accounting final exam
Reconciling the bank account
Reconcile balance per books and balance per bank to their "correct" or "true" balance.
retained earnings statement
a financial statement that indicates how much of the previous income was distributed to the owners of the business in the form of dividends and how much was retained in the business to allow for future growth
supplies purchased
asset
companies recognize supplies expense
at the end of the accounting period by counting the number of supplies used and subtracting it from the supplies bought
prepaid expenses
expenses paid in cash before they are used or consumed
accrued expenses before adjustment
expenses understated, liabilities understated
Ratio analysis
expresses the relationship among selected items of financial statement data
Bonds may be issued at
face value, below face value (discount), or above face value (premium)
Declining-balance method results in
higher depreciation in the early years of an asset's life than does the straight-line approach.
higher debt to asset ratios
higher percentage means greater the risk that the company may not meet maturing obligations. more established companies can afford to have a higher ratio.
Operating activities involve
income statement items
accrued expenses after adjustments
increase expenses, increase liabilities
manufacturing overhead includes
indirect materials, indirect labor, depreciation on factory buildings and machines, insurance, taxes, and maintenance on factory facilities
predictive value
information that helps provide accurate expectations about the future
types and frequency of reports of managerial accounting
internal reports and as frequently as needed
If goods are defective
inventory is reduced to reflect decline in value
when a company recognizes revenue from an advance
it decreases unearned revenue account and increases the revenue account
Cost constraint
it weighs the cost that companies will incur to provide information against the benefit that financial statement users will gain from having the information available
Cost of goods manufactured schedule helps
managers determine if the company is maintaining control over the costs of production
internal users
managers who plan, organize, and run a business. they answer questions in a timely basis and present financial information through financial statements
current assets section is in the
balance sheet
For an activity level to be useful in cost behavior analysis
changes in the level or volume of activity should be correlated with changes in cost
Sunk cost
costs that have already been incurred and will not be changed or avoided by any present or future decisions
avoidable costs
costs that must be incurred to perform an activity at a given level, but that can be avoided if that activity is reduced or discontinued
bonds attract
many investors
Important for a company to
o Keep assets in good operating condition. o Replace worn-out or outdated assets. o Expand its productive assets as needed
financial budgets
primarily on cash resources needed to fund expected operations and planned capital expenditures. it include capital expenditure budget, cash budget, and the budgeted balance sheet
Ideal standards
represent optimum levels of performance under perfect operating conditions
Notes payable usually
require the borrower to pay interest.
Historical cost principle
requires that companies record plant assets at cost
purpose of reports for managerial accounting
special-purpose for specific decisions
regulations
standards imposed by government agencies
Credit terms specify
the amount of the cash discount and time period in which it is offered. They also indicate the time period in which the purchaser is expected to pay the full invoice price
paid-in capital
the amount stockholders have invested in the company
value of a company is a function of
the amount, timing, and uncertainty of its future cash flows
times interest earned
(Net Income + Interest Expense + Income Tax Expense) / Interest Expense
labor price variance equation 2
(actual hours x actual rate) - (actual hours x standard rate)
change since base period equation
(current year amount - base year amount) / base year amount
current results in relation to base period equation
(current year amount)/ base year amount
interest =
(face value of note) * (annual interest rate) * (time in terms of one year)
sales in dollars equation
(fixed costs + target net income)/contribution margin ratio = sales in dollars
sales in units equation
(fixed costs + target net income)/unit contribution margin = sales in units
return on common stockholders' equity
(net income - preferred dividends) / average common stockholders' equity
earnings per share
(net income - preferred dividends) / weighted average common shares outstanding
standard direct materials cost per unit =
(standard materials cost price) x (the standard direct materials quantity)
total direct labor cost equation
(units to be produced) x (direct labor hours per unit) x (direct labor cost per hour)
Determining cost of plant assets
- The historical cost principle requires that companies record plant assets at cost - Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use
Determining inventory qualities - periodic inventory system
- To determine inventory on hand at the balance sheet date - To determine the cost of goods sold for the period
Knowledge of the break-even point is useful to management
- Whether to introduce new product line - Change sales prices on established products - Enter new market areas
income/loss from discontinued operations consist of two parts
- income/loss from operations - gain/loss on disposal of the component
Three types of comparisons to improve the decision-usefulness of financial information
- intracompany basis - intercompany basis - industry averages
CVP considers the interrelationships among
- volume or level of activity - unit selling price - variable costs per unit - total fixed costs - sales mix
reasons to acquire treasury stock
1. to reissue the shares to officers and employees under bonus and stock compensation plans 2. to increase trading of the company's stock in the securities market 3. to have additional shares available for use in acquiring other companies 4. to reduce the number of shares outstanding and thereby increase earnings per share
2/10, n/30
2% discount if paid within 10 days, otherwise net amount due within 30 days
average collection period
365/accounts receivable turnover
Incremental analysis approach
Decisions involve a choice among alternative actions. Process used to identify the financial data that change under alternative courses of action. Both costs and revenues may vary or Only revenues may vary or Only costs may vary
preferred stock
A special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do.
standard vs. budget
A standard is a unit amount. A budget is a total amount.
debt financing
Borrowing money
Who writes the U.S. Standards (U.S. GAAP)?
