ACC211 Final Exam

What are the three sections on the cash flow statement?

-operating, investing, financing

How can CVP change the sales price and costing decisions?

-Cost-Volume-Profit (CVP) Analysis: -is a powerful tool that helps managers make important business decisions -is a relationship among costs, volume, and profit or loss -determines how much the company must sell each month just to cover costs or to break even -helps managers decide how sales volume would need to change to achieve the same profit level CPV analysis relies on the interdependency of five components, or pieces of information: -sales price per unit, volume sold, variable costs per unit, fixed costs, and operating income -CVP assumptions: 1) no volume discounts 2) costs are linear throughout relevant range 3) revenues are linear in relevant range 4) inventory levels will not change 5) sales mix will not change -contribution margin examples on slides 8-16 of chapter 7 -breakeven point: sales level at which operating income is zero -if sales are above breakeven, then profit -if sales are below breakeven, then loss -fixed expenses = total contribution margin -total sales = total expenses -units sold = fixed expenses + operating income/contribution margin per unit -example on slide 19 of chapter 7 example on slide 22-24 -sales in dollars = fixed expenses +operating income/contribution margin ratio -example on slide 20 of chapter 7 -CVP analysis helps managers determine what they need to sell to earn a target amount of profit -sales in dollars = fixed exp + target operating income/contribution margin ratio -example on slide 21 of chapter 7 -example on slide 25 -graphing the CVP relationships: 1) choose a sales volume (units x price) -plot point for sales revenue -draw sales revenue line from origin through the plotted point -example on slide 27 2) draw the fixed cost line -example on slide 28 3) draw the total cost line (fixed plus variable) -example on slide 29 5) mark operating income and operating loss areas on graph -example on slide 30 of chapter 7 -operating loss is to the left of breakeven point and operating income is to the right -example of entire process on slides 31-34

What are the steps to decide about special orders?

-a company may consider offering a product or service at a price different from the usual price -firms have the opportunity to consider special orders from potential customers in markets not ordinarily served -special-order decisions: focus on whether a specially priced order should be accepted or rejected -these order often can be attractive, especially when the firm is operating below its maximum productive capacity -example on slide 36-39 of chapter 8

What is a fixed cost?

-a cost that does not change in total as output changes -costs that in total are constant within the relevant range as the level of output increases or decreases -fixed costs are extremely important to understand because they usually are relatively large in amount -effective business decisions involving financial estimations often include fixed costs -discretionary fixed costs are fixed costs that can be changed or avoided relatively easily in the short run at management discretion -advertising is a discretionary fixed cost because it depends on a management decision -committed fixed costs, on the other hand, are fixed costs that cannot be easily changed -lease cost is a committed fixed cost because it involves a long-term contract

What are the steps to determining if a business product line or department should be discontinued?

-a manager needs to determine whether a segment, such as a particular product or service line or a geographic sales region, should be kept or dropped -making effective keep-or-drop decisions require that managers identify and consider only the relevant information of the business segment in question -a segment is a subunit of a company of sufficient importance to warrant the production of performance reports -steps: 1) list the alternatives being considered 2) list the relevant benefits and costs for each alternative 3) which alternative is more cost effective and by how much? -a potential complication of a keep-or-drop analysis is the implication such a decision might have on other aspects of the business -example on slides 49-52 -sometimes dropping one line would lower sales of another line, as many customers buy both lines at the same time -example on slides 54-57

What are the different types of responsibility centers, and what are their functions?

-a responsibility center is a segment of the business whose manager is accountable for specified sets of activities -cost center: manager is responsible only for costs -revenue center: manager is responsible only for sales , or revenue -profit center: manager is responsible for both revenues and costs -investment center: manager is responsible for revenue, costs, and investments -investment centers represent the greatest degree of decentralization (followed by profit centers and finally by cost and revenue centers) because their managers have the freedom of make the greatest variety of decisions

What types of transactions are included in each section of the statement of cash flows, and which way do they change cash flows?

-activities that increase cash are sources of cash and are referred to as cash inflows -activities that decrease cash are uses of cash and referred to as cash outflows -operating: the ongoing, day-to-day, revenue generating activities of an organization -sources of cash - collection of sales revenue -uses of cash - payment of operating expenses -operating cash flows involve increases or decreases in either current assets or current liabilities -see slide 11 of chapter 14 -investing: those activities that involve the acquisition or sale of long-term assets. Long-term assets may be productive assets or long-term investments -sources of cash - sale of long-term assets -uses of cash - purchase of long-term assets -look for changes in three long-term asset accounts: property, plant, and equipment, accumulated depreciation, and investments -example on slide 14 of chapter 14 -financing: activities that raise cash from or payment to creditors and owners. Interest payments are included in the operating section -sources of cash - issuance of long-term debt or stock -uses of cash - retirement of long-term assets, treasury stock purchases, dividends-look for changes in the company's long-term liabilities, common stock, and retained earnings accounts -any change in long-term liabilities (like bonds, mortgages, notes payable) can be explained by new borrowings or the repayments of principal on existing debt -preferred and common stock, dividends payable, treasury stock, retained earnings -ending balance - beginning balance + issuances - repayments -ending balance, RE = beginning balance, RE + net income - dividends declared -example on slide 16 of chapter 14

How do you apply different overhead rates based on different cost pools?

