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MBAD 6131 Management Accounting > Topic 1: Important Definitions > Flashcards

Topic 1: Important Definitions Flashcards

1
Q

Accounting Equation

A

Assets = Liabilities + Owner’s Equity

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2
Q

Assets =

A

Liabilities + Owner’s Equity

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3
Q

Owner’s Equity =

A

common stock (contributed by owner’s) + retained earnings

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4
Q

What are current assets?

A

Assets the company expects to use or convert to cash within one year

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5
Q

Is a copyright a current asset?

A

No, it is an intangible asset therefore it is a long-term asset

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6
Q

What is a liability?

A

This is the amount the company owes to others. These are claims creditors have on the company’s assets.

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7
Q

What is a current liability?

A

A debt that is to be paid within one year

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8
Q

Is a mortgage payable long-term or short-term liability?

A

Long-term

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9
Q

Are bonds payable long-term or short-term liability?

A

Long-term

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10
Q

What is owner’s equity?

A

It is capital that has been invested in the company by its shareholders (its owners). It is the owners’ claims on the company’s assets.

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11
Q

What is contributed capital?

A

The total dollar amount of money (or other assets) the owners have paid (“contributed”) to the company in exchange for stock (shares of ownership)

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12
Q

What is another name for contributed capital?

A

Paid-in capital

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13
Q

What are the two components of contributed capital?

A

Common stock and preferred stock

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14
Q

What is another name for common and preferred stock?

A

Capital stock

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15
Q

What are retained earnings?

A

the total dollar amount the company has earned and retained. Net income (earnings)increases this amount; dividends decrease this amount.

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16
Q

What is revenue?

A

It is money earned from the sale of merchandise or services to customers (from normal business operations)

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17
Q

When you earn revenue, what happens to your company’s assets?

A

They increase. If they pay immediately, cash increases. If they’re planning to pay later, accounts receivable increases.

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18
Q

What is an expense?

A

Cost incurred by a company to conduct its normal business operations (i.e. the cost of doing business)

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19
Q

What do expenses do to your company’s assets?

A

Expenses decrease your company’s assets.

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20
Q

Net income =

A

Revenue - Expenses, net income is also known as profits and earnings

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21
Q

Dividends

A

distributions of a corporation’s earnings to stockholders

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22
Q

Are wages payable current or long-term liabilities?

A

Current liabilities

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23
Q

Are expenses cash payments for costs incurred to earn revenues?

A

No, they are not always paid off immediately. They are costs (whether paid or not) incurred to earn revenue)

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24
Q

Do the difference between assets and liabilities increasing indicate that the company is becoming more profitable?

A

No, the owner could’ve just added in more money into the company. Retained earnings increasing is an indicator that the company is becoming more profitable.

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25
Q

Are retained earnings assets, liabilities, or stockholder’s equity?

A

Stockholder’s equity

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26
Q

Is common stock an asset, a liability, or a stockholder’s equity?

A

Stockholder’s equity

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27
Q

Do accounts receivable count as revenue?

A

Yes

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28
Q

What is another name for owner’s equity?

A

Stockholder’s equity

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29
Q

Owner’s equity =

A

Assets - liabilities

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30
Q

What is another name for a company’s net worth or net value?

A

Owner’s equity

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31
Q

What are the two components of owner’s equity?

A

Contributed capital + retained earnings

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32
Q

Retained earnings =

A

Revenues - expenses - dividends

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33
Q

Net income =

A

revenues - expenses

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34
Q

What is the left side of a T account?

A

It is debit

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35
Q

What is the right side of a T account?

A

It is credit

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36
Q

What is the pneumonic device you should know for left side debit, right side credit?

A

After Eating Dinner, Let’s Rest on a Comfortable Sofa

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37
Q

What does debit increase?

A

Assets, expenses, and dividends

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38
Q

What does credit increase?

A

Liabilities, Revenue, Common stock (also known as owner’s equity)

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39
Q

What is accounts payable categorized as?

A

It is a liability

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40
Q

What comes first, recording a transaction in a journal or a ledger?