Financial Accounting Standards Board
directing
a management function that involves coordinating a company's diverse activities and human resource to produce a smooth-running operation. this function relates to implementing planned objectives and providing necessary incentives to motivate employees
creditor
a person that loans money to a company with the legal right to be paid at the agreed time. they get paid prior to stockholders' claims
insurance
a prepaid expense that companies purchase in advance to protect themselves from losses due to unforeseen events
auditor's report
a report prepared by an independent outside auditor that states the auditor's opinion about the fairness of presentation of the financial position
Sales discounts
a seller may offer a cash discount for the prompt payment of the balance due
Companies report other comprehensive income in
a separate statement of comprehensive income
generally accepted accounting principles
a set of accounting standards that is used in the preparation of financial statements
proportional tax system
a tax whose average tax rate remains constant as the taxpayer's income increases or decreases
Vertical analysis (common-size analysis)
a technique for evaluating financial statement data that expresses each item in a financial statement as a percentage of a base amount.
interest expense
a type of expense that means amount of interest paid on various debts
accounts payable
a type of expense that means an obligation to pay for goods on credit from suppliers
income tax expense
a type of expense that means corporate taxes paid to the government
wages payable
a type of expense that means current liabilites
interest payable
a type of expense that means obligations to pay for the outstanding amounts owed to banks
when there is a discontinued operation the income statement
adds a new section called discontinued operations that reports operating tax loss and the loss on disposal net of the applicable income tax. it indicates the separate effects of continuing and discontinued operations on net income
Securities and exchange commission
agency of the US government that oversees US financial markets and accounting standard-setting bodies
Cost in depreciation
all expenditures necessary to acquire the asset and make it ready for intended use
under a periodic system
all goods purchased during the period are assumed to be available for the first sale, regardless of the date of purchase
under SOX
all publicly traded US corporations are required to maintain an adequate system of internal control
target net income equation
Sales - Variable Costs - Fixed Costs
sales tax payable
Sales tax collected from customers by the seller, representing current liabilities payable to the government
equity financing
Selling shares of stock
Cost flow assumptions
Several systematic assumptions about the flow of inventory, used by companies to value their inventory. The main cost flow assumptions are specific identification, average-cost, FIFO, and LIFO.
notes payable
Short-term or long-term liabilities that a business promises to repay by a certain date.
solvency
The ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity
Going concern assumption
The assumption that the company will continue in operation for the foreseeable future.
Public Company Accounting Oversight Board
The group charged with determining auditing standards and reviewing the performance of auditing firms.
materiality
The maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of users. ex: a large company rounds its financial statement figures to the nearest thousand
Activity-based costing
allocation of overhead to specific jobs based on their percentage of activities
accumulated depreciation
amount shows the total amount of depreciation that the company has expensed so far in the asset's life
US economy has shifted towards
an emphasis on services
To obtain maximum benefit from a bank reconciliation
an employee who has no other responsibilities related to cash should prepare the reconciliation
consistency
an enhancing quality that means company uses the same accounting principles and methods from year to year
Timely
an enhancing quality that means that information must be available to decision-makers before it loses its capacity to influence decisions
unearned revenue vs. accrued revenue
Unearned Revenue is not shown in the Income Statement until the goods or services have been delivered against that sale, whereas Accrued Revenue is shown as Income, regardless of the cash collection process
data analytics
analyzing data, often using software and statistics, to draw inferences
corporate stockholders
are not liable for debts and legal obligations but generally pay higher taxes
both discount and a premium on bonds
are valuation accounts
Inventory Is accounted for
at cost Costs include all expenditures necessary to acquire goods and place them in a condition ready for sale
Regardless of whether prices are rising or falling
average-cost produces net income between FIFO and LIFO.
Electronic funds transfer system result in
better internal control since no cash or checks are handled
the production budget provides
a basis for the budgeted costs for each manufacturing cost element
Partnership
a business owned by 2+ people associated as partners
Sole proprietorship
a business owned by one person that is simple to set up and gives you control over the business
Petty cash fund
a cash fund used to pay relatively small amounts
notes about the financial statement
clarify the financial statements and provide additional details. it also provides a description of significant accounting policies and methods used in preparing the statements, an explanation of uncertainties, and various statistics and details
two parts of stockholders' equity
common stock and retained earnings
Risk assessment
companies must identify and analyze the various factors that create risk for the business and determine how to manage this risk
merchandising companies
companies that sell products that someone else has manufactured
Internal auditors
company employees who continuously evaluate the effectiveness of the company's internal control systems - Review activities of departments and individuals to determine whether prescribed internal controls are being followed - Recommend improvements
Unearned revenues
company has a performance obligation to transfer a service to one of its customers. customer deposits for future service and that can result in unearned revenues
independent internal verification is useful for
comparing recorded accountability with existing assets
vertical analysis enables
comparison of companies of different sizes
Intercompany basis
comparisons with other companies provide insight into a company's competitive position
Industry averages
comparisons with the industry averages provide information about a company's relative position within the industry
debt to equity ratio can be
computed in different ways so you may not be able to make comparisons
Corporate social responsibility
considers a company's efforts to employ sustainable business practices with regard to its employees, society, and the environment
manufacturing costs
consists of activities and processes that convert raw materials into finished goods.
Manufacturing overhead
consists of costs that are indirectly associated with the manufacturer of the finished product.
publicly held corporation
corporation that sells stock on the open market
dividends
corporations pay stockholders on a regularly basis as long as there is enough cash
depreciation is a
cost allocation process
purchase of treasury stock is accounted for by
cost method
companies record product costs as
cost of goods sold
Two categories of expenses
cost of goods sold and operating expenses
interest payable
current liability
interest costs
incurred to finance a construction project are included in the cost of the asset when a significant period of time is required to get the asset ready for use
Large companies often assign
independent internal verification to internal auditors
return on assets
indicates the amount of net income generated by each dollar of assets.
investors are interested in net income because
it can help predict future net income
Cash budget contributes to
more effective cash management
Depreciable cost is equal to
the cost of the asset less its salvage value
maturity date of the bond
the date that the final payment is due to the investor from the issuing company.
