Allowance = expense recorded as estimate + write off known uncollectibles = Allowance for bad debts account (contra-asset)
POS = Credit sales x set % = simple + good matching but no consideration of existing allowance account balance
POAR = AR x set % = credit allowance account by amount required to give allowance account a credit balance of the amount calculated by AR x set %. The amount you had to credit by will be the recorded expense! = very meaningful net realizable value
RTR = net credit sales / average receivables
DRR = 365/receivable ratio
AR = allowance / gross AR

Question 17

Inventory: what? principle? Systems (2) Cost of goods sold methods (4) retail inventory method? LCNRV? ITR + Diir?

Answer 17

What = current-asset intended for resale
Principle = cost principle
Perpetual = updated as per every change = inventory balance manipualted to represent total cost of acquisition
Periodic = updated as per end of year stock = revenue recorded but not COGS (until year end) = purchases account (temporary asset account) used to record any changes to inventory = Transportation-in + Purchase returns and allowances (contra-asset) + purchase discounts (contra-asset) = count inv at end of period for COGS = doesnt factor purchases between sales
Special identification = know exact unit x amount x value
FIFO = duh
LIFO = dont use in aus
moving average = cogs and ending inv balance in between fifo and lifo
weighted average = cost of all units / units
RIM = estimate cost of goods sold by historical gross profit %
LCNRV = at end of ac period principle of conservatism requires inv reported at net realisable value (inventory loss expense account)
ITR = COGS / avg inv balance = ability to sell inv
Diir = 365 / ITR

Question 18

Managerial vs Financial? Long term (strategic) planning activities (4) short-term (operational) planning activities (4)? Operating activities? controlling activities?

Answer 18

Financial = external users + gauging companies financial position within market/economy = make informed decisions for external user
Managerial = Internal users + inform managerial decisions for optimal future outcome = planning, operating, controlling
Strategic = Long-term planning activities = market share, new equipment/investment, sales growth, plant location
Operational = Short-term planning activities = current cash needs, customer service needs, sales quotas, time budgets
Operating activities = day-to-day decisions (should we?)
controlling activities = ensure we reach goals

Question 19

Traditional environment? Lean production and JIT environment?

Answer 19

Traditional = similar machines grouped + raw materials, WIP and finished goods with inventories acting as buffer for unexpected orders + lengthy distribution of WIP throughout process
Lean = fast and efficient supplier relationships = orders taken and then production commences = low inventory on hand = lower costs + manufacturing cells

Question 20

Manufacturing costs? Non-manufacturing costs? Journalising transactions?

Answer 20

M costs = costs incurred in manufacturing process = direct labour + direct materials + overhead (indirect material + indirect labour + other factory costs)
Non-m costs = costs incurred outside of manufacturing (design, admin, RandD, sales, etc.)
Journalising = only use raw/wip/final inventory accounts (not overhead +direct labour, etc.) and wages/accounts payable/cash…

Question 21

Schedule of cost of goods manufactured + sold

Answer 21

start with beginning amounts for raw/WIP/finished add manufacturing costs to WIP and subtract Ewip for COGM then add COGM to finished and subtract Efinished for COGS and then use COGS to find G profit…
NOTE: COGS, Sales and G profit are Balance sheet and used with period (non-manufacturing costs) to find net profit as per income statement

Question 22

Full product cost components (3)? Contribution margin income statement? sales mix formula? contribution margin ratio how and what? operating leverage?

Answer 22

Components = mixed (component with V on top of F) + variable (volume proportionate) + fixed (volume indifferent)
Contribution margin statement = Sales - variable expenses = Contribution margin and then Contribution margin - fixed expenses = Net profit
Sales mix formula = weighted average contribution margin = total contribution margin of each unit within the ratio mix / number of mixed units i.e. for a 3:1 ratio you would have 3 units of the first product and 1 unit of teh second and hence 4 units
CMR = CM/sales = when high profit is strongly effected by an increase or decrease in sales
Operating leverage = CM / Net income (loss) = used as an indicator of how sensitive net profit is to a change in sales.

Question 23

Budgeting types (3)? Master budget? The operating cycle stages (4)?

Answer 23

Planning (goals), Control (comparing actual to budget), Operating (day-to-day action)
Master budget = a comprehensive budgeting approach whereby sales are identified first using a “sales budget”. Next the “production Budget” is prepared to specifiy the volume of product for each month. Next material purchases, direct Labour and manufacturing overhead budgets are prepared separately, as well as a budget for SandA expenses. Next cash receipts (expcted incomes each month), cash disbursements (estimated costs for materials, labour, overhead and SandA) and a summary cash budget (totals for operating cash flows, investing cash flows, financing cash flows) are all prepared. These budgets can then all be used for a budgeted income statement and budgeted balance sheet.
Operating cycle = Cash > manufacture > sell > collect cash > repeat

Question 24

Cost levels (4)? ABC stages (2) Why use ABC costing over traditional costing?