A

First you record a transaction in a journal, then transfer it to a T ledger

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41
Q

When is revenue recorded under accrual based accounting?

A

It is recorded when the action transpires, e.g. if you buy a flight, it is recorded when the flight occurs

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42
Q

What is the revenue recognition principle?

A

Revenue should be recognized in the same period in which it is EARNED

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43
Q

What is the expense recognition principle?

A

This is also called the matching principle, it requires that expenses be recorded in the same period as the revenue by those expenses. Expenses are recorded when incurred, not paid.

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44
Q

What is a financing activity?

A

It involves stocks. Borrowing money or selling stock to raise money; paying cash dividends to stockholders.

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45
Q

What is an investing activity?

A

Buying or selling relatively permanent resources the company needs to operate (these resources are called long-term assets)

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46
Q

What is an operating activity?

A

Once a company has the resources (“assets”) it needs, it can begin operating. This usually involves generating revenue and incurring expenses.

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47
Q

What type of business activity is buying inventory?

A

Operating Activity

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48
Q

What type of business activity is buying equipment to be used to manufacture goods?

A

Investing Activity

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49
Q

What type of business activity is selling goods to customers?

A

Operating Activity

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50
Q

What type of business activity is issuing shares of common stock?

A

Financing Activity

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51
Q

What type of business activity is paying a utility bill for electricity used in the production of goods?

A

Operating Activity

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52
Q

What type of business activity is receiving cash from customers?

A

Operating Activity

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53
Q

What type of business activity is paying cash to stockholders?

A

Financing Activity

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54
Q

What type of business activity is receiving cash from issuing new stock?

A

Financing Activity

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55
Q

What type of business activity is paying cash to suppliers of inventory?

A

Operating Activity

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56
Q

What type of business activity is buying a new office building?

A

Investment Activity

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57
Q

What types of transactions are recorded on an Income Statement?

A

Revenue and expenses

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58
Q

What is net income?

A

Revenue - expenses

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59
Q

What is shown on the statement of retained earnings?

A

Retained earnings is increased by net income and decreased by dividends

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60
Q

Which do you prepare first, income statement or statement of retained earnings?

A

Income statement

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61
Q

What are the four types of Financial Statements?

A

Income Statement, Retained Earnings Statement, Balance Sheet, Statement of Cash Flows

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62
Q

What is a balance sheet?

A

A list of the companies assets, liabilities, and owner’s equity

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63
Q

What time frame does a balance sheet show?

A

It shows a snapshot of the company’s current assets, liabilities, and owner’s equity on that current day

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64
Q

What is shown first on a balance sheet?

A

Assets

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65
Q

What order are assets listed on a balance sheet?

A

In order of liquidity, so cash first

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66
Q

What is the first step of the accounting cycle?

A

Obtain and analyze data about a transaction from a document

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67
Q

What is the second step of the accounting cycle?

A

Record the transaction in a journal

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68
Q

What is the third step of the accounting cycle?

A

Post the transaction from the journal to accounts in ledgers (general ledger & subsidiary ledger)

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69
Q

What is the fourth step of the accounting cycle?

A

Prepare unadjusted trial balance

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70
Q

What is the fifth step of the accounting cycle?

A

Record and post adjusting journal entries

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71
Q

What is the sixth step of the accounting cycle?

A

Prepare adjusted trial balance

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72
Q

What is the seventh step of the accounting cycle?

A

Prepare financial statement

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73
Q

What is the eighth step of the accounting cycle?

A

Record and post closing entries

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74
Q

What is the ninth step of the accounting cycle?

A

Prepare post-closing trial balance

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75
Q

What is the purpose of a trial balance?

A

It ensures that debits = credits

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76
Q

What are fixed assets?

A

Called PPE, properties, plant, and equipment, they are expected to benefit the business for a number of years, used in the operations of business, not intended for sale to customers, have physical substance

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77
Q

When the company records a fixed asset, what’s the price they record it at?

A

They record it at cost. Later the cost is depreciated; land is never depreciated.

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78
Q

What is depreciation called on an income statement?