-activity rates are used because there is not one cost for all activities, so it is better to use activity rates -you use those activity rates to compute overhead specific to those cost pools

Know the different types of variances from standards on material , direct labor, variable overhead, and fixed overhead

-actual cost = actual price per unit x actual quantity used -planned cost = standard price per unit x standard quantity allowed -total variance = actual cost - planned cost -example on slide 16 of chapter 10 -DM price variance = AQP x (AP - SP) -DM Quantity variance = SP (AQU - SQA) -example o slides 24-26 of chapter 10 -DL rate variance = AH x (AR - SR) -total labor variance = (AR x AH) - (SR x SH) where AR = actual hourly wage rate, AH = actual direct labor hours used, SR = standard hourly wage rate, and AR = actual hourly wage rate -total labor variance is comprised of the DL rate variance and the DL efficiency variance -DL Efficiency variance = SR x (AH - SHA) -examples on slides 34-38 -total variable overhead variance = actual variable overhead - (standard variable overhead x standard hours) -VOH spending variance = actual VOH - (AH x SVOR) -example on slide 45 of chapter 10 -VOH efficiency variance = (AH - SH) x SVOR -example on slide 45 of chapter 10 -fixed overhead budget variance = actual fixed overhead - budgeted fixed overhead -example on slide 50 of chapter 10 -fixed overhead volume variance = budgeted fixed overhead - (SHA x SR) -example on slides 52-53 on chapter 10 -fixed overhead volume variance measures the utilization of the fixed capacity costs -if production volume is greater than anticipated, then fixed overhead has been overallocated and the fixed overhead volume variance is favorable -if production volume is less than anticipated, then fixed overhead has been under allocated and the fixed overhead volume variance is unfavorable

How do you create and use a flexible budget?

-all businesses should prepare budgets -budgets help business owners and managers to plan ahead, and later, exercise control by comparing what actually happened to what was expected in the budget -budgets formalize managers' expectations regarding sales, price, and costs -even small businesses and nonprofit entities can benefit from the planning and control provided by budgets -before preparing a budget, an organization should develop a strategic plan -the strategic plan plots a direction for an organization's future activities and operations; it generally covers at least five years -managers use budgets because they plan for a specific period of time, help management determine how to use resources, and are used to estimate future costs and revenues

What is an annuity, and how do you use the tables to find the net present value of a project?

-annuity: a stream of equal installments mad at equal time intervals -is a factor of the time value of money -tables on slides 25-26 of chapter 12 -net present value measures the profitability of an investment -a positive NPV indicates that the investment increases the firm's wealth -to use the NPV method, a required rate of return must be defined -the required rate of return is the minimum acceptable rate of return -once the NPV for a project is computed, it can be used to determine whether or not to accept an investment -if the NPV is greater than zero, the investment is profitable and, therefore, acceptable: -a positive NPV signals that: 1) the initial investment has been recovered 2) the required rate of returns has been recovered 3) a return in excess of (1) and (2) has been received -if the NPV equals zero, the decision maker will find acceptance or rejection of the investment equal -if the NPV is less than zero, the investment should be rejected. In this case, it is earning less than the required rate of return -examples on slides 30-40 of chapter 12 -pros of NPV: -incorporates the time value of money -provides an excellent method for screening projects or investments -cons of NPV: -calculations can become complicated -the NPV's of an investments/projects of different sizes are not comparable -as a result, this measure cannot be used to rank order investments/projects

How does the allocation base drive overhead costs?

-because they are used to determine overhead rates, the higher the allocation base used, the higher the overhead rate/cost

How do you choose an allocation base?

-choose whichever is most important/relevant at the time

What is the difference between the horizontal method of analysis and the vertical method of analysis?

