Principles of Financial and Managerial Accounting Flashcards
Accounting
The study of quantitative information, primarily financial, that is useful in decisions that can help change what happens in the future
The 4 steps in a decision-making process
- identify the issue
- gather information
- identify alternatives
- select the best option
Capital
The money used by a business to get resources they need - also known as financing
The 3 sources of capital
- Investors (owners)
- Creditors
- The business itself in the form of earnings
What do accountants do in a business?
- measure and report the results of business activities
- advise on company’s actions on how to structure activities to achieve business goals
What are the 2 types of accounting?
- Managerial
2. Financial
What are the 2 major categories of reports?
- Internal
2. External
Internal reporting
Used by those who direct day-to-day - the info needed for planning, implementing plans, and controlling costs
External reporting
Used by individuals and organizations that have an economic interest in the business but are not part of management
Financial accounting is summarized in 3 primary financial statements
- Balance sheet
- Income statement
- Statement of cash flows
Balance Sheet
Reports the resources, liabilities, and the owner’s equities of a business
Income statement
Reports the amount of net income earned during a specific period
Statement of cash flows
Reports the amount of cash collected and paid out in operating, investing, and financing
Lenders
Only care about being repaid with interest
Investors
Want info on what the future potential profit will yield
Competitors
What to review the relative profitability of other businesses to identify strategic opportunities
The 3 Structural elements of accounting
- Accounting organizations
- Ethics/ethical standards
- Technology
FASB
Financial Accounting Standards Board
-a private group that set the accounting standards rules in the USA
GAAP
Generally accepted accounting principles
GASB
Governmental accounting standards board
-sets the accounting/financial reporting standards for state and local governments
Other organizations that affect accounting standards
- SEC
- AICPA
- IRS
- IASB
SEC
Securities and Exchange Commission
- federal agency that has legal authority to set accounting rules in the US
- regulated financial markets and stock exchanges
AICPA
American Institute of Certified Public Accountants
-the professional association of CPA’s
IRS
Internal Revenue Service
-collects and regulates income taxes
IASB
International Accounting Standards Board
-FASB for everywhere except the USA
The 4 steps of the Accounting Cycle
- Analyze transactions
- Record the effects of transactions
- Summarize the effects of transactions
- Prepare reports
Internal Transactions
A transaction that occurs within a company - does not involve an external party and is not recorded in financial records
External Transaction
An exchange that occurs between a company and an external party that is recorded in financial records
Arms-length transaction
A transaction where a buyer and seller independently to get the best possible deal
The Accounting Equation
Assets = liabilities + equity
The account equation breakdown
Assets (resources) = liabilities (a method of financing resources that requires payment) + equity (a method of financing resources that does not require repayment and represents ownership interests in the business)
Account
A place where we record all the effects of transactions that relate to a certain item i.e. cash account, AP account, supplier account
Dividends
Money distributed to the owners (stockholders) of a corporation
The 3 Primary Financial Statements
- Balance sheet
- Income statement
- Statement of cash flows
Balance sheet
- A summary of the financial position a company is in at a particular date
- Reports assets, liabilities, and equity
- Used by investors/creditors
Income statement
Reports net income during a period of time - the economic performance of a company
Statement of cash flows
- Reports the amount of cash collected and paid out by a company in operating/investing/financial activities
- shows the inflows (receipts) and outflows (payments) of a company during a period of time
Statement of retained earnings
Accumulated profits or losses a business since the business started
Identified the changes in accumulated investments by owners and profits since day one
Form 10-K
Required to provide specific information to users including
- what the business does
- risk exposure
- significant owned properties
- legal issues
Form 10-Q
Financial reports of publically traded companies file quarterly to the SEC
CIK
Central Index Key
Unique identifying # for each company
Liquidity position
Whether or not a company will be able to pay its liabilities
Solvency position
Can the company survive long term given its current debt structure
Assets
Economic resources that are owned and controlled by a company
Common assets are cash, AR, inventory, and buildings
Liabilities
Obligations to pay someone else
Common liabilities are AP, inventory, and buildings
Owner’s equity
the remaining assets of a business after the liabilities have been deducted
Sources of owner’s equity are capital stock, and retained earnings
Capital Stock
The amount given by shareholders to obtain shares
The format of a balance sheet
- Assets always listed first in order of current and then long term
- Liabilities are listed second with current then long term (current (within 1 year)= AP, bank loans)) (long term=bank loans)
- Owners equity is listed last separated into paid in capital and retained earnings
Liquid assets
Assets that are in the form of cash or can be easily converted into cash
Illiquid assets
Assets that take time and effort to convert into cash
Comparative financial statments
Statements that include information from both current and preceding years that are prepared for users to identify significant changes
What are the 3 limitations of the Balance sheet?