A

It’s called depreciation expense, listed as an expense

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79
Q

What is depreciation called on a balance sheet?

A

It’s called accumulated depreciation, listed as a deduction from Fixed Assets (it is a contra-asset account)

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80
Q

What is book value and market value?

A

The book value is the value of the asset listed in the financial reports, and the market value is how much the asset is worth on the market. These values can significantly differ.

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81
Q

What is an asset’s depreciable cost?

A

It is cost - minus any residual value

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82
Q

What is an asset’s book value?

A

It is cost minus accumulated depreciation

83
Q

Is depreciation a process of cost allocation of asset valuation?

A

Cost allocation

84
Q

Depreciation applies to what and is excluded from what

A

It applies to buildings, equipment, machinery, vehicles, furniture & fixtures, and land improvements, but not land

85
Q

What are the factors used in calculating depreciation?

A

Cost (fixed assets are recorded at their original cost), useful life (an estimate of the expected productive life, also called service life, of the asset), and residual value (an estimate of the asset’s value at the end of it’s useful life, this is also called salvage value)

86
Q

Straight life depreciation is what we will use, what is the formula for yearly depreciation expense?

A

It is (cost minus residual value) / useful life

87
Q

What is the formula for Goods available for sale?

A

Beg inv + purchases = G.A.S.

88
Q

What is the formula for Ending inventory?

A

G.A.S. - COGS = EI

89
Q

What is specific identification method?

A

It is tracking the individual cost of each particular unit sold, e.g. car dealership, jewelry store

90
Q

What is FIFO?

A

It assumes that the first goods received were the first goods sold

91
Q

What is LIFO?

A

It assumes that the last goods received are the first goods sold

92
Q

What is the average cost method?

A

It is assuming that each unit of good sold is valued by the average cost of all goods available for sale

93
Q

Under the perpetual inventory system, purchases of merchandise for sale are recorded in an account called:

A

Inventory

94
Q

A purchaser, dissatisfied with merchandise received, may return the goods to the seller for credit. This transaction is known, by the seller, as a:

A

sales return

95
Q

Under the perpetual inventory system, freight costs paid for by the buyer on incoming merchandise are considered:

A

Part of inventory

96
Q

Freight costs incurred by the seller on outgoing merchandise are considered

A

Operating expenses to the seller

97
Q

If a sales invoice shows credit terms of 2/10, n/30, the discount period is:

A

10 days. 2% off if paid within 10 days. If not paid within ten days, the entirety is due in 30 days.

98
Q

Sales returns and allowances and sales discounts are:

A

Contra-revenue accounts

99
Q

If you are a buyer and you pay off freight costs, what account is debited and credited?

A

Debited: Inventory Credited: Cash

100
Q

If you are a seller and your buyer pays off freight expenses, what is your journal entry?

A

There is no journal entry for when your buyer pays off freight expenses.

101
Q

In a period of rising prices, what are the differences between LIFO and FIFO reporting methods?

A

FIFO reports the highest net income, tax expense, and inventory at the end of the year, LIFO the lowest, FIFO reports the lowest COGS, and LIFO the highest

102
Q

What is LIFO reserve?

A

It is the amount by which the inventory would be increased (or decreased) if the firm had instead been using FIFO

103
Q

Net realizable value =

A

Estimated selling price - direct costs of disposal

104
Q

What is LIFO?

A

An inventory costing method that assumes the cost of the latest goods purchased are the first to be allocated to the costs of goods sold

105
Q

What is days to sell inventory? What is the formula?

A

Days to sell inventory is the measure of the average number of days inventory is held; calculated as 365 divided by the inventory turnover ratio

106
Q

What are consigned goods?

A

Goods held for sale by one party (the consignee) although ownership of the goods is retained by another party (the consignor), artist using a gallery to sell his art, artist is consignor and the gallery is the consignee

107
Q

What is market value?

A

Another term for the current cost to replace an item of inventory

108
Q

What is another term for the current cost to replace an item of inventory

A

Market value

109
Q

What is lower of cost or market basis?