-common-size analysis expresses line items or accounts in the financial statements as percentages -the two major forms of common-size analysis are horizontal analysis and vertical analysis -horizontal analysis (trend analysis): expresses a line item as a percentage of some prior-period amount -allows the trend over time to be assessed -in horizontal analysis, line items are expressed as a percentage of a base period amount -the base period can be the immediately preceding period, or it can be a period further in the past -comparing a given financial statement line item, such as sales or various expenses, as a percentage of some prior-period amount, managers can better identify trends in performance -examples on slides 6-7 on chapter 15 -vertical analysis: concerned with relationships among items within a particular time period -expresses the line item as a percentage of some other line item for the same period -with this approach, within-period relationships can be assessed -line items on income statements often are expressed as a percentage of net sales. Items on the balance sheet often are expressed as a percentage of total assets -by comparing a given financial statement line item as a percentage of some other line item (such as sales or total assets) for the same time period, managers can better understand the relative size and importance of each item -examples on slides 9-10 on chapter 15

What is contribution margin?

-contribution margin per unit = selling price per unit - variable cost per unit -is the aggregate amount of revenue available after variable costs to cover fixed expenses and provide profit to the company -contribution margin = sales revenue - variable expenses -operating income = contribution margin - fixed expenses -see chapter 7

How do you calculate the contribution margin ratio?

-contribution margin ratio: percentage of each sales dollar that is available for covering fixed expenses and generating a profit -contribution margin per unit = sales price per unit - variable costs per unit -example on slide 9 of chapter 7 -contribution margin ratio = unit contribution margin/sales price per unit -example starting on slide 10 of chapter 7

What costs are controllable, and what costs are not controllable for a manager?

-controllable costs can be changed by a manager; these include variable costs and things like the advertising budget, bonuses, etc. -uncontrollable costs are fixed costs like rent, depreciation, etc.

What is conversion cost?

-conversion cost is the sum of direct labor cost and manufacturing overhead cost -conversion cost = direct labor + manufacturing overhead

What are mixed costs?

-costs that have both a fixed and a variable component -Example: overhead for a company may consist of a fixed supervisor salary plus the cost of supplies that vary with the quantity of output produced -the formula for a mixed cost is: total cost = total fixed cost + total variable cost -mixed costs could be assigned to either the fixed or variable cost category without much concern for the classification error or its effect on decision making -alternatively, the total mixed cost could be arbitrarily divided between the two cost categories (this is rarely done and not a good option) -typically, mixed costs for many firms are large enough to call for separation

How do you calculate equivalent units and the costs of an equivalent unit?

-equivalent units: amount of work done during a period in terms of fully complete units of output -equivalent units = units completed + (units in ending work in process x fraction complete) -Example on slide 22 of chapter 6 -Cost per equivalent unit = total cost/equivalent units -example on slide 23 of chapter 6

How is managerial accounting different from financial accounting?

-financial accounting provides information for external users, including: investors, creditors, customers, suppliers, government agencies, and labor unions -financial accounting is historical -financial accounting provides information for external users for investment decisions, stewardship evaluation, monitoring activity, and regulatory measures -financial statements must follow rules defined by the SEC, Financial Accounting Standards Board, and the International Accounting Standards Board -financial accounting = external accounting -financial accounting is externally focused, must follow externally imposed rules, provides objective financial information, has a historical orientation, provides information about the firm as a whole, and is more self-contained

What is managerial accounting?

-identifies, collects, measures, classifies, and reports financial and nonfinancial information to internal users in planning, controlling, and decision making -produces information for internal users, such as managers, executives, and workers -managerial accounting = internal accounting -managerial accountants play a critically important decision-making support role in an organization -managerial accountants assist those who are responsible for carrying out an organization's basic objectives by providing them with various types of performance measurement information -internally focuses, no mandatory rules, financial and nonfinancial information; subjective information possible, emphasis on the future, internal evaluation and decisions based on very detailed information, broad and multidisciplinary -effective managerial accounting systems provide information that helps improve companies' planning, control, and decision-making activities -important uses of managerial accounting include: new methods of estimating product and service cost and profitability, understanding customer orientation, evaluating the business from a cross-functional perspective, and providing information useful in improving total quality management

What is included on the income statement of a service firm?

-in a service organization, there is not product to purchase, like in a merchandising or manufacturing operation -there are no beginning or ending inventories and no cost of goods sold and gross margin on the income statement -the cost of providing services appears along with the other operating expenses of the company -the primary use for the income statement is for external financial reporting -investors and outside parties use it to determine the financial health of the company -it can also be helpful to show employees and managers where the money is spent and what effect this spending has on the company -cost of goods sold typically does not exist on the income statement of service organizations because such organizations generate sales by providing services rather than selling products -therefore, the income statement for a service provider is important because it showcases how the major expenses incurred to provide key services compare to the organization's overall sales revenue

What are the advantages and disadvantages of a decentralized business?