labor price variance
the difference between the actual amount paid and the amount that should have been paid for the number of hours
total overhead variance
the difference between the actual amount paid and the amount that should have been paid for the number of hours
Income statement shows
net income based on accrual basis of accounting but does not show the amount of cash generated by operations
income statement results in
net income or net loss for a period of time
return on assets
net income/average total assets
return on assets equation
net income/average total assets
profit margin
net income/net sales
profit margin equation
net income/net sales
income statement presents
net sales cost of goods sold operating expenses income taxes
asset turnover
net sales/average total assets
Some companies issue
no-par stock with a stated value. for accounting purposes, companies treat the stated value in the same way as par value
total fixed costs has a
non linear graph
long-range plans are
not detailed, they identify long-term goals, select strategies to achieve those goals, and develop policies and plans to implement those goals
when a company produces multiple products
not practical to determine the unit contribution margin for each product. the contribution margin ratio is the percentage of each dollar of sales that is available to cover fixed costs and generate net income
debt to asset ratio measures
the percentage of total financing provided by creditors rather than stockholders
Companies record sales revenue when
the performance obligation is satisfied
Qualitative factors
o Potential effects of the make-or-buy decision or the decision to eliminate a line of business on existing employees and the community in which the plant is located o The cost savings that may be obtained from outsourcing or eliminating a plant should be weighed against these qualitative attributes
Revenue-producing ability declines because of:
o Wear and tear o Obsolescence: asset becomes out of date o Recognizing depreciation for an asset does not result in the accumulation of cash for replacement of the asset
long-term liabilities
obligations that the company expects to pay after one year
plant assets are expected to be
of service to the company for a number of years.
dividends are a reduction
of stockholders' equity but not an expense and is not included in the calculation of net income
a company reports disposal of a significant component
on its income statement both income from continuing operations and income/loss from discontinued operations
Companies often identify current maturities of long-term debt
on the balance sheet as long-term debt due within one year
why partnerships are formed
one individual does not have enough economic resources or unique skills to initiate or expand the business
freight costs incurred by the seller are
operating expenses to the seller
company with higher asset turnover is
operating more efficiently
Companies report unrealized losses or trading securities in
other expenses and losses section of the income statement
price variance is also known as
overhead controllable variance
quantity variance is referred to as
overhead volume variance
prepaid
paid for in advance
issuance of common stock affects only
paid-in capital accounts
companies account for indirect materials as
part of manufacturing overhead
annual report
part of the annual report that includes financial statements and other important information like management discussions and an analysis section
Opportunity
part of the fraud triangle where the workplace must provide opportunities that an employee can take advantage of
Very few companies use
perpetual LIFO, FIFO, or average cost
with fifo, ending inventory is based on
prices of the most recent units purchased
Bank reconciliation
process of comparing the bank's balance with the company's balance and explaining the differences to make them agree
Manufacturing costs incurred to
produce a product are classified as direct materials, direct labor, and manufacturing overhead
In a period of inflation FIFO
produces a higher net income because lower unit costs of the first units purchased are matched against revenue.
In a period of inflation LIFO
produces a lower net income because higher unit costs of the last goods purchased are matched against revenue.
return on assets equation 2
profit margin * asset turnover
CVP analysis is important in
profit planning
types of tax systems
progressive, proportional, regressive
enterprise resource planning systems
provide a comprehensive, centralized, integrated source of information to manage all major business processes
ratios can
provide clues to the underlying condition that may not be apparent in the individual financial statement components
Bond prices for both new issues and existing bonds
quoted as a percentage of the face value of the bond.
easier for corporations to
raise funds
market interest rate
rate investors demand for loaning funds to the corporation.
profit margin measures the
rate of return on sales, which is a measure of the percentage of each dollar of sales that results in net income
sole proprietorship and partnership
receive more favorable tax treatment but are liable for all debts and legal obligations of the business
Bank statements
received from a bank that shows its bank transactions and balances
with fifo, the cost of the oldest units are
recognized first even if they are not sold first
If actual costs are less than standard costs
the variance is favorable and increases profit
When actual costs exceed standard costs
the variance is unfavorable and reduces profit
direct labor
the work of factory employees that can be physically and directly associated with converting raw materials into finished goods
if a relationship is linear
then changes in the activity index will result in a direct, proportional change in the total variable cost
Payable
those that still need to be paid
creditors analyze the balance sheet
to determine if they will be repaid and to determine if cash on hand is sufficient
Trend for many manufacturers is
to have more fixed costs and fewer variable costs
With every payroll, the employer incurs liabilities
to pay various payroll taxes levied upon the employer
purpose of statement of cash flows
to provide relevant information about the cash receipts and cash payments of an enterprise during a period
accrued expense adjust
to record the obligations that exist on the balance sheet and to recognize expenses that apply to the current accounting period
sale of bonds above face value causes
total cost of borrowing to be less than the bond interest paid
Cost of goods sold
total cost of merchandise sold during the period. This expense is directly related to the revenue recognized from the sale of goods
cost of goods manufactured =
total cost of work in process - ending work in process inventory
vertical analysis - base for liability and stockholders equity
total liabilities and stockholders' equity
vertical axis of a CVP graph
total revenue (sales) and total costs (fixed + variable)
Effective Tax Rate Formula
total tax/total income
Goods in transit
Purchased goods not yet received. Sold goods not yet delivered.
indirect materials
Raw materials that do not physically become part of the finished product or for which it is impractical to trace to the finished product because their physical association with the finished product is too small.
labor quantity variance equation
(actual hours x standard rate) - (standard hours x standard rate)
materials price variance equation
(actual quantity x actual price) - (actual quantity x standard price)
total materials variance equation
(actual quantity x actual price) - (standard quantity x standard price)
Major differences between the master budgets of a merchandiser and a manufacturer
- A merchandiser uses a merchandise purchases budget instead of a production budget - A merchandiser does not use the manufacturing budgets (direct materials, direct labor, manufacturing overhead)
Human resources controls
- Bond personnel who handle cash -require employees to take vacations - conduct background checks
Creating proper incentives
- Budgets are used as an evaluation tool, some managers try to "game" the budgeting process by underestimating their division's predicted performance so that it will be easier to meet their performance targets - If budgets are unattainable levels, managers sometimes time unethical actions to meet the targets in order to receive higher compensations or to keep their job
can increase return on assets by
- By increasing the margin it generates from each dollar of goods that it sells (the profit margin) - By increasing the volume of goods that it sells (the asset turnover).