- Cost is reported, not the market value (cash = market value and inventory =cost)
- Some assets are not reported especially intangible items that are hard to measure
- Value on the books does not equal the market value of a company
What is the difference between the balance sheet and the income statement
Balance sheet is in real time
Income statement is how much is made over a period of time
Net income
Net income = Revenue - expenses
“earnings or profit reflects the company’s revenues in relation to its expenses
Revenues
The amount of assets created through the sale of goods and services
Expenses
The amount of assets consumed through operations i.e. salaries
What is the difference between revenue and assets
Revenue is an activity that generated assets i.e. selling a product (revenue) for cash (asset)
Assets can be generated elsewhere i.e. borrowing money from a bank
Gross profit
AKA gross margin
The difference between sales and cost of goods sold ( = sales - cost of goods sold)
Operating income
Reports the results of what a company does on a daily basis
Operating income = sales - cost of goods - operating expenses
Expenses are divided into 2 categories
Non operating: interest and income taxes
Operating
EPS
Earnings (loss) per share divides net income for current period by the number of shares of stock outstanding during the period
EPS = net income / outstanding # of stock shares
Basic EPS
Based on historical transactions
Net income - actual average outstanding shares
Diluted EPS
Estimating what EPS would be if certain transactions had occurred
Expanding the accounting equation
Assets = liabilities + (capital stock + cumulative net income - cumulative dividends)
Cash inflows
Selling goods, selling assets, borrowing, and investments
Cash outflows
Operating expenses, repay loans, and pay a return on investments
Individual flow items are classified into 3 activities
- Operating activities
- Investing activities
- Financing activities
How the 3 financial statements tie together
- the income statement explains the change in retained earnings balance in the balance sheet
- the statement of cash flows explains the change in the cash balance in the balance sheet
Common size financial statements
Amounts for a given year being shown as a percentage of sales
Horizontal analysis
financial statement analysis that compares a business results from year to year - comparing percentages over time for the same company
How is horizontal analysis calculated?
(Year 2 - year 1) / year 1 = percentage change from year to year
Vertical analysis
Comparing different company’s financial statements at the same point in time in similar industries
Percentage of sales = income statement / sales
Cash budget
A short term schedule of expected cash inflows and outflows during a period of time
The federal government has 3 types of expenditures
- Discretionary - Congress under presidential guidelines can decide how to spend money
- Mandatory - the expenditures must be made and congress has not discretion
- Interest on the federal debt - must always be paid
Master budget
An integrated group of detailed budgets that outline the overall operating and financing pans for a specific period of time,
Begins with sales budget then production budget then selling and admin budget
Master budget outline
- Start with sales budget/forecast
- Production budget based on sales budget
- Production budget drives direct material and labor budget
- Sales/production/labor budget is combined with the selling/admin budget
- Once cash inflows/outflows are known, a budgeted income statement and balance sheet can be prepared
Sales budget
A schedule of projected sales over the budget period
Production budget
A schedule of production requirements for the budget period
Direct materials budget
A schedule of direct materials to be used during the budget period and direct materials to be purchased during that period
Direct labor budget
A schedule of direct labor requirements for the budget period
Manufacturing and overhead budget
A schedule of production costs other than those for direct labor and materials
Selling and admin budget
A schedule of all non-production spending expected to occur during the budget period
Operating capital
Funds available for use in financing the day-to-day activities of a business
Decentralized company
An organization where managers at all levels have the authority to make decisions concerning the operations for which they are responsible
Responsibility accounting
A system in which managers are assigned and held accountable for certain costs, revenues, or assets
Cost variance
A difference between actual cost and budgeted cost
Responsibility center
An organizational unit in which a manger has control over and is held accountable for its performance
The 3 types of responsibility centers
- Cost
- Profit
- Investment
Cost center
Manager has control over what costs are incurred
Profit center
Manager has control over the generation of revenues and costs
Investment center
Manager has control over revenues, costs, and amounts invested
Segment margin
The difference between segment revenue and segments costs
Sales - variable costs = combination margin - direct fixed costs
Segment margin statement
A profit and loss statement that identifies costs directly chargeable to a segment and further divides them into variable and fixed costs behavior patterns
Direct costs