-in centralized decision making, decisions are made at the very top level, and lower-level managers are charged with implementing these decisions -decentralized decision making allows managers at lower levels to make and implement key decisions pertaining to their areas of responsibility -delegating decision-making authority to the lower levels of management in a company is called decentralization -reasons for decentralization: -ease of gathering and using local information, focusing of central management, training and motivating of segment managers, enhanced competition, exposing segments to market forces -divisions of a decentralized firm can be organized in a number of different ways, including: types of goods or services, geographic lines, and responsibility centers -the main disadvantage of decentralization is that upper-level managers lose control of every task and must learn to trust the skills and instincts of their lower-level managers

What is a variable cost?

-increases in total with an increase in output and decreases in total with a decrease in output -costs that vary in direct proportion to changes in output within the relevant range -variable costs are part of several critically important performance measures used throughout managerial accounting, including contribution margin, segment margin, and variable costing -variable costs can also be represented by a linear equation: total variable costs = variable rate x amount of output -total variable costs depend on the level of output

How do you calculate the payback period using cash flows on capital investments?

-is quick and easy to calculate and used for shorter life span investments -payback: length of time it takes to recover the cost of investment -payback period = amount invested/expected annual net cash inflows -example on slide 10-13 of chapter 12 -is a non-discounting model, meaning it ignores the time value of money

What is included on the income statement of a manufacturing firm?

-it is important that all sales revenue and expenses attached to a time period appear on the income statement -expenses are separated into three categories: production (cost of goods sold), selling, and administrative -cost of goods sold represents the cost of goods that were sold during the period and then transferred from finished goods inventory on the balance sheet to cost of goods sold on the income statement -gross margin is the difference between sales revenue and cost of goods sold, and it shows how much the firm is making over and above the cost of units sold -gross margin does not equal operating income or profit -it is computed without subtracting selling and administrative expenses if gross margin is positive, the firm will charge prices that cover the product cost

How do you calculate the margin of safety?

-margin of safety: the excess of expected sales over breakeven sales -margin of safety in units = expected sales in units - breakeven sales in units -margin of safety in dollars = expected sales in dollars - breakeven sales in dollars -example on slides 51-52 of chapter 7 -break-even points in units = fixed cost/unit contribution margin -break-even sales revenue = fixed cost/contribution margin ratio

What are the inventoriable product and period costs of a merchandising company?

-merchandising companies are those that sell tangible goods to their customers -inventoriable product costs: purchases plus costs of freight, import duties, etc. -period costs: all costs except purchases

What is absorption costing?

-one of the methods of computing income, the other being variable costing -assigns all manufacturing costs to the product -direct materials, direct labor, variable overhead, and fixed overhead define the cost of a product -under absorption costing, fixed overhead is viewed as a product cost, not a period cost -under this method, fixed overhead is assigned to the product through the use of a predetermined fixed overhead rate and is not expenses until the product is sold -fixed overhead is an inventoriable cost -see slide 47 of chapter 3: product costs include direct materials, direct labor, variable overhead, and fixed overhead, and period costs include selling expenses and administrative expenses -Generally accepted accounting principles (GAAP) require absorption costing for external reporting -examples on slides 50-52 on chapter 3 -because the only difference between the two approaches is the treatment of fixed factory overhead, the unit product cost under absorption costing is always greater than the unit product cost under variable costing -examples on slides 58-60 of chapter 3 -under absorption costing, if inventories keep increasing, there will be more net income. Companies have increased inventories to manipulate net income. -if manager bonuses are tied to net income and more product is produced than sales, this can lead to increasing net income -this practice can lead to fraud -if production > sales, absorption income > variable income -if production < sales, absorption income < variable income -if production = sales, absorption income = variable income

What is the high-low method of finding variable and fixed costs?

-one of the three commonly used methods of separating mixed costs into fixed and variable components -requires the simplifying assumption of a linear cost relationship -given two points, the slope and the intercept can be determined -high-low method: method of separating mixed costs into fixed and variable components by using just the high and low data points -there are four steps that must be taken in the high-low method: 1) find the high point volume and the low point volume for a given data set 2) using the high and low points, calculate the variable rate -variable rate = (high point cost - low point cost)/(high point output - low point output) 3) calculate the fixed cost using the variable rate and either the high point or low point -fixed cost = total cost at high point - (variable rate x output at high point) 4) form the cost formula for the data based on the high-low method -examples on slides 25-32 on chapter 3

How do you calculate operating leverage?

-operating leverage: the relative amount of fixed and variable costs that make up a company's total costs -operating leverage factor = contribution margin/operating income -how responsive a company's operating income is to changes in volume -lowest possible value for this factor is 1, if the company has no fixed costs -example on slide 53 -high operating leverage companies have: higher levels of fixed costs and lower levels of variable costs, higher contribution margin ratios, higher risk, higher potential for reward -low operating leverage companies have: higher levels of variable costs and lower levels of fixed costs, lower contribution margin ratios -for low operating leverage companies, changes in volume DO NOT have as significant an effect on operating income, so they face lower risk and lower potential for reward -merchandising companies are low operating leverage companies -see slides 56-60 on chapter 7 for contribution margin, breakeven units, breakeven sales, margin of safety, and degree of operating leverage problem

What is lean accounting/management?