Bank reconciliation adjustments
- Collection of electronic funds transfer increases cash and decreases accounts receivable - Book error of cash disbursements leads to an adjustment of cash and accounts payable - NSF check becomes accounts receivable for the depositor and increases accounts receivable and decreases cash - Bank charges expense is for fees for processing debt and credit card transactions
Independent internal verification
- Companies should verify records periodically or on a surprise basis - An employee who is independent of the personnel responsible for the information should make the verification - Discrepancies and exceptions should be reported to a management level that can take appropriate corrective action
To determine cost of goods sold
- Determine the cost of goods on hand at the beginning of the accounting period - Add to it the cost of goods purchased - Subtract the cost of goods on hand as determined by the physical inventory count at the end of the accounting period
Segregation of duties
- Different individuals should be responsible for related activities - The responsibility for record keeping an asset should be separate from the physical custody of that asset - The work of one employee should provide a reliable basis for evaluating the work of another employee
cash is also
- Easily concealed and transported - most susceptible to fraudulent activities - Numerous errors can occur in large volumes of cash transactions
Important accounting differences between standards and budgets
- Except in the application of manufacturing overhead to jobs and processes, budget data are not incorporated in cost accounting systems - A company may report its inventories at standard cost in its financial statements, but it would not report inventories at budgeted costs
3 factors that determine accrued interest
- Face value of the note - Interest rate, which is always expressed as an annual rate - Length of time the note is outstanding
Advantages of standard cost
- Facilitate management planning - Promote great economy by making employees more cost conscious - Useful in setting selling prices - Contribute to management control by providing basis for evaluation of cost control - Useful in highlighting variance sin management by exception - Simplify costing of inventories and reduce clerical costs
cash receipts section
- Includes expected receipts from the principal sources of revenue - usually cash sales and collections on credit sales - Shows expected interest and dividends receipts as well as proceeds from planned sales of investments, plant assets, and capital stock
For each sale the seller
- Increases accounts receivable or cash and sales revenue - Increases Cost of Goods Sold and decreases Inventory
bonding contributes to safeguarding of cash in 2 ways
- Insurance company carefully screens all individuals before adding them to the policy - Bonded employees know that the insurance company will vigorously prosecute all offenders
Cash disbursements controls
- Internal control over cash disbursements is more effective when companies pay by check or electronic funds transfer than by cash - One exception is payments for incidental amounts that are paid out of petty cash
Allowance method for uncollectible accounts
- Involves estimating uncollectible accounts at the end of each period. - Ensures that companies state receivables on the balance sheet at their net realizable value. - Companies estimate uncollectible accounts and net realizable value using information about past and current events as well as forecasts of future collectibility.
Financing activities
- Obtaining cash from issuing debt - Repaying the amounts borrowed - Obtaining cash from stockholders, repurchasing shares, and paying dividends
Documentation procedures
- Provide evidence that transactions and events have occurred - Companies should establish procedures for documents - Companies should use pre-numbered documents and all documents should be accounted for - The control system should require that employees promptly forward source documents to the accounting department - This control helps to ensure timely recording of the transaction
process of vouchers
- Starting point in preparing a voucher is to fill out the appropriate information about the liability incurred - An employee then in the accounts payable department records the voucher and files it according to the date on which it will be paid - Paid voucher is sent to the accounting department for recording
Repair, Retain, or Replace Equipment
- The book value of old machine does not affect the decision - Book value is a sunk cost - Costs which cannot be changed by future decisions (sunk cost) are not relevant in incremental analysis -However, any trade-in allowance or cash disposal value of the existing asset is relevant
costs included for land
- The cash purchase price. - Closing costs such as title and attorney fees. - Real estate broker commissions. - Accrued property taxes and other liens on the land assumed by the purchaser.
Eliminate Unprofitable Segment or Product
- The key is to focus on the relevant costs, the data that change under the alternative courses of action - A decision to discontinue a segment based solely on the bottom line - net loss - is inappropriate - In deciding on the future status of an unprofitable segment, management should consider the effect of elimination on related product lines - In some business, services or products may be linked - In addition, management should consider the effect of eliminating the product line on employees who may have to be discharged or retrained
Limitations of internal control
- design their systems to provide reasonable assurance of proper safeguarding of assets and reliability of the accounting records - controls may vary with the risk level of activity - human element imposes limitations on internal control - size of the business may impose limitations because its harder for smaller companies
weaknesses of current ratio
- does not consider the composition of the current assets - does not disclose whether a portion of the current assets is slow-moving inventory
Bank statements are prepared from a bank's perspective
- every deposit that the bank receives is an increase in the bank's liabilities - account payable to depositor
internal reports
- financial comparisons - operating alternatives - projections of income from new sales campaigns - forecasts of cash needs for the upcoming year
How incremental analysis works
- helps managers choose the alternative that maximizes the net income - relevant costs and revenues - opportunity cost - sunk costs
controller
- maintaining the accounting records - ensuring an adequate system of internal control - preparing financial statements, tax returns, and internal reports
CVP is critical for
- setting selling prices - determining a product mix - maximizing use of production facilities
assumptions that underlie each cost-volume-profit analysis
- the behavior of both costs and revenues is linear throughout the relevant range of the activity index - costs can be classified accurately as either variable or fixed - changes in activity are the only factor that affect costs - all units produced are sold - when more than one type of product is sold, the sales mix will remain constant - the percentage that each product represents of total sales will stay the same
Setting standard costs
-requires input from all persons who have responsibility for costs and quantities -standards should change whenever managers determine that the existing standard is not a good measure of performance
steps in computing fixed and variable costs under high low method
1. (change in total costs at High vs. Low activity level)/High - Low activity level = variable cost per unit 2. determine the total fixed costs by subtracting the total variable costs at either the high or the low activity level from the total cost at that activity level
Types of incremental analysis
1. Accept an order at a special price. 2. Make or buy component parts or finished products. 3. Sell products or process them further. 4. Repair, retain, or replace equipment. 5. Eliminate an unprofitable business segment or product.
