Midterm Flashcards
What is the purpose of financial accounting and who are its users
gives people insight on if they should incest in the business, should they lend out money
users are creditors, investors, etc
examples of users of accounting info
creditor, investors, business users, not for profit, government, individuals for personal tax
any decision maker is a user
4 types of financial statements
income statement
balance sheet
statement of changes in owner’s equity
cash flow statement
what is the GAAP
generally accepted accounting principles
underlying concepts that governs financial accounting
primary purpose is ensure the usefulness of financial information
useful information must be relevant and faithful representation
Reporting entity consideration
each entity is accounted for separately and distinctly from other entities
e.g company owner ensures business transaction are accounted separately from personal transactions
cost and materiality constraints
The benefits from the information produced should out-weigh the time, effort and cost to produce it.
A piece of information is material if…
it would affect a decision maker’s decision
materiality is judgement based
going concern assumption
- We assume that an entity will remain in operation for the foreseeable future (12 months+)
The Stable-Monetary-Unit (Currency) Assumption
The dollar’s purchasing power is relatively stable
doesn’t acknowledge inflation of time value of money
The Cost Principle of Measurement:
- Acquired assets and services should be recorded at their actual cost
Also known as original or historical cost
Revenue Recognition Principle
Requires that revenue be recorded at the time that it is earned, regardless of whether cash or another asset has been exchanged.
Matching Principle:
- The matching principle instructs expenses should be reported in the same period in which the corresponding revenues are earned. Declare revenue have to declare expenses at the same time
Accrual Accounting
Accrual Accounting involves the practice of declaring Revenues when earned, and reporting expenses that were incurred related to the revenues and time period.
laws require accrual accounting
tracks revenues and expenses separate from exchange of payment
Sole Proprietorship:
one owner
unlimited liability
limited life
not a separate legal entity from the owner
owner taxed on profits at own personal tax rate
Partnerships:
- Two or more owners sole proprietorships together
- Not a separate legal entity from the owners
- Unlimited liability
- Limited life
- Owners taxed on profits
corporation
- Separate legal entity from the owner(s)
- Limited liability (the corporation pays the lawsuit, not the owner’s own person assets)
- Unlimited life
- Corporation taxed on profits, flat not the owner’s personal tax rate
examples of current assets
cash
a/r
inventory
prepaid expenses
short term investments
examples of long-term assets
property
plant
equipment
intangible assets (patents, goodwill, trademarks)
examples of current liabilities
a/p
unearned revenue
Double entry accounting
every business transaction affects at least two accounts
What does the term “Financing” mean for a business?
- The term “Financing” refers to the methods used by a company to raise money to support its operations
what are the 2 major categories of financing for a company?
debt financing and capital financing
debt financing means…
funding that comes from creditors
recorded as liabilities using payable accounts
capital financing refers to…
money received from owners (investors or shareholders)
recorded under owner’s equity
may be received from one, or many, investors, and is sometimes done using stock exchanges and “IPO’s”
What is an IPO?
initial public offering, when a company offers shares for sale to the public, money in exchange for ownership
book value
sum of company’s account balances for all assets
market value
usually different than book value
what people are willing to pay for company
what does bankruptcy mean?
when a company is unable to pay its debts, one of 2 things can happen:
company may apple to courts for creditor protection bankruptcy laws
or
- An unpaid creditor may apply to put a company into “receivership” to liquidate company assets to obtain repayment of debt
what are bankruptcy laws intended to do?
- preserve employment and reduce social stress and welfare support
- provide creditors with a measure of debt repayment
benefit the economy, by forgiving debt and providing businesses another chance to access credit and continue to pay taxes.
In accounting, when a portion of the value of an asset is used to generate revenue, that value is
transferred to an expense account
when an asset is used is when it can be expensed
what is the ledger in accounting?
list of all the company’s accounts
normal balances
An account’s normal balance is the debit or credit side where increases are recorded.
what 3 things do journal entries include
date
title of the account debited/credited and the dollar amount
short explanation of the transaction
What is a trial balance?
- A trial balance summarizes the ledger by listing all accounts with their balances
- Assets first, followed by liabilities and then owner’s equity, revenues and expenses
What are the differences between an employee and a contractors
-do they have their own tools or does the company own them
-do they set their own hours
What are the required salary deductions the receiver general (fed government) requires employers take from emlpoyee’s pay?