-organizes costs according to the value chain and collects both financial and nonfinancial information -companies attempt to increase organizational value by eliminating wasteful activities that exist throughout the value chain, which has led to a change in accounting, called lean accounting -lean operations are a philosophy and business strategy of manufacturing and service companies reducing waste, which lowers costs and increases competitive position

What are the different objectives of management?

-planning: the detailed formulation of action to achieve a particular end -Ex: setting objectives and identifying methods to achieve those objectives; improve quality - supplier evaluation program -decision making: the process of choosing among competing alternatives; between competing alternative one and competing alternative two -controlling: the managerial activity of monitoring a plan's implementation and taking corrective action as needed -compares actual performance and expected performance

What is a predetermined overhead rate, and how is it applied to a job?

-predetermined overhead rate = estimated annual overhead/estimated annual activity level -the predetermined overhead rate is calculated at the beginning of the year -the predetermined overhead rate includes estimated amounts in both the numerator and the denominator -steps to estimating overhead: -1) calculate the predetermined overhead rate -the associated activity level depends on which activity is best associated with overhead -the number of machine hours could be a good choice of activity level for the overhead of a company that has automated production 2) apply overhead to production throughout the year -applied overhead is found by multiplying the predetermined overhead rate by the actual use of the associated activity for the period -applied overhead = predetermined overhead rate x actual activity level -once this is calculated, the total cost of the product for the period is the actual direct materials and direct labor, plus the applied overhead: -total product costs = actual direct materials + actual direct labor + applied overhead -examples on slides 28-30 on chapter 4 3) reconcile the difference between the total actual overhead incurred during the year and the total overhead applied to production -at the end of the year, it is time to reconcile any difference between actual and applied overhead and to correct the the cost of goods sold account to reflect actual overhead spending -applied overhead will rarely equal actual overhead -example on slides 35 and 36 of chapter 4 -a plantwide rate based on direct labor hours = overhead = total overhead cost/total direct labor hours

What is prime cost?

-prime cost is the sum of direct materials cost and direct labor cost -prime cost = direct materials + direct labor

How do costs flow from one department to another?

-production costs to selling costs to admin costs -raw materials to WIP to finished goods to cost of goods sold

What are the different ratios of chapter 15, and how are they calculated?