Cash vs. Accrual Accounting
1. Accrual accounting must be used by all companies who sell securities (stock) to the public 2. Cash accounting can be used by any companies who does not sell stock to the public. Cash accounting is also used by individuals to account for their personal finances 3. This is typically required because cash accounting can be easily manipulated and thus lead to misleading financial statement
disadvantages of participative budgeting
1. Can be time consuming and costly 2. Can foster budgetary "gaming" through budgetary slack
the balanced scorecard functions
1. Employs both financial and nonfinancial measures. (For example, ROI is a financial measure; employee turnover is a nonfinancial measure.) 2. Creates linkages so that high-level corporate goals can be communicated all the way down to the shop floor. 3. Provides measurable objectives for nonfinancial measures such as product quality, rather than vague statements such as "We would like to improve quality." 4. Integrates all of the company's goals into a single performance measurement system, so that an inappropriate amount of weight will not be placed on any single goal.
Management's decision-making process
1. Identify the problem and assign responsibility 2. Determine and evaluate possible courses of action 3. Make a decision 4. Review results of the decision
Classification of cash flows
1. Operating Activities 2. Investing Activities 3. Financing Activities
recognizing accounts receivable
1. Service organization records a receivable when it performs service on account. 2 Merchandiser records accounts receivable at the point of the sale of merchandise on account.
Usefulness of the statement of cash flows
1. The entity's ability to generate future cash flows 2. The entity's ability to pay dividends and meet obligations 3. The reasons for the difference between net income and net cash provided by operating activities 4. The cash investing and financing transactions during the period
Two criteria apply in determining the cost of equipment
1. The frequency of the cost—one time or recurring. 2. The benefit period—the life of the asset or one year.
stockholder rights
1. Vote in election of board of directors and on actions that require stockholder approval. 2. Share the corporate earnings through receipt of dividends. 3. Keep the same percentage ownership when new shares of stock are issued (preemptive right). 4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim.
order of liquidity
1. cash 2. investments 3. receivables 4. inventories 5. prepaid expenses
Reconciliation procedure
1. deposits in transit 2. outstanding checks 3. errors 4. bank memoranda
the balanced scorecard evaluates company performance from different perspectives
1. financial perspective 2. customer perspective 3. internal process perspective 4. learning and growth perspective
three ways to find the break-even point
1. math equation 2. using the contribution margin 3. CVP pgraph
causes of labor price variance
1. paying workers different wages 2. misallocation of workers
budgeting and long-range planning have three significant differences
1. time period involved 2. emphasis 3. the amount of detail presented
Need for reconciliation has two causes
1.Time lags that prevent one of the parties from recording the transaction in the same period. 2.Errors by either party in recording transactions.
days in inventory
365/inventory turnover
participative budgeting
A budgetary approach that starts with input from lower-level managers and works upward so that managers at all levels participate.
special orders
A company has an opportunity to obtain additional business if its willing to make a price concession to a specific customer 1. Assume that the sales of products in other markets would not be affected by this special order 2. If the company is operating at full capacity, it is likely that the special order would be rejected because the company would have to expand plant capacity
valuation account
A contra account that reduces the carrying value of an asset to a net realizable value that is less than cost.
privately held corporation
A corporation that has only a few stockholders and whose stock is not available for sale to the general public.
treasury stock
A corporation's own stock that has been reacquired by the corporation and is being held for future use.
units of activity method
A depreciation method in which useful life is expressed in terms of the total units of production or use expected from the asset.
Straight line method
A depreciation method that allocates an equal amount of depreciation each year. (Cost - Residual value) / Useful life.
Perpetual inventory system
A detailed inventory system in which a company maintains the cost of each inventory item, and the records continuously show the inventory that should be on hand.
selling and administrative budget
A detailed schedule of planned expenses that will be incurred in areas other than manufacturing during a budget period.
fiscal year
A fiscal period consisting of 12 consecutive months
CVP graph
A graphical representation of the relationships between an organization's revenues, costs, and profits on the one hand and its sales volume on the other hand.
Sarbanes-Oxley act
A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate.
percentage-of-receivables basis
A method of estimating the amount of bad debt expense whereby management establishes a percentage relationship between the amount of receivables and the expected losses from uncollectible accounts.
Theory of constraints
A specific approach used to identify and manage constraints in order to achieve the company's goals.
Notes receivable
A written promise that a customer will pay a fixed amount of principal plus interest by a certain date in the future.
Revising periodic depreciation
Accounted for in the period of change and future periods (Change in Estimate). Not handled retrospectively. Not considered error.
When an account becomes uncollectible and must be written off
Accounts Receivable should be decreased
accounts receivable vs. accounts payable
Accounts payable is the money a company owes its vendors, while accounts receivable is the money that is owed to the company, typically by customers
margin of safety in dollars equation
Actual (Expected) Sales - Break-Even Sales
Electronic funds transfer system
Allows banks to transfer funds among accounts quickly and accurately without the exchange of checks.
Liabilities
Amounts owed to creditors
Accounts receivable
Amounts to be received in the future due to the sale of goods or services
accounts receivable
Amounts to be received in the future due to the sale of goods or services
Historical cost principle
An accounting principle that states that companies should record assets at their cost.
International Accounting Standards Board
An accounting standard-setting body that issues standards adopted by many countries outside of the United States.
retained earnings
An amount earned by a corporation and not yet distributed to stockholders.
cash equivalent price
An amount equal to the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable.
Economic entity assumption
An assumption that every economic entity can be separately identified and accounted for.
Monetary unit assumption
An assumption that requires that only those things that can be expressed in money are included in the accounting records.
Periodicity assumption
An assumption that the economic life of a business can be divided into artificial time periods.
periodicity assumption
An assumption that the economic life of a business can be divided into artificial time periods.
Voucher
An authorization form prepared for each expenditure in a voucher system
Manufacturing overhead budget
An estimate of expected manufacturing overhead costs for the budget period.
Revenues
An increase in assets or a decrease in the liabilities resulting from the sale of goods or the performance of services
Periodic inventory system
An inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period.
expanded accounting equation
Assets = Liabilities + Common Stock + Revenues - Expenses - Dividends
Operating activities
Cash flow activities that include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income.