Answer 24

Unit level = incurred each time a unit is produced (supplies, depreciation)
Product level = incurred for each type of product produced (product development costs)
Batch level = incurred for batches of goods produced (depreciation for setup equipment)
Facility level = sustain general facility processes (insurance and tax, salary of plant manager)
ABC = activity based costing = identify activities + identify cost drivers i.e. the unit level activity “repair and maintenance of factory equipment” is driven by machine hours, labour hours, or number of units.
ABC vs Traditional = Whilst traditional costing is simple and fast, it does not factor in the differing proportions of costs allocated to each type of product as it simply uses one relevant factor to assign overhead through (doesn’t factor diverse products).

Question 25

Cost analysis? Vertical integration?

Answer 25

Cost analysis = a means of maximising short-run income without reducing long-run income by comparing relevant costs, assessing qualitative issues and opportunity costs (rent out factory) when deciding on special orders, outsourcing, processing further and adding/dropping a product..
Vertical integration = when a company is involved in multiple steps of the value chain extending from RandD to customer service. Advantage is no dependence on timely delivery and disadvantage is suppliers may have have better quality or lower prices.

Question 26

NPV? IRR?

Answer 26

Net present value = compares present outflows (investment) to present inflows (return on investment) and includes a discount rate for minimum rate of return as well as risk and uncertainty of future cash flows. HOWEVER does not tell actual rate of return = must use trial and error
Internal Rate of Return = a non-discounted method useful in approximating payback period. Payback period = original investment / Net annual cash inflows

Question 27

When can accounting produce different numbers legally? Why use earnings management?

Answer 27

When = This is possible in various areas of accountancy reporting where judgements or estimates are required. For example COGS (fifo, lifo, etc.), depreciation, sales recognition and bad debts.
Why = to encourage investment, pay larger/smaller dividends, paint a picture of a company that has long-term benefits

Question 28

Recording of manufacturing costs vs recording of non-manufacturing?

Answer 28

Manufacturing costs are attached to specific products and as such are expensed on the income statement when COGS has been established. Non-manufacturing costs are not attached to products and as such are to be immediately expensed on the income statement the moment they become apparent.

Question 29

Actual Vs Normal costing

Answer 29

Actual = actual overhead costs assigned directly into WIP
Normal = estimated or predetermined overhead rates used to apply overhead to WIP

Question 30

Relevant range?

Answer 30

The normal range of production that can be expected for a particular product and company

Question 31

Absorption Vs Variable costing

Answer 31

Absorption (full) = A method of costing in which product costs include direct labour, direct material, and fixed and variable overhead; required for external financial statements and for income tax reporting
Variable (direct) = A method of costing in which product costs include direct labour, direct materials and variable overhead; fixed overhead is treated as a period cost, consistent with a focus on cost behaviour.

Note; Cost behaviour = how costs react to changes in production volume or other levels of activity

Question 32

Macro Vs micro earnings management

Ethics involved?

Answer 32

Macro = getting accounting standards to best suit you/your clients = pooling with others to essentially subtract from the ruling power of the GAAP if they do not comply to your pooled demands...
Micro = using the choice available to show the best financial picture of the company 

The ethics of the situation are rather tricky. On one hand the ability for accountants to manipulate financial information and in doing so negate the negative effects on stakeholders is a very unethical procedure. However imposing strict regulation upon all firms equally, regardless of the type of operation, etc. could be very costly to small businesses and impose unfair terms i.e. also unethical.

Question 33

How would you go about recording a change in NRV?

Answer 33

First calculate the amount of value lost due to changing market prices i.e. the new NRV. lets say this amount totals to $25 lost on inventory. In recording this we would debit COGS and credit Inventory both for $25. This entry shows that the value of our inventory is now $25 less and records an expense incurred as COGS due to NRV

Question 34

ENTRIES under Percentage of sales and under Percentage of AR

Answer 34

Percentage of sales = First analyse the information to determine what needs to be written off for the period in question. Now if there is an amount to write off you will need to analyse the existing allowance balance and see if the amount in the account allows you to write off the full amount without incurring an expense. In writing off the amount, in the scenario where allowance fully covers the write off, you will simply debit allowance for the amount and credit AR for the amount. This step is the same for the Percentage of AR approach as well. Next you will want to calculate, using the historical percentage, the percentage of total credit sales from the period for which you will likely not collect anything on. As Percentage of sales does not factor in the existing allowance balance you will simply record the bad debt expense as the calculated amount (debit) and the allowance (credit) for the same amount.

Percentage of AR = Same first step as above. Next you will need to calculate the AR for the period. THIS MEANS taking BEGINNING AR + CREDIT SALES - CREDIT COLLECTED ON - AR WRITTEN OFF IN STEP 1!!!!!!!!!!!!!!!! Next you will take the historical percentage and times the newly calculated AR (WITH AR WRITTEN OFF SUBTRACTED!!!!) by it to determine the allowance balance you will need. Now you take the existing allowance balance and credit by the amount required to give a normal balance equal to the calculated amount you wont collect on. The amount you are required to credit by will equal to the bad debt expense you record.

Question 35

Control activities (5)

Answer 35

Establish responsibility
Maintain adequate documentation
Segregation of duties
Physical security
Independent verification