-ratio analysis is the second major technique for financial statement analysis -ratios: fractions or percentages computed by dividing one account or line-item amount by another -for example, operating income divided by sales produces a ratio that measures the profit margin on sales -liquidity ratios: measure the ability of a company to meet its current obligations -used to assess the short-term debt-paying ability of a company -if a company does not have the short-term financial strength to meet its current obligations, it is likely to have difficulty meeting its long-term obligations -the most common liquidity ratios are: current ratio, quick or acid-test ratio, accounts receivable turnover ratios, and the inventory turnover ratio -current ratio: a measure of the ability of a company to pay its short-term liabilities out of short-term assets -current ratio = current assets/current liabilities -the current ratio provides a direct measure of the ability of a company to meet its short-term obligations -many creditors use the rule of thumb that a 2.0 ratio is needed to provide good debt-paying ability -a declining current ratio is not necessarily bad, particularly if it is falling from a high value -a high current ratio may signal excessive investment in current resources (such as cash) -a declining current ratio may signal a move toward more efficient utilization of resources -a declining current ratio coupled with a current ratio lower than that of other firms in the industry may mean that a company is having liquidity problems -quick or acid-test ratio: measure of liquidity that compares only the most liquid assets with current liabilities -excluded from the quick ratio are non-liquid current assets such as inventories -quick ratio = (cash + marketable securities + accounts receivable)/current liabilities -a low liquidity of receivables signals more difficulty since the quick ratio would be overstated -example on slide 19 of chapter 15 -accounts receivable turnover ratio: measures the liquidity of receivables -accounts receivable turnover ratio = net sales/average accounts receivable -average accounts receivable = (beginning receivables + ending receivables)/2 -the accounts receivable turnover ratio can be used to determine the number of days the average balance of accounts receivable is outstanding before being converted into cash -accounts receivable in days = 365 days/accounts receivable turnover ratio -the result as good or bad depends to some extent on what other companies in the industry are experiencing -a low turnover ratio may suggest a need to modify credit and collection policies to speed up the conversion of receivables to cash -example on slide 23 of chapter 15 -inventory turnover ratio = cost of goods sold/average inventory -average inventory = (beginning inventory + ending inventory)/2 -this ratio determines how many time the average inventory turns over, or is sold, during the year -turnover in days = 365/inventory turnover ratio -a low turnover ratio may signal the presence of too much inventory or sluggish sales -cost of goods sold = starting inventory + purchases - ending inventory -example on slide 26-29 of chapter 15 -leverage ratios: measure the ability of a company to meet its long and short-term obligations -when a company incurs debt, it has the obligation to repay the principal and the interest -holding debt increases the riskiness of a company -leverage ratios can help an individual to evaluate a company's debt-carrying ability -the most common leverage ratios are: times-interest earned ratio, debt ratio, and debt-to-equity ratio -times-interest-earned ratio: uses the income statement to assess a company's ability to service its debt -times-interest earned ratio = (income before taxes + interest expense)/interest expense -recurring income before interest and taxes is used because it is the income that is available each year to cover interest payments showing how well the company can service debt -example on slide 32 of chapter 15 -debt ratio: -investors and creditors are the two major sources of capital -as the percentage of assets financed by creditors increases, the riskiness of the company increases -debt ratio = total liabilities/total assets -since total liabilities are compared with total assets, the ratio measures the degree of protection afforded creditors in case of insolvency -creditors often impose restrictions on the percentage of liabilities allowed -if this percentage is exceeded, the company is in default, and foreclosure can take place -debt to equity ratio: compares the amount of debt that is financed by stockholders -debt-to-equity ratio = total liabilities/total stockholders equity -creditors would like this ratio to be relatively low, indicating that stockholders have financed most of the assets of the firm -stockholders, on the other hand, ma wish this ratio to be higher because that indicates that the company is more highly leveraged and stockholders can reap the return on the creditors' financing -the debt ratio and debt-to-equity ratio provides insights into the capital structure (i.e., debt or equity) used by a company to finance its assets -example on slide 37 of chapter 15 -profitability ratios: measure the earning ability of a company. These ratios allow investors, creditors, and managers to evaluate the extent to which invested funds are being used efficiently -investors earn a return through the receipt of dividends and appreciation of the market value of their stock -both dividends and market price of shares are related to the profits generated by companies -since they are the source of debt-servicing payments, profits also are of concern to creditors -managers also have a vested interest in profits -bonuses, promotions, and salary increases often are tied to reported profits -profitability ratios, therefore, are given particular attention by both internal and external users of financial statements -return on sales: is the profit margin of sales -it represents the percentage of each sales dollar that is left over as net income after all expenses have been subtracted -return on sales is one measure of the efficiency of a firm -return on sales = net income/sales -return on sales computes the cents from each sales dollar that remains after subtracting all expenses -example on slide 40 of chapter 15 -return on total assets: measures how efficiently assets are used by calculating the return on total assets used to generate profits -return on total assets = {net income + [interest expense (1 - tax rate)]}/average total assets -average total assets = (beginning total assets + ending total assets)/2 -by adding back the after-tax cost of interest, this measure reflects only how the assets were employed -it does not consider the manner in which they were financed (interest expense is a cost of obtaining the assets, not a cost of using them) -return on assets is a popular ratio that assesses the efficiency with which assets generate earnings -example on slide 43 of chapter 15 -return on common stockholders' equity: -return on total assets is measured without regard to the source of invested funds -for common stockholders, however, the return that they receive on their investment is of paramount importance -of special interest to common stockholders is how they are being treated relative to other suppliers of capital funds -provides a measure that can be used to compare against other return measures (e.g., preferred dividend rates and bond rates -return on stockholders' equity = (net income - preferred dividends)/average common stockholders' equity -example on slide 45-46 -earnings per share: -investors also pay considerable attention to a company's profitability on a per-share basis -earnings per share = (net income - preferred dividends)/average common shares -average common shares outstanding is computed by taking a weighted average of the common shares -example on slides 48-49 -price-earnings ratio: -should be interpreted with caution as it is comprised of stock price and earnings, which is a number that can be manipulated to meet certain targets involving analyst expectations, managerial bonuses, and other organizational goals -price-earnings ratio varies widely across companies and compares the market price per share of stock to the earnings generated per share of common stock -example on slide 52 -dividend yield and payout ratios: -dividend yield = dividends per common share/market price per common share -by adding the dividend yield to the percentage change in stock price, a reasonable approximation of the total return accruing to an investor can be obtained -dividend payout ratio = common dividends/(net income - preferred dividends) -the payout ratio tells an investor the proportion of earnings that a company pays in dividends -investors who prefer regular cash payments instead of returns through price appreciation will want to invest in companies with a high payout ratio -investors who prefer gains through appreciation will generally prefer a lower payout ratio -examples on slides 54-55

What costs are relevant in making a decision?

-relevant costs (and revenues) possess two characteristics: -they are future items AND -they differ across alternatives -all pending decisions relate to the future -accordingly, only future costs and future revenues can be relevant to decisions -opportunity cost: the benefit sacrificed or foregone when one alternative is chosen over another -an opportunity cost is relevant because it is both a future cost and one that differs across alternatives -an opportunity cost is never an accounting cost, because accountants do not record the cost of what might happen in the future (i.e., they do not appear in financial statements) -it is easy to fall into the trap of believing that variable costs are relevant and fixed costs are not, but this assumption is not true -the key point is that changes in supply and demand for resources must be considered when assessing relevance

How do you see red flags for a company's financial statement using these ratios?

-see card above

How do budgets flow into financial statements?

-see slide 18 on chapter 9

How do you use and set up a sales budget, production budget, material budget, direct labor budget, overhead budget, manufacturing budget, selling and administrative expenses budget, operating expenses budget, capital expenditure budget, cash collections budget, cash payments budget, combined cash budget, and a budgeted balance sheet

-see slides on chapter 9

How are the interest percent and the number of periods used to calculate the net present value of an investment?

-see the card above

How do you calculate standard costs?

-standard cost per unit = quantity standard x price standard -a manager should be able to compute the standard quantity of materials allowed and the standard hours allowed for the actual output, where: -SQ = unit quantity standard x actual output -SH = unit labor standard x actual output -examples on slides 11-14

What is variable costing?

-stresses the difference between fixed and variable manufacturing costs -variable costing assigns only variable manufacturing costs to the product; these costs include direct materials, direct labor, and variable overhead -the rationale for excluding fixed overhead from period costs when preparing variable-costing income statements is that fixed overhead is a cost of capacity - or staying in business - such as the lease cost on a manufacturing plant understanding variable-costing income statements is important because they can provide useful insights into various capacity cost management decisions -fixed overhead is treated as a period expense and is excluded from the product cost -under variable costing, fixed overhead of a period is seen as expiring that period and is charged in total against the revenues of the period -see slide 47 of chapter 3: product costs include direct materials, direct labor, and variable overhead, and period costs include fixed overhead, selling expenses, and administrative expenses -the Financial Accounting Standards Board (FASB), the Internal Revenue Service (IRS), and other regulatory bodies do not accept variable costing as a product-costing method for external reporting -yet variable costing can supply vital cost information for decision making and control, information not supplied by absorption costing -for internal application, variable costing is an important managerial tool -examples on slides 53-55 on chapter 3 -examples on slides 61-63 on chapter 3 -if more units are sold than were purchased, variable costing income is greater than absorption-costing income

What is a sunk cost, and how is it used?

-sunk cost: a cost that cannot be affected by any future action -although managers should ignore sunk costs for relevant decisions, it unfortunately human nature to allow sunk cost to affect these decisions -for example, depreciation, a sunk cost, is sometimes allocated to future periods though the original cost is unavoidable -in choosing between the two alternatives, the original cost of an asset and its associated depreciation are not relevant factors

How is contribution margin used to forecast costs?

-tells a lot about what money is available to cover fixed costs and how likely you are to have a profit or loss

What is the difference between applied overapplied overhead and underapplied overhead?

-the difference between actual overhead and applied overhead is called an overhead variance -if actual overhead is $400,000 for the year but $390,000 was applied to production, we would say that the variance is underapplied overhead by $10,000 -if actual overhead is $400,000 for the year but $410,000 was applied to production, we would say that the variance is overapplied overhead by $10,000 -if overhead has been underapplied, then product cost has been understated -if overhead has been overapplied, then product cost has been overstated -generally, the entire overhead variance is assigned to cost of goods sold, since the amount is usually small or immaterial -underapplied overhead is added to cost of goods sold -overapplied overhead is subtracted from cost of goods sold -if the overhead variance is material, or large, the variance would be allocated among the ending balances of work in process, finished goods, and cost of goods sold

How does a job costing worksheet look?

-the job-order cost sheet is prepared for every job -accounting for a job-order production begins by preparing the source of documents that are used to keep track of the costs of jobs -see slide 20 on chapter 4 -direct materials, direct labor, and applied overhead are added to get total cost and are then divided by the number of units to get the unit cost -total cost = direct materials + direct labor + applied overhead -unit cost = total cost/number of units

What is the order of the different parts of a master budget?