Valuing accounts receivable
Companies report accounts receivable on the balance sheet as an asset.
enhancing qualities
Comparability, verifiability, timeliness, and understandability
Contribution Margin Ratio
Contribution Margin / Sales
fixed costs
Costs that do not vary with the quantity of output produced
relevant costs
Costs that will differ between alternatives and influence the outcome of a decision
Cash disbursements section
Expected cash payments for direct materials, direct labor, manufacturing overhead, and selling and administrative expenses.
FOB destination
Freight terms indicating that ownership of goods remains with the seller until the goods reach the buyer.
Purchases and returns allowance
From the buyer's perspective, returned merchandise or an adjustment for defective merchandise.
Over-the-counter receipts
In retail businesses cash registers are used which are visible to the customers for the receipt of cash - A cash sale is entered in the cash register with the amount visible to the customer - Customer receives an itemized cash receipt and is expected to count the change received - Cash register's tape is locked in the register until the supervisor removes it. This accumulates the daily transactions totals - Cash receipts are often networked with the company's computers for direct recording in its records
Investing activities
Includes cash transactions involving the purchase and sale of long-term assets and current investments
high inventory turnover
Inventory that moves in and out of inventory quickly. This category typically includes high-fashion or highly perishable products with a limited shelf life.
examples of hybrid forms
Limited liability companies (LLC) Subchapter S corporations
sell or process further
Many manufacturers have the option of selling products at a given point in the production cycle or continuing to process with the expectation of selling them at a later point at a higher price Process further as long as the incremental revenue from such processing exceeds the incremental processing costs
margin of safety ratio equation
Margin of Safety in Dollars / Actual (Expected) Sales
expense recognition principle
Match expenses with revenues in the period when the company makes efforts to generate those revenues
total variance equation
Materials Variance + Labor Variance + Overhead Variance
Last-In, First-Out (LIFO)
Method for assigning cost to inventory that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold.
First-In First-Out (FIFO)
Method to assign cost to inventory that assumes items are sold in the order acquired; earliest items purchased are the first sold.
Qualities of Useful Information
Relevance and Faithful representation
external users
Persons using accounting information who are not directly involved in running the organization.
content of reports for managerial accounting
Pertains to subunits of the business. Very detailed. Extends beyond double-entry accounting to any relevant data. Standard is relevance to decisions.
financing activities
Primary sources of outside funds are borrowing money and issuing share of stock in exchange for cash
Aging the accounts receivable
Process of classifying accounts receivable by how long they are past due for purposes of estimating uncollectible accounts.
Product vs. Period Costs
Product: Direct Materials, Direct Labor, Variable Manufacturing Overhead Period Period:Fixed Selling and Administrative Expenses, Variable Selling and Administrative Expenses,Fixed Manufacturing Overhead
Cash-basis accounting
Reporting income when the cash is received and expenses when the cash is paid.
purpose of balance sheet
Reports assets, liabilities, and equity at a specific date. Provides information about resources, obligations to creditors, and equity in net resources. Helps in predicting amounts, timing, and uncertainty of future cash flows.
example of comprehensive income
Stassi corporation purchased IBM bonds for $10.5K as an investment to sell in the future. At the end of the year, Stassi was still holding the investment, but the bonds' market price was now $8K. Stassi is required to reduce the recorded value of its IBM investment by $2.5K, which is an unrealized loss. Should Stassi include the $2.5K unrealized loss in net income? answer: The company will realize the unrealized gain/loss so it will be a part of net income
common stock
Term used to describe the total amount paid in by stockholders for the shares they purchase.
progressive federal income tax system
The U.S. has a progressive income tax system that taxes higher-income individuals more heavily than lower-income individuals
activity index
The activity that causes changes in the behavior of costs in cost-behavior analysis
Unit Contribution Margin
The amount of revenue remaining per unit after deducting variable costs; calculated as unit selling price minus unit variable costs.
Service companies
The critical factor in budgeting is coordinating professional staff needs with anticipated services. - If a firm is overstaffed, labor costs may be high and profits may be low from additional salaries If a service company is understaffed, revenue could be lost because existing and prospective client needs for service cannot be met
materials price variance
The difference between the actual unit price paid for an item and the standard price, multiplied by the quantity purchased.
Merchandise purchases budget
The estimated cost of goods to be purchased by a merchandiser to meet expected sales.
Introductory phase
The initial phase of the product life cycle (also called the pioneering phase) when a new product is introduced, costs are highest, and profits are lowest. - Company will not generate positive cash from operations - Cash used in operations will exceed cash generated from operations - Company spends considerable amounts to purchase productive assets such as buildings and equipment - To support its asset purchases, the company issues stock or debt
Information and communication
The internal control system must capture and communicate all pertinent information both down and up the organization, as well as communicate information to appropriate external parties.
Control environment
The overall attitude of management and employees about the importance of controls.
fair value
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Financial Accounting Standards Board
The primary accounting standard-setting body in the United States.
break-even analysis
The process of finding the break-even point
relevance
The quality of information that indicates the information makes a difference in a decision. it provides information that has predictive value
Relevant range
The range of activity within which assumptions about variable and fixed cost behavior are valid.
Tax effects
The reason is that LIFO results in the lowest income taxes (because of lower net income) during times of rising prices
Fraud triangle
The three factors that contribute to fraudulent activity by employees: opportunity, financial pressure, and rationalization.
Balanced scorecard
This approach uses both financial and nonfinancial measures to evaluate all aspects of a company's operations in an integrated fashion. Performance measures are linked in a cause-and-effect fashion to ensure that they all tie to the company's overall objectives
purpose of retained earnings statement
To improve market and investor confidence in the organization. It is used as a marker to help analyze the health of a firm. Retained earnings do not represent surplus funds.
purpose of income statement
To show income, expenses and profit for the year
total manufacturing costs vs costs of goods manufactured
Total manufacturing costs is the sum of all manufacturing costs incurred during the period Costs of goods manufactured is the cost of those goods that were completed during the period
Other receivables
Various forms of nontrade receivables, such as interest receivable and income taxes refundable.