Costs that are specifically traceable to a business unit or segment being analyzed
Segment margin ratios
The segment margin divided by the segment’s net sales revenue - a measure of the profitability of the segment’s operating performance
Financial accounting
Summary data primarily used and intended for people outside the business who are making occasional decisions
Managerial accounting
Detailed data used and intended for people inside the business who are making daily decisions
Product-line income statement
Shows both the gross profit and the income loss generated from operations for each product lines sold
Product-line profitability report
Shows the profitability of different product lines over time for a manufacturer over a broad operation
Internally generated and confidential
Cost center report
Confidential report comparing budgeted and actual expenses
Cost accountant
An accountant who is specifically to prepare and analyze accounting info for internal decision making
MANAGERIAL ACCOUNTING
Financial accounting department
Controller, financial statement accountant, and bookkeeper prepared balance sheet, income statement, and statement of cash flows
FINANCIAL ACCOUNTING
What are the 3 Functions of managerial accounting?
- Planning
- Controlling
- Evaluating
Long-run planning
- Includes strategic planning and capital budgeting
- making decisions whose effects extend several years in the future (3-5)
Short-term planning
Includes production and process prioritizing, and operational budgeting
The 2 categories of short-run planning
Production prioritizing and operational budgeting
Production prioritizing
Managements continual evaluation to various product lines and profitability in order to identify opportunities and improve profits
Operational budgeting
Managerial planning decisions regarding current and immediate operations that are characterized by regularity and frequency
- Controlling
Tracking the actual performance of a company by measuring variances between estimated and actual achievement
- Evaluating
Comparing actual performance against expected inputs of costs, outputs of quality, and timelines
What are the 3 types of businesses?
- Manufacturing
- Servicing
- Merchandising
Manufacturing business
Any organization whose main economic activity involves using components or raw material to make finished goods
Service business
Any organization whose main economic activity invloves producing a non-physical product that provides value
Merchandising business
A business that purchased finished goods for resale
Product costs
All costs necessary to create the product, the cost of all people and processes
-reported in the income statement as part of cost of good sold once the product is sold
Period costs
Activities or facilities outside of production that are charged as expenses to the income statement in the period they were incurred
-reported immediately on the income statement in the period they are incurred
What are the 3 types of manufacturing costs?
- Direct materials
- Direct labor
- Manufacturing overhead
Direct materials
Includes the cost of raw materials that are used directly in the manufacture of products
Direct labor
Includes hourly wages and other payroll related costs and expenses of factory employees who work directly on products
Manufacturing overhead
Includes all manufacturing costs incurred during the manufacturing process that are not classified as direct labor or materials (rent/utilities etc)
Cost of goods manufactured statement
A schedule supporting the income statement that summarize the total cost of goods manufactured and transferred out of the work in process inventory account during a period
Product vs. period costs
Costs incurred inside factory vs. costs incurred outside factory
Inventoried as part of the balance Shay then transferred to cost of goods sold expense vs. expensed immediately in the income statement
Merchandising product and period costs
Product costs: purchasing goods from suppliers
Period costs: selling and administration costs
Servicing product and period costs
Product: providing services, direct labor and service overhead
Period:
Selling and administration costs
Manufacturing product and period Costs
Product: Manufacturing product, direct materials and labor, and manufacturing overhead
Period: selling and administration costs
Indirect materials
Materials that are necessary but are not directly included in or are not a significant part of the product i.e. glue and screws etc
Indirect labor
Labor that is necessary but not directly related to actual production (maintenance)
Cost volume profit analysis CVP
Techniques for determining how changes in revenues, costs, and level of activity affect the profitability of an organization
Fixed costs
Cost they remain constant in total, regardless of activity level, over a certain range of activity
Variable costs
Cost that change in total in direct proportion to change is an activity level
Stepped costs
Cost that change in total in large amounts with changes in volume of activity
Mixed costs
Costs that contain both variable and fixed cost components
Relevant range
The range of operating level, or volume of activity where the relationship between total cost and activity are approximately linear
Economy of scale
A pattern of decreasing cost per unit as a unit volume increases
Direct costs
Costs that can physically be traced to a business unit or segment
What are the three classifications of manufacturing overhead?