CPP payable
EI payable
Income tax payable
other deductions might be health insurance, union dues etc
What are fringe benefits
additional $ paid by the company to various agencies such as WSIB, vacation pay or compensation packages such as dental plans, etc.
3 tool of financial analysis
horizontal analysis (comparing company’s financial performance across time)
vertical analysis (comparing company’s financial performance to a base amount, compare company performance within the year)
ration analysis: determination of key relationships among financial statement items, used with horizontal analysis a lot
what is gross margin
the difference between the price you sell things at and the cost of the things that you sold
What are the 4 building blocks of ratio analysis?
- liquidity: ability to meet short-term obligations and efficiency (how well a company’s uses it’s assets and converts them to cash)
2.solvency: ability to to cover long-term obligations and generate future revenues - profitability: company’s ability to generate an adequate return on invested capital
4.market: ability to generate positive market expectations
difference between managerial vs financial accounting in users, time horizon, verifiability vs relevance, precision vs timeliness, unit of analysis, regulation, and requirement
users: financial primarily external, managerial primarily internal
time horizon: financial historical perspective, managerial historical and future persepective
verifiability vs relevance: financial verifiability, managerial relevance
precision vs timeliness: financial precision, managerial timely
unit of analysis: financial entire organization, managerial individual units of organization or sometimes entire organization
regulation: financial must follow prescribed accounting standards, managerial no prescribed standards
requirements: financial mandatory, managerial not mandatory
The Lean Business Model
main idea underlying this model is to eliminate waste
customers don’t want to pay for costs of waste in the prices they pay or the time they wait for products
what 4 practices are included in the lean business model?
just-in-time
total quality management
process re-engineering
theory of constraints
Just in time
a production and inventory control system in which materials are purchased and units are produced only as needed to meet actual customer demand
Benefits of a JIT system
- Reduced inventory costs
- Greater customer satisfaction
- Higher quality products
Less warehouse space needed
Total Quality Management
an approach to continuous improvement that focuses on customers and using teams of front-line workers to systematically identify and solve problems
benchmarking
studying organizations that are the best in the world at performing a particular task
Plan-do-check-act cycle
part of TQM
plan: study current process and implement plan for improvement
do: implement it at small scale and collect data
check: evaluate the data to see if it showed improvement
act: if it did, implement it company wide, if not go back to plan
process re-engineering
an approach to improvement that involves completely redesigning business processes in order to eliminate unnecessary steps, reduce errors, and reduce costs
questions a business process in detail then completely redesigns it
Theory of constraints
management approach to identify and deal with constraints, 3 steps
- identify constraints
- limit the strain on the system to the capacity of the constraints
- focus on strengthening the weakest link
What is corporate Governance?
Is the system by which an organization is directed and controlled
- motivates board of directors to pursue objectives in the interests of company’s owners rather than top managements interests
cost object
anything for which cost information is desired
Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.
what is a sunk cost
something you’ve already paid for can’t be changed by any decision, should be ignored when making decisions
What ways did Fishs Eddy make ways
retail store, online, business to business (to restaurants and other businesses who sell), and registry
merchandiser vs manufacturer activités
merchandisers buy finished goods and sell finished goods
manufacturers by raw materials and produce and sell finished goods
on the balance sheet, what would the difference in inventories be for a merchandisers vs manufacturer
merchandiser would just have merchandise inventory while manufacturers would have raw materials, work in process and finished goods under inventories
direct cost
cost that can be easily traced to a cost object (direct materials and direct labour)
indirect cost
costs that cannot easily be traced to a cost object (manufacturing overhead)
what 3 things make up manufacturing costs
direct material, direct labour and manufacturing overhead
what 3 things make up manufacturing overhead
indirect labour, indirect materials and cost incurred to run the factory
period costs are…
non manufacturing costs such as marketing and selling costs, and admin costs
product costs are…
direct material, direct labour and manufacturing overhead, basically anything in the factory
what is the difference between period and product costs in terms of where they appear on balance sheet/income statement
product costs first appear as inventory on the balance sheet and then cogs on income statement
period costs appear as expense on the income statement only
contribution margin
amount remaining once all the variable costs have been deducted from sales revenues
provides managers with an income statement that clearly distinguishes between fixed and variable costs
What three manufacturing/product costs does COGS consist of
manufacturing overhead (can e fixed or mixed cost), direct labour, direct materials (both variable costs)