-the master budget is the comprehensive financial plan for the organization as a whole (may be called the plan) -typically, for a one-year period, corresponding to the fiscal year of the company -yearly budgets are broken down into quarterly and monthly budgets -a master budget can be divided into operating and financial budgets: -operating budgets: describe the income-generating activities of a firm: sales, production, and finished goods inventories. Outcome is a pro forma or budgeted income statement 1) sales budget -the sales budget is created first because it initiates the creation of budgets by all of the other sections -example on slide 22 of chapter 9 2) production budget: tells how many units must be produced to meet sales needs and to satisfy ending inventory requirements -total units needed = units needed for sales + desired ending inventory -units to produce = total units needed - units in beginning inventory -example on slide 24 of chapter 9 -material budget -after the production budget is completed, the budgets for direct materials, direct labor, and overhead can be prepared -purchases = direct materials needed for production + direct materials in desired inventory - direct materials in beginning inventory -example on slide 26 of chapter 9 -direct labor budget: shows the total direct labor hours and the direct labor cost needed for the number of units in the production budget -example on slides 28-29 on chapter 9 -overhead budget: shows the expected cost of all production costs other than direct materials and direct labor -many companies use direct labor hours as the driver for overhead; the overhead costs with direct labor hours is variable overhead; the remaining overhead items are fixed overhead -variable overhead budget example on slide 31 and budgeted manufacturing cost per unit on slide 32 3) selling and administrative expenses budget (slide 33) and total operating expenses budget (example on slide 34) 4) budgeted income statement (slides 35 and 36) -merchandiser's cost of goods sold, inventory, and purchases budget (example on slide 37) -financial budgets: detail the inflows and outflows of cash and the overall financial position -planned cash inflows and outflows appear in the cash budget. The expected financial position at the end of the budget period is shown in a budgeted, or pro forma, balance sheet -components of financial budgets: 1) capital expenditures budget: shows the company's plan to invest in a new property, plant, or equipment (capital investments -example on slide 39 2) cash collections budget -example on slides 40-42 3)cash payments budget -example on slides 45-46 -building a cash payments budget example on slides 43-44 -combined cash budget and example on slide 47 -how to prepare a cash budget example on slide 48 4) budgeted balance sheet: depends on information contained in the current balance sheet and in the other budgets in the master budget -example on slide 50

What is process costing?

-those firms producing similar products or services -firms in process industries mass-product large quantities of similar or homogeneous products -Examples: food canning and manufacturing, cement, petroleum, pharmaceutical and chemical manufacturing -process firms accumulate production costs by process or by department for a given period of time -unit cost = process costs/output -see chapter 4

Know about the time value of money

-time value of money factors: -principal amount (p): can be a single lump sum present value of 1 or an annuity -number of period (life of investment) (n) -interest rate (i) - compound interest is assumed -cash flows: can be uniform (annuity) or uneven -net present value: the difference between the present value of the cash inflows and outflows associated with a project -formula on slide 24 of chapter 12 -tables on slides 25-26 of chapter 12

How can standard costs be used with a flexible budget?

-two reasons for adopting a standard cost system are frequently mentioned: -to improve planning and control -comparing actual costs with budgeted costs identifies variances -overall variances can be further broken down into a price variance or a usage or efficiency variance if unit price or quantity standards have been developed -and to facilitate product costing -costs are assigned to products using quantity and price standards for direct materials, direct labor, and overhead -the standard cost sheet should show the quantity of each input and what is needed to produce one unit -standard costing records inventory-related costs at standard cost rather than actual cost -saves on bookkeeping costs -isolates price and efficiency variances as soon as they occur -standard costing is essentially substituting an expected cost for an actual cost in accounting records -budgets set standards that are used to control and evaluate managerial performance -to determine the unit standard cost for a particular input, two decisions must be made: -the quantity decision: the amount of input that should be used per unit -the pricing decision: the amount that should be paid per unit of the input to be used -the quantity decision produces quantity standards -the pricing decision produces price standards -the unit standard cost can be computed by multiplying these two standards -standard cost per unit = quantity standard x price standard -two reasons for adopting a standard cost system are frequently mentioned: -to improve planning and control -comparing actual costs with budgeted costs identifies variances -overall variances can be further broken down into a price variance or a usage or efficiency variance if unit price or quantity standards have been developed -to facilitate product costing -costs are assigned to products using quantity and price standards for direct materials, direct labor, and overhead

How many units are transferred to the next department, and how many are in WIP?

-units to account for = units in beginning WIP + units started during the period + ending WIP -slide 25 of chapter 6

What is job-order costing?

-when a company's products/services are unique -customized or built-to-order products and services that vary from customer to customer -Examples: printing, construction, furniture making, medical and dental services, automobile repair, and beautician services -costs are accumulated by job -unit cost = total job costs/output

What are the steps the the decision-making model?

1) recognize and define the problem 2) identify alternatives as possible solutions to the problem. Eliminate alternatives that clearly are not feasible 3) identify the costs and benefits associated with each feasible alternative -classify costs and benefits as relevant or irrelevant, and eliminate irrelevant ones from consideration 4) estimate the relevant costs and benefits for each feasible alternative 5) assess qualitative factors 6) make the decision by selecting the alternative with the greatest overall net benefit