- Estimated
- Actual
- Applied
Estimated manufacturing overhead
The amount of overhead cost that management has budgeted for the upcoming production period created by dividing estimated overhead by the expected level of activity
Actual manufacturing overhead
Manufacturing costs other than direct materials or labor recorded as costs incurred
Applied manufacturing overhead
The amount of the manufacturing overhead that is assigned to the goods produced, entered as production takes place in our applied to work in process on the basis of predetermined overhead rate
How does manufacturing overhead work?
Manufacturing overhead is a temporary holding account that simultaneously records actual overhead costs as they occur while regularly transferring allocated overhead costs into the asset account called work in process inventory
Under applied manufacturing overhead
The amount of actual overhead expenses incurred during the period exceeded the amount of overhead applied during the period
Over applied manufacturing overhead
The amount of actual overhead expenses incurred during the period was less than the amount of overhead applied during the period
What is the CVP equation?
Sales revenue - variable costs - fixed costs = profit
Contribution margin
The difference between total sales and variable costs, the portion of sales revenue available to cover fixed costs and provide a profit
Contribution margin income statement
And income statement in which costs are separated by behavior (fixed/variable) instead of by functional classification (cost of goods, admin expenses)
Per unit contribution margin
The excess of the sales price of one unit over it’s variable costs
Break even point
The amount of sales at which total cost of the number of units sold = the total revenue at which point there is no profit or loss
Where does the break even point fall on the break even chart?
The break even point is where total revenues = total costs
Differential costs
Future cost that change is a result of a decision also called incremental or relevant costs
Sunk costs
Past costs that cannot and do not change as a result of a future decision
The two categories of costs
1. Out of pocket
2. Opportunity
Out-of-pocket costs
Cost they require an outlay of cash or other resources
Opportunity costs
The benefits lost or forfeited as a result of selecting one alternative course of action over another
Contribution margin calculation
CM = sales revenue - variable costs
Breakeven calculation
Sales revenue - variable costs - fixed costs = $0
CVP calculation
Sales revenue - variable costs -fixed costs = profit
Return on sales revenue
A measure of operating performance computed by dividing net income by total sales revenue
What is the CVP equation for a variable cost ratio in place of a per unit variable cost?
Sales revenue - (variable cost ratio x sales revenue) - fixed costs = profit
Contribution margin ratio
The percentage of sales revenue left after variable costs are deducted
What are the three methodologies for computing product costs?
- Job order costing
- Activity-based costing
- Process costing
Job order costing
- A method of product costing whereby each job, product, or batch of products is costed separately
- used when the product or service provided can be considered as separate and distinct from other products
Activity-based costing ABC
-A method of attributing overhead costs to products based on measurable factors that relate to activities that create overhead costs and allocating those cost based on activities
Process costing
A method of product costing whereby production costs for a period or accumulated and then averaged over all units manufactured during the period
What is cost data needed for?
Setting sales prices, measuring gross margin, valuing assets, and making optimal choices
Unit level activities
Overhead activities that are performed each time a unit is produced
Batch level activities
 overhead activities that are performed each time a new production batch is started or ended
Product line activities
Overhead activities that are associated with the capability to produce different types of products
Cost pool
A combination of costs associated with performing a specific task such as producing a particular product
Activity rate
The amount of the estimated cost pool divided by the estimated number of cost driver events
Cost driver
A numerical measure used to reflect the amount of a specific cost that is associated with a particular activity