A

A basis whereby inventory is stated at the lower of either its replacement cost of its historical cost

110
Q

When LIFO is used, do you use lower of cost or market rule or the net realizable value rule?

A

LCM rule

111
Q

When FIFO, average cost, or specific identification are used, do you use net realizable value or LCM rule?

A

Net Realizable Value

112
Q

What is net realizable value?

A

Estimated selling price - direct costs of disposal

113
Q

What is average cost method?

A

An inventory costing method that uses the weighted average unit cost to allocate the cost of goods available for sale to ending inventory and cost of goods sold

114
Q

What is LIFO reserve?

A

For a company using LIFO, the difference between inventory using LIFO and inventory using FIFO

115
Q

What is merchandise inventory?

A

Goods in a form ready for sale to customers and owned by the company

116
Q

What are raw materials?

A

Basic parts used in production but have not yet been placed into production

117
Q

What is work in process?

A

Inventory that has been placed in the production process but is not yet complete

118
Q

What are finished goods?

A

Items that have been completed and are ready for sale

119
Q

Which account do inventories fall under?

A

Current Assets

120
Q

What is the formula for ending inventory?

A

Beginning inventory + Purchases = Goods Available for Sale - Cost of Goods Sold = Ending Inventory

121
Q

What are the four methods of determining the cost of ending inventory?

A

Last in First out, First in First out, Average Cost Method, Specific Identification

122
Q

Is it true that LIFO assumes the latest goods purchased are the first ones to be sold?

A

Yes

123
Q

Is it true that LIFO seldom coincides with the actual physical flow of inventory?

A

Yes

124
Q

Is it true that LIFO’s ending inventory is based on the price of the most recent units purchased?

A

No

125
Q

Is it true that with LIFO, ending inventory is obtained by taking the unit cost of the earliest goods available for sale and working forward until all units of inventory have been costed?

A

Yes

126
Q

What is a perpetual inventory system?

A

Records for inventory are updated with each sale and purchase, COGS is determined each time a sale occurs, at the end of the year employees make a count of physical inventory to verify the accuracy of inventory records

127
Q

What is a periodic inventory system?

A

Purchases and sales are not updated with each transaction, at the end of the year employees count inventory and calculate ending inventory and COGS

128
Q

When you purchase goods, what does the journal entry look like?

A

You debit inventory and credit accounts payable

129
Q

When you are returning goods, what does the journal entry look like?

A

You debit accounts payable and credit inventory

130
Q

When you receive a purchase discount 2/10, n/30, what does the journal entry look like?

A

Debit accounts payable whole amount

Credit cash the amount minus the discount and credit the amount discounted as Inventory

131
Q

What does 2/10, n/30 mean?

A

You get a 2% discount if paid off in ten days, there is a 30 day due date on payment

132
Q

If the goods have been paid after the discount period, what would the journal entry have been?

A

Debit Accounts Payable and Credit Cash

133
Q

If you received damage goods and then agreed to keep them for a $50 discount, what journal entry would you, the buyer, make?

A

Debit Accounts Payable and Credit inventory

134
Q

In a perpetual inventory system, a return of defective merchandise is recorded by the buyer by crediting:

A

Inventory

135
Q

When you are the seller, how do you record the sales of inventory?

A

Two journal entries, first one debit Accounts Receivable and Credit Sales Revenue, second one debit Cost of Goods Sold and credit and Inventory

136
Q

What is a contra revenue account?

A

Sales Returns and Allowances

137
Q

What is a contra asset account?

A

Depreciation

138
Q

If a buyer returns goods to you, the seller, what are the two journal entries you should record?

A

You want to debit inventory and credit cost of goods sold and then debit Sales Returns and Allowances and credit Accounts Receivable

139
Q

If you offered a buyer a sales discount, 2/10, net/30, how would you record that in a journal entry?

A

You would debit cash for the amount owed minus the discount, debit Sales Discounts for 2% off the amount owed, and then credit Accounts Receivable for the entirety of the amount owed, excluding the discount

140
Q

The term “sold on account” will always involve a debit and credit to which accounts?

A

It will involve a debit to accounts receivable and a credit to Revenue

141
Q

With a payment from your customer, which accounts will be debited and credited?

A

Cash will be debited and accounts receivable will be credited

142
Q

Under a perpetual inventory system, purchases of merchandise for sale are recorded in an account called:

A

Inventory

143
Q

A purchaser, dissatisfied with merchandise received, may return the goods to the seller for credit. This transaction is know, by the seller, as a:

A

Sales Return

144
Q

Under the perpetual inventory system, freight costs paid for by the buyer on incoming merchandise are considered:

A

Part of inventory

145
Q

Freight costs incurred by the seller on outgoing merchandise are considered:

A

Operating expenses to the seller

146
Q

If a sales invoice shows credit terms of 2/10, n/30, the discount period is:

A

10 days

147
Q

Sales returns and allowances and sales discounts are:

A

Contra revenue accounts

148
Q

Bolen Corporation, which uses a perpetual system, purchased on account $4,500 of inventory on June 25. Which of the following entries is required on June 29 when Bolen returned $800 of inventory to the seller?

A

Debit accounts payable and Credit inventory

149
Q

In a period of rising prices, FIFO reports:

A

Lowest cost of goods sold and highest income tax expense, net income, and inventory balance at year-end

150
Q

In a period of inflation, the cost flow method that results in the lowest income taxes is the:

A

LIFO method

151
Q

The cost flow method that often parallels the actual physical flow of merchandise is the:

A

FIFO method

152
Q

On December 31, year 2, a company reports inventory of $250,000 using LIFO. If the company had used FIFO, its inventories would have been higher by $40,000 at the end of year 2 and by $30,000 in year 1. It’s LIFO reserve in year 2, therefore, is:

A

$40,000

153
Q

In a period of increasing prices, the inventory system that will yield the highest net income is:

A

FIFO

154
Q

In a period of inflation, the cost flow method that results in the highest ending inventory is the:

A

FIFO

155
Q

What is market value?

A

It is the current placement cost of inventory (not your company’s selling price)

156
Q

How do you record a write down, replacing inventory in a journal?

A

You debit Loss on Inventory (this is similar to an expense) and credit Inventory

157
Q

Under the LCM (lower of cost or market) rule, market is defined as:

A

The cost of replacing inventory, not the inventory’s selling price

158
Q

What happens to cost of goods sold and net income if beginning inventory is understated?

A

Cost of goods sold is understated and net income is overstated

159
Q

If beginning inventory is overstated, what happens to cost of goods sold and net income?

A

COGS is overstated and net income is understated

160
Q

If ending inventory is understated, what happens to cost of goods sold and net income?

A

Cost of goods sold is overstated, and net income is understated

161
Q

If ending inventory is overstated, what happens to COGS and net income?

A

Cost of goods sold is understated and net income is overstated

162
Q

If ending inventory is understated, what happens to assets, liabilities, and SoE?

A

Assets are understated, liabilities no change, and SoE is understated

163
Q

If ending inventory is overstated, what happens to assets, liabilities, and SoE?

A

Assets are overstated, liabilities no change, and SoE is overstated

164
Q

Understating ending inventory will overstate:

A

Cost of Goods Sold, understate net income, understate assets, and and understate SoE

165
Q

What is the inventory turnover ratio?

A

The inventory turnover ratio is cost of goods sold divided by average inventory, it is the amount of times a company sells its entire inventory per year

166
Q

What is average inventory?

A

It is beginning inventory plus ending inventory divided by two

167
Q

When do you use physical turnover ratio?

A

When using LIFO, where you calculate by the units of goods instead of the cost of goods

168
Q

What is the physical inventory turnover ratio formula?

A

Units sold divided by average units in inventory

169
Q

What are days to sell inventory?

A

365 divided inventory turnover ratio

170
Q

Days to sell inventory can also be interpreted as:

A

The average age of the inventory

171
Q

What does a high inventory turnover ratio mean?

A

It means the company sells all of its inventory frequently, it could mean the company is efficient in minimizing storage costs or the company is losing out on money by not having enough inventory to meet demand

172
Q

What does a low inventory turnover ratio mean?

A

It can indicate the company is incurring unnecessary, avoidable costs with having too much inventory such as storage and inventory insurance and damage or obsolescence.

173
Q

Who are the users in financial accounting?

A

People who are external to the company, investors, lenders

174
Q

Who are the users in managerial accounting?

A

Internal users, managers, consultants

175
Q

What is the subject of financial accounting?

A

General purpose financial statements, primary focus is on the whole organization

176
Q

What is the subject of managerial accounting?

A

Special-purpose reports, focuses on segments of the organization

177
Q

What is the timeliness of reports in financial accounting?

A

Reports are prepared periodically(e.g. quarterly, annually)

178
Q

What is the timeliness of managerial accounting reports?

A

Emphasis on timelines (reports are prepared as needed)

179
Q

What is the time focus of financial accounting?

A

Historical perspective

180
Q

What is the time focus of managerial accounting?

A

Future emphasis

181
Q

What are the GAAP requirements for financial accounting?

A

Must follow GAAP and prescribed formats

182
Q

What are the GAAP requirements for managerial accounting?

A

Need not follow GAAP or any prescribed format

183
Q

What is the verifiability vs relevance for financial accounting?

A

Emphasis on verifiability and objectivity of financial data

184
Q

What is the verifiability vs relevance for managerial accounting?

A

Emphasis on relevant data to assist management in deciison making

185
Q

What is the required vs option for financial accounting?

A

Mandatory for external reports

186
Q

What is the required vs option for managerial accounting?

A

Not mandatory

187
Q

What are merchandising companies?

A

such as Wal-Mart, purchase finished goods from suppliers for resale to customers

188
Q

What are manufacturing companies?

A

such as Cemex and General Motors, purchase raw materials from suppliers and convert those raw materials to finished goods, which are sold to customers. Thus, manufacturing companies produce (“manufacture”) their own products

189
Q

What are raw materials inventory?

A

The basic parts that will be used in production but have not yet

190
Q

Work-in-process inventory?

A

the portion of inventory that has been placed into the production process but is not yet complete

191
Q

Finished goods inventory

A

Items that are completed and ready for sale

192
Q

What are direct materials?

A

Raw materials that become part of the finished product or provided as part of a service and that can be physically and conveniently traced directly to the product or service

e.g. an engine or a radio installed in a car, food provided by a wedding catering company

193
Q

What is direct labor?

A

Labor costs that can be easily traced to individual units produced or to a service provided to a client.

e.g. Wages paid to automobile assembly workers “touch labor” - labor costs paid to those who directly touch the product, doesn’t include things like janitors

194
Q

What is overhead?

A

Also called factory overhead, it’s indirect materials and indirect labor.

It’s all production costs (or costs of providing services) except direct materials and direct labor. It only includes costs with operating the factory or providing services to clients.

E.g. the cost of the factory’s rent or lease, utilities (e.g. electricity for lighting and heating/air conditioning), property taxes, depreciation (on both the factory and equipment in the factory), and insurance

195
Q

What are product costs?

A

Direct materials, direct labor, overhead

196
Q

What are period costs?

A

Selling and administrative costs

197
Q

What are non-production costs?

A

Selling and administrative and selling and administrative expenses

198
Q

What are indirect materials?

A

Materials used to support the production process

Examples: lubricants and cleaning supplies used in the automobile assembly

199
Q

What is indirect labor?

A

Wages paid to employees who are not directly involved in production work.

E.g. maintenance workers, janitors, and security guards

200
Q

What are selling costs?

A

Advertising/marketing costs, shipping (freight out), sales salaries & commission, costs related to billing your customers, warehousing of finished goods

201
Q

What are administrative costs?

A

Salaries for executives, accountants, secretaries, and human resources personnel (HR), depreciation on buildings & equipment (and autos) NOT used in the production process

202
Q

What are prime costs?

A

Direct labor, direct material

203
Q

What are conversion costs?

A

Manufacturing overhead, direct labor

MBAD 6131 Management Accounting (1 decks)

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