Maturity phase
When sales of a product peak and then slowly start to decline. cash generated from operations exceeds investing needs
cash budget
a budget that estimates cash inflows and outflows during a particular period like a month or a quarter
corporation
a business organized as a separate legal entity owned by stockholders. investors receive shares of stock to indicate their own ownership claim
NSF check
a check that is not paid by a bank because of insufficient funds in a bank account
Investments
a company that has excess cash can invest in stocks and bonds of other corporations
merchandising company
a company that resells tangible products previously bought from suppliers
gross profit rate indicates
a company's ability to maintain an adequate selling price above is cost of goods sold
Times interest earned indicates
a company's ability to meet interest payments as they come due
free cash flow indicates
a company's solvency. it is the amount of excess cash it generated after investing in free capital expenditures for paying dividends
Industry-average comparison
a comparison based on average ratios for particular industries
Intercompany comparisons
a comparison based on comparisons with a competitor in the same industry
Intracompany comparisons
a comparison covering two years for the same company
issuance of stock
a corporation can issue common stock directly to investors or indirectly through an investment banking firm that specializes in bringing securities to the attention of prospective investors
a variable cost is
a cost that remains the same per unit at every level of activity
Declining-balance method
a depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual depreciation expense over the asset's useful life
Production budget
a detailed plan showing the number of units that must be produced during a period in order to satisfy both sales and inventory needs
Pro forma income
a factor affecting quality of earnings that means companies whose stock is publicly traded are required to present their income statement following GAAP. it is a second measure of income that excludes items that the company thinks are unusual or non-recurring
Informal recognition
a factor affecting quality of earnings that means offering deep discounts by encouraging customers to buy early
Alternative accounting methods
a factor affecting quality of earnings that means variations among companies in application of GAAP can hamper comparability
income statement
a financial statement showing how successfully a business performed during a period of time through reporting revenues and expenses
balance sheet
a financial statement that presents what the business owns (assets) and what it owes (liabilities) at one point in time. it reports assets and claims at a specific amount in time
statement of cash flows
a financial statement that shows where the business obtained cash during a period of time and how that cash was used. it reports the operating, investing, and financing activities of a company and shows the net increase or decrease in the amount of cash
bonds
a form of interest-bearing note payable issued by corporations, universities, and governmental agencies
when cash is received in advanced
a liability is recorded
controlling
a management function that is the process of keeping the company's activities on track. managers determine whether planned goals are met and decide what changes are needed if deviations from the target are seen
planning
a management function that requires managers to look ahead and to establish objectives.
earnings per share is
a measure of net income earned on each share of common stock
debt to asset ratio
a measure of solvency that is calculated by dividing total liabilities (current and long-term) by total assets
Voucher system
a network of approvals by authorized individuals, acting independently, to ensure that all disbursements by check are proper
retained earnings
a part of stockholders' equity that means net income retained in the corporation
common stock
a part of stockholders' equity that means when a company sells new shares of stock
Gross profit may be expressed as
a percentage by dividing the amount of gross profit by the net sales known as gross profit rate
bank uses a debit memorandum when
a previously deposited customer's check "bounces" because of insufficient funds
Internal control
a process designed to provide reasonable assurance regarding the achievement of company objectives related to operations, reporting, and compliance
Budgeted balance sheet
a projected financial statement that forecasts the types and amounts of assets a firm will need to implement its future plans and how the firm will finance those assets - a projection of financial position at the end of the budget period - developed from the budgeted balance sheet for the preceding year and budgets for the current year
budgeted income statement
a projection showing how a firm's budgeted sales and costs will affect expected net income
Sales returns and allowances
a purchaser may be dissatisfied with the merchandise received because the goods are damaged or defective, of inferior quality, or do not meet the purchaser's specifications and return the item
liquidity ratio
a ratio that measures short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash
solvency ratio
a ratio that measures the ability of the company to survive over a long period of time
profitability ratio
a ratio that measures the income or operating success of a company for a given period of time
high-low method usually produces
a reasonable estimate
the master budget
a set of interrelated budgets that constitutes a plan of action for a specified time period
in most business situations
a straight-line relationship does not exist for variable costs throughout the entire range of possible activity. at abnormally low levels of activity, it may be impossible to be cost-efficient. at abnormally high levels of activity, labor costs may increase sharply because of overtime pay
regressive tax system
a tax whose average tax rate decreases as the taxpayer's income increases and increases as the taxpayer's income decreases
progressive tax system
a tax whose average tax rate increases as the taxpayer's income increases and decreases as the taxpayer's income decreases
administrative expenses
a type of expense that means salaries of administrative staff, telephone services, heating at the office
cost of goods sold
a type of expense that means the cost of materials
selling expenses
a type of expense that means the cost of workers' salaries
bonds payable
a type of liability where debt securities sold to investors that have to be repaid by a particular date in the future
Common stock
a type of liability where the total amount paid by stockholders for the shares they purchase
Notes payable
a type of liability where there's a written agreement stating that one party agrees to pay the other party a certain amount of cash
NSF check creates an
account receivable for the depositor and reduces cash in the bank account
accruals
accrued revenues and accrued expenses
accrued revenues may
accumulate with the passing of time and are unrecorded because the earning of interest does not involve daily transactions
profit margins vary
across industries
total overhead variance equation
actual overhead - overhead applied
LIFO coincides with
actual physical flow of inventory
fifo often parallels
actual physical flow of merchandise
Manufacturers compute cost of goods sold by
adding the beginning finished goods inventory to the cost of goods manufactured and subtracting the ending finished goods inventory
Preparation of a company's cash budget are based on
additional assumptions that will be given
cash budget is prepared
after the other budgets because the information generated by the other budgets dictates the expected inflows and outflows of cash
average-cost method
allocates the cost of goods available for sale on the basis of the weighted-average unit cost incurred
factors affecting quality of earnings
alternative accounting methods pro forma income improper recognition
statement presentation
alternative to using a contra-asset account by decreasing the asset account by the amount of depreciation each period
income statement - dividends
amounts paid out are not expenses
income statement - issuing stock
amounts received are not revenues
contra asset account
an account that is offset against an asset account on the balance sheet
depreciation is
an allocation concept not a valuation concept
when expenses are prepaid
an asset account is increased (debited) to show the service or benefit that the company will receive in the future
Companies initially record product costs as
an asset called inventory. these costs don't become expenses until the company sells the finished goods inventory
cash is
an asset that is readily convertible into any other type of asset
Understandability
an enhancing quality that means that information presented in a clear and concise fashion so that users can interpret it and comprehend its meaning.
comparability
an enhancing quality that means when different companies use the same accounting principles
sales budget
an estimate of expected sales revenue for the budget period
bad debt expense
an expense account to record losses from extending credit
salaries and wages expense is
an expense that reduces stockholders' equity and assets
target net income
an income objective management sets to determine the amount of sales necessary to achieve this specified level of income
adjustments for accrued expenses results in
an increase in liability and expenses increases
adjustment for accrued revenues results in
an increase to the asset account and an increase to a revenue account
Bad Debt Expense is reported on the income statement as
an operating expense
elements of an annual erport
annual report and management discussion and analysis
a budget may be prepared for
any period of time
Sales taxes are expressed
as a percentage of the sales price.
Total fixed costs remain constant
as activity changes
cost of insurance paid in advance is recorded
as an increase in the asset account prepaid insurance
The cost of a long-term asset is expensed
as the asset benefits the company
after prepaid expenses are paid
asset account decreases and expenses account increases
Fair value principle
assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)
prepaid expenses before adjustment
assets overstated, expenses understated
current assets
assets that a company expects to convert to cash or use up within one year or its operating cycle. the cutoff is one year from the balance sheet date
Intangible assets
assets that do not have physical substance and are very valuable like patents, copyrights, trademarks, or trade names that give the company exclusive rights for a specified period of time
accrued revenues before adjustment
assets understated, revenues understated
property, plant, and equipment
assets with relatively long useful lives that are currently used in operating the business like land, buildings, equipment, delivery vehicles, and furniture
Purchasing activities
assign related purchasing activities to different individuals
Establishment of responsibility
assign responsibility to specific employees. control is most effective when only one person is responsible for a given task
Companies do not include unrealized gains or losses on
available-for-sale securities in net income but report them as other comprehensive income and it is not included in net income
with LIFO, ending inventory is
based on the prices of the oldest units purchased
Raw materials
basic goods that will be used in production but have not yet been placed into production
raw materials
basic materials and parts used in the manufacturing process
Every sales transaction should
be supported by a business document
contra asset account is preferable
because it discloses the original cost and the total cost that has expired
Companies often use notes payable instead of accounts payable
because notes payable provide written documentation of the obligation in case legal remedies are needed to collect the debt.
An assumption about inventory cost flow is used
because prices usually change, and tracking which units have been sold is difficult
cost of goods available
beginning inventory + cost of goods purchased
market rate < contractual rate
bond is selling at a premium
when contractual interest rate and market interest rate are the same
bonds sell at face value
A traditional income statement vs CVP income statement
both report the income statement - Traditional income statement does not classify costs as variable or fixed - Traditional income statement does not report a contribution margin - Sometimes per unit amounts and percentage of sales amounts are shown in separate columns on CVP income statement
When using the periodic system the physical inventory count is used to determine
both the cost of the goods sold and the cost of ending inventory
sales budget for a merchandiser is
both the starting point and the key factor in the development of the master budget
Trading security
bought and held primarily for sale in the near term to generate income on short-term price differences
required merchandise purchases equation
budgeted cost of goods sold + desired ending merchandise inventory - beginning merchandise inventory
emphasis
budgeting focuses on achieving specific short-term goals, like meeting annual profit objectives
the amount of detail presented
budgets can be very detailed to meet specific results
merchandisers compute cost of goods sold
by adding the beginning inventory to the cost of goods purchased and subtracting the ending inventory
tax bills must be voted on
by both houses of congress
Sustainable income differs from net income because
by the amount of unusual revenues, expenses, gains and losses included in the current year's income
par value stock
capital stock that has been assigned a value per share in the corporate charter
outstanding stock
capital stock that has been issued and is being held by stockholders
no-par value stock
capital stock that has not been assigned a value in the corporate charter
Retained earnings statement shows
cash dividends declared but does not show the cash dividends paid during the year
payout ratio
cash dividends declared on common stock/net income
Investing activities involve
cash flows resulting from changes in investments and long-term asset items
Financing activities involve
cash flows resulting from changes in long-term liability and stockholders' equity items
three sections of a cash budget
cash receipts, cash disbursements, financing
Variable-cost element can
change as activity levels change
Adjustments
changes made to accounts at the end of the accounting period to ensure that the revenue recognition and expense recognition principles are followed
Incremental analysis sometimes involves
changes that could seem contrary to intuition Sometimes variable costs do not change under the alternative courses of action
notes payable due within 1 year of the balance sheet date are
classified as current liabilities.
Mixed costs must be
classified into their fixed and variable elements
CVP Income Statement
classifies costs as variable or fixed and computes a contribution margin
hybrid forms
combine the tax advantages of partnerships with the limited liability of corporations
The gross profit rate helps
companies decide if the prices of their goods are in line with changes in the cost of inventory
Sales activities
companies should assign related sales activities to different individuals. Accountant should not have physical custody or access to the asset
Determining inventory qualities - perpetual inventory system
companies take physical inventory to check the accuracy of their perpetual inventory records and to determine the amount of inventory lost due to wasted raw materials, shoplifting, or employee theft
Manufacturing overhead is when
companies use a standard predetermined overhead rate in setting the standard. overhead rate is determined by dividing budgeted overhead costs by an expected standard activity index
Intracompany basis
comparisons within a company are often useful to detect changes in financial relationships and significant trends
bottlenecks
constraints within the value chain that limit a company's profitability
Direct labor budget
contains the quantity (hours) and cost of direct labor necessary to meet production requirements
parts of internal control
control environment risk assessment control activities information and communication monitoring
in CVP income statement
cost includes all costs and expenses related to product and sale of the product manufacturing costs + selling and administrