UFC1

Question 1

7 differences between managerial and financial accounting (1)

Answer 1

1 users and decision makers - F) external, M) internal
2 purpose of info - F) external users for decision making, M) managers for decision making
3 flexibility - F) GAAP, M) flexible
4 timeliness of info - F) only after audit is complete, M) quickly, no audit
5 time dimension - F) focus on historical info, M) mostly estimates
6 focus of info - F) whole org, M) org’s projects and parts
7 nature of info - F) monetary, M) monetary and nonmonetary

Question 2

Institute of Management Accountants/IMA def (1)

Answer 2

professional association for management accountants, issued code of ethics to help accountants involved in solving ethical dilemmas
report info accurately and with integrity

Question 3

5 characteristics used to classify costs (1)

Answer 3

1 behavior - fixed or variable, or mixed
2 traceability - direct (traceable to a single cost object) or indirect (not)
3 controllability - controllable or not controllable for employee based on structure of org
4 relevance - sunk cost (already been incurred and cannot be avoided or changed, irrelevant for future decisions), out-of-pocket (requires future cash and must consider opportunity cost)
5 function - cost capitalization as inventory (production costs - direct materials, direct labor, and indirect manufacturing costs called overhead), are assigned to balance sheet; or cost expenses (period costs - selling and general admin expenses), flow directly to the current income sheet as expenses

Question 4

main diff between income statement of manufacturer and merchandiser (1)

Answer 4

items making up cost of goods sold

• merchandiser: beginning merch inv + cost of goods purchased - ending merch inv = cost of goods sold
• manufacturer: beginning finished goods inv + cost of goods manufactured - ending finished goods inv = cost of goods sold

Question 5

3 items accounting for a manufacturer’s cost of goods sold (1)

Answer 5

1 direct materials - tangible component of finished product (45% total cost)
2 direct labor - wages of employees traced directly to finished goods (indirect cannot be directly traced)
3 factory overhead/manufacturing overhead - all other costs that cannot be separately traced to finished goods (OT, factory rent, etc)

Question 6

prime and conversion costs (1)

Answer 6

• prime - direct material + direct labor costs

* conversion - direct labor + overhead

Question 7

3 activities in manufacturing (1)

Answer 7

1 materials - raw materials
2 production - goods in process. Includes beginning goods in process, direct labor, and overhead. Products costs are costs of both finished goods manufactured and goods in process.
3 sales - finished goods. Cost of finished product sold reports on income statement as cost of goods sold; cost of products not sold is reported on balance sheet as ending finished goods inventory.

Question 8

cost vs general accounting system (1)

Answer 8

• cost - records manufacturing activities using perpetual inventory system which reflects costs of materials, goods in process, and finished goods inventories; and time info about inventories and manufacturing costs per unit of product
• general - uses periodic inventory system

Question 9

2 types of cost accounting systems (2)

Answer 9

1 job order - custom production; production of custom order. ALLOCATES overhead estimates.
2 process order

Question 10

target cost for job def (2)

Answer 10

expected selling price - desired profit = target cost

Question 11

purpose of job order cost accounting system (2)

Answer 11

determine cost of producing each job or job lot, calculate cost per unit

Question 12

job cost sheet def (2)

Answer 12

record maintained for each job

Question 13

materials ledger card for job cost accounting (2)

Answer 13

record updated each time units are purchased or issued for production use

• direct cost - to job cost sheet
• indirect cost - to factory overhead ledger

Question 14

predetermined overhead rate def (2)

Answer 14

uses estimate of total overhead cost and allocates factor such as total direct labor cost BEFORE start of period to estimate overhead cost
*predetermined overhead rate = estimated overhead costs / estimated activity base

Question 15

process operations def (3)

Answer 15

aka process manufacturing/process production

• mass production of products in continuous flows or steps
• example: crude oil

Question 16

focus of job order costing system vs process costing (3)

Answer 16

• job - focus on individual job or batch

* process - process/department itself and cost of standardized units produced per process/department

Question 17

unit cost of goods for continuous process items (3)

Answer 17

total cost assigned to process / total number of units started and finished in the period

Question 18

equivalent units of production/EUP def (3)

Answer 18

refers to number of units that could have been started AND completed given the cost incurred during a period (process cost)

Question 19

cost of goods manufactured (3)

Answer 19

total manufacturing cost (direct materials, direct labor, and factory overhead) for period + beginning goods in process - ending goods in process

Question 20

managerial activities such as product pricing, product mix decisions, and cost control depend on what (4)

Answer 20

accurate product cost info

Question 21

3 methods of overhead allocation (4)

Answer 21

1 single plantwide overhead rate - one rate. Volume-based measures such as direct labor hours or machine hours
2 dept overhead rate - two or more rates. Volume-based measures such as direct labor hours or machine hours
3 activity-based costing method - 2 to many rates. Activities that drive costs, such as number of batches of product produced.

Question 22

cash flows under plantwide overhead rate method and formula (4)

Answer 22

cost object is the unit of product/VOLUME/DIRECT LABOR HOURS
*good for all same or homogenous/continuous production
total budgeted overhead cost pool / chosen allocation base

Question 23

cost flows under departmental overhead rate method and formula (4)

Answer 23

diff overhead rate for each production dept.

• first stage dept is cost object
• second stage products are cost objects

departmental overhead rate = total dept overhead cost / total units in dept allocation base

Question 24

3 key advantages of the plantwide and departmental overhead rate methods 4

Answer 24

1 they are based on available info, like direct labor hours
2 they are easy to implement
3 they are consistent with GAAP and can be used for external reporting needs
*disadvantage of both is that overhead is usually too complex to dumb down so easily, and assumes that diff products are similar in volume, complexity, and batch size

Question 25

4 steps of ABC 4

Answer 25

1 identify activities and the costs they cause (combine similar activities for simplicity) 2 trace overhead costs into costs pools 3 determine activity rates - assign overhead costs to final cost objects *cost pool activity rate = overhead costs assigned to pool / number of activities 4 assign overhead costs to cost objects *overhead = activities consumed * activity rate

Question 26

benefit of ABC 4

Answer 26

breaks down specific cost for custom orders or low volume items * cost based on input rather than output means more accurate overhead cost allocation * more effective overhead cost control * focus on relevant factors (for marketing or R&D) * better management of activities - activities-based management and value-added activities

Question 27

cost-volume-profit/CVP analysis 5

Answer 27

aka break-even analysis * computing sales level at which a company earns income or incurs loss (break even point) * classify costs as fixed or variable

Question 28

step-wise cost def 5

Answer 28

costs that remain fixed but increase at different volumes in chunks (like adding another employee's salary) *graph looks like steps

Question 29

3 methods used to evaluate past costs and determine if they are fixed or variable 5

Answer 29

1 scatter diagrams - draw estimated line of cost behavior (where dots are common), vertical axis is fixed cost. Change in cost/change in units - variable cost per unit 2 high-low method - graphically connecting the highest and lowest unit volumes. Calculate variable rate from these points. then back into fixed cost by subtracting variable. 3 least-squares regression - statistical and most precise method

Question 30

contribution margin per unit def (5)

Answer 30

amount by which a product's unit selling price exceeds its total unit variable cost * contributes to covering fixed costs and generating profits on a per unit basis * contribution margin per unit = sales price per unit - total variable cost per unit

Question 31

contribution margin ratio (5)

Answer 31

% of a unit's selling price that exceeds total unit variable cost *contribution margin ratio = contribution margin per unit / sales price per unit

Question 32

formula for break-even point (5)

Answer 32

break-even point in units = fixed costs / contribution margin per unit

Question 33

break-even point in dollars calculation (5)

Answer 33

fixed costs / contribution margin ratio

Question 34

weighted-average contribution margin def (5)

Answer 34

for multi-product company - based on each product's percentage in product mix * break-even point in units = fixed costs / weighted-average contribution margin

Question 35

master budget def (7)

Answer 35

a formal, comprehensive plan for a company's future. Contains several individual budgets that are linked with each other to form a coordinated plan *includes budgets for sales, purchases, production, various expenses, capital expenditures, and cash

Question 36

3 basic components of a master budget (7)

Answer 36

1 operating budget 2 capital expenditures budget 3 financial budget

Question 37

5 steps to creating the master budget (7)

Answer 37

1 prepare sales budget (part of op budget) *includes planned sales units and expected dollars from these sales 2 develop production budget (part of op budget ) 3 prepare manufacturing, selling, and general and admin expense budget (part of op budget no included in selling expenses - salaries, depreciation, interest expense and income tax expense) 4 prepare capital expenditures budget 5 consolidate op and capital expenditures budgets into financial budget

Question 38

formula for merchandise purchase budget (7)

Answer 38

inventory to be purchased = budgeted ending inventory + budgeted cost of sales for the period - budgeted beginning inventory

Question 39

4 steps in budgetary control process (8)

Answer 39

1 develop budget 2 compare actual to budget 3 take action 4 start new plans

Question 40

fixed budget control system def (aka static budget) (8)

Answer 40

master budget is based on a single prediction for sales volume or other activity level * report - F/favorable and U/unfavorable * primary use is for management to monitor and control ops

Question 41

flexible budget purpose (aka variable budget) (8)

Answer 41

uses actual volume and predicted amounts of revenues and expenses corresponding to it * designed to reveal effects of volume of activity on revenues and costs * relies on distinctions between fixed and variable costs

Question 42

price variance def (flexible budgets ch8)

Answer 42

diff between actual and budgeted revenue due to diff between actual quantity of input used and budgeted quantity of input (quantity variance)

Question 43

standard costs def (8)

Answer 43

preset costs for delivering a product or service under normal conditions * managerial accountants, engineers, personnel administrators, and other managers set standard costs * when variances occur, management will manage by exception and address largest discrepancies first

Question 44

ideal vs practical standards (standard costs) (8)

Answer 44

* ideal - what is present in finished product (no waste) | * practical - what is actually required to end result with ideal amount

Question 45

cost variance formula (8)

Answer 45

cost variance/CV = actual cost/AC - standard cost/SC

Question 46

price variance formula (8)

Answer 46

(AQ*AP)-(AQ*SP)

Question 47

quantity variance (8)

Answer 47

(AQ*SP)-(SQ*SP)

Question 48

formula for overhead cost variance (8)

Answer 48

overhead cost variance/OCV = actual overhead incurred/AOI - standard overhead applied/SOA

Question 49

2 types of overhead cost variances (8)

Answer 49

1 controllable - diff between actual overhead costs incurred and budgeted overhead costs based on a flexible budget. Refers to activities under management's control 2 volume variance - diff between actual volume of production and standard volume of production. Based on FIXED overhead.

Question 50

5 steps to managerial decision making (10)

Answer 50

``` 1 define the decision task 2 identify alternative courses of action 3 collect relevant info and evaluate each alternative 4 select the preferred course of action 5 analyze and assess decisions made ```

Question 51

reason to use incremental costs vs historical data (10)

Answer 51

incremental is a more specific way to find out if additional volume will truly be cost effective or create additional revenue

Question 52

scrap or rework analysis (10)

Answer 52

analysis to decide if it is more cost effective to scrap or rework a line or process (like a make-or-buy analysis, or sell or process analysis, or decision to keep or replace equipment)

Question 53

considerations when dedicating time to producing different lines in the product mix (10)

Answer 53

1 machine hours required (must factor that into cost per product to make valid comparison) 2 demand limits - never produce more of a product than demand will justify

Question 54

Segment elimination: avoidable and unavoidable expenses (10)

Answer 54

* avoidable - (aka escapable) are amounts company would not incur if it eliminated the segment * unavoidable (inescapable) - amounts that would continue even if it was eliminated *eliminate if revenues are less than avoidable expenses (will operate at a loss)

Question 55

capital budgeting def (11)

Answer 55

process of analyzing alternative long-term investments and deciding which assets to acquire or sell *objective is satisfactory ROI

Question 56

4 reasons why capital budgeting is risky (11)

Answer 56

1 the outcome is uncertain 2 large amounts of money are involved 3 investment involves a long-term commitment 4 the decision could be difficult or impossible to reverse, no matter how poor it turns out to be

Question 57

investment analysis not using time values of money (11)

Answer 57

1 payback period *payback period = cost of investment / annual net cash flow *short period is preferred 2 accounting rate of return *ARR = annual after-tax net income / annual average investment

Question 58

2 investment analysis that do use time value of money (11)

Answer 58

1 net present value *discounted future net cash flows - investment *if >= 0, accept project 2 internal rate of return *rate that yields an NPV of 0 for investment *if >=0, accept project

Question 59

hurdle rate def (11)

Answer 59

minimum acceptable rate of return on an investment, as set by management

Question 60

3 types of "centers" that determine what financial info is used to evaluate that dept (9)

Answer 60

1 profit center - incurs costs and generates revenues (selling departments) 2 cost center - incurs costs only (manufacturing, accounting, advertising, purchasing) 3 investment center - incurs costs and generates revenues and is responsible for effectively using center assets

Question 61

different indirect expenses and ways to allocate them (9)

Answer 61

1 wages - based on time spent in each team 2 rent - floorspace 3 advertisements - % total sales 4 machinery depreciation - # hours using machine 5 utilities - floorspace or horsepower or equipment

Question 62

departmental contribution to overhead def (9)

Answer 62

report of the amount of sales less DIRECT expenses | *better to evaluate a profit center than estimating cost when many expenses are indirect

Question 63

2 ways to evaluate performance of investment center (9)

Answer 63

1 method of estimating investment center return on total assets: ROI = investment center net income / investment center ave invested assets 2 investment center residual income = investment center net income - target investment center net income *even if something reduces ROI, if it increases residual income it should be considered

Question 64

cash equivalent def (12)

Answer 64

time deposit and other highly liquid investment with original maturities of 90 days or less *cash and cash equivalents are combined for cash flow statement

Question 65

3 categories of cash receipts and cash payments (besides cash and cash equivalents) reported on the cash flow statement (12)

Answer 65

1 operating - in: customer sales, dividends, interest from borrowers; out: salaries, interest to lenders, suppliers. Collection of interest on loans is reported under ops per FASB. 2 investing - purchase and sale of short-term investments in securities of other entities, other than cash equivalents, and lending and collecting money for notes receivable 3 financing - trans and events that affect long-term liabilities and equity. Obtaining cash and repaying amounts borrowed, and receiving cash from or distributing cash to owners. GAAP requires payments of interest expense be classified here.

Question 66

source vs use in cash flow statement (12)

Answer 66

* source - net inflow | * use - net outflow

Question 67

full-disclosure principle (12)

Answer 67

requires statement or footnote detailing non-financial investment on cash flow statement

Question 68

layout of cash flow statement (12)

Answer 68

3 sections of cash flows: Ops, investment, and financing, net increase/decrease in cash, prior period-end balance, and current period-end balance

Question 69

5 steps in preparing a cash flow statement (12)

Answer 69

1 compute net increase/decrease in cash 2 compute net cash for ops 3 compute net cash for investment activities 4 compute net cash for financing activities 5 compute net cash flow by summing 2-4

Question 70

purpose of financial statement analysis (13)

Answer 70

applies analytic tools to general-purpose financial statements and related data for making business decisions

Question 71

4 building blocks of financial statement analysis (13)

Answer 71

1 liquidity and efficiency - ability to meet short-term obligations and generate revenues 2 solvency - ability to generate future revenues and meet long-term obligations 3 profitability 4 market prospect

Question 72

5 items commonly used to analyze financial info (13)

Answer 72

``` 1 income statement 2 balance sheet 3 statement of stockholders' equity (retained earnings) 4 statement of cash flows 5 notes to these statements ```

Question 73

3 most common tools for financial statement analysis (13)

Answer 73

1 horizontal - comparison of firm's financial condition and performance across time *comparative sheets used to view dollar change, percent change, trend percent (line graphs are helpful) 2 vertical - comparison of firm's financial condition and performance to base amount. Use common-size statement to track % 3 ratio - measurement of key relations between financial statement items; provide symptoms of underlying conditions. Current ratio = current assets/current liabilities

Question 74

comparative financial statement (13)

Answer 74

statement of 2 or 3 consecutive periods with side by side data for comparison

Question 75

common-size income statement (13)

Answer 75

expresses each amount as % of base amount (which is revenue)

Question 76

working capital and current ratio (financial statement analysis) and 3 additional considerations (13)

Answer 76

*working capital: current assets - current liabilities *current ratio: current assets / current liabilities **2:1 thought to be good credit risk in short run 1 type of business - few inventories can operate on ratio of less than 1:1 2 composition of current assets - excessive amount of receivables and inventory weakens ability to pay current liabilities. Use acid-test ratio to determine liquidity. 3 turnover rate of assets - revenues / assets

Question 77

acid-test ratio def (13) financial statement analysis

Answer 77

*reflects company's short term liquidity (cash + short-term investments + current receivables) / current liabilities

Question 78

debt and equity ratios (13)

Answer 78

* gauge solvency * debt - % total liabilities of total assets * debit to equity ratio: total liabilities / total equity

Question 79

return on total assets (13)

Answer 79

net income / ave total assets

Question 80

common-size balance sheet (13)

Answer 80

uses total assets as base to calculate % of assets, liability, and equity

Question 81

AR turnover formula (13)

Answer 81

net sales / average AR, net

Question 82

inventory turnover formula (13)

Answer 82

cost of goods sold / average inventory

Question 83

day's sales uncollected formula and purpose (13)

Answer 83

(AR, net / net sales) * 365 *shows how long it takes to collect on AR

Question 84

day's sales inventory formula and purpose (13)

Answer 84

(ending inventory / cost of goods sold) * 365 *shows inventory liquidity

Question 85

total asset turnover formula and purpose (13)

Answer 85

net sales / ave total assets *shows firm;s ability to use assets efficiently

Question 86

profit margin formula (13)

Answer 86

net income / net sales

Question 87

price-earnings ratio (13)

Answer 87

market price per common share / earnings per share

Question 88

dividend yield formula (13)

Answer 88

annual cash dividend per share / market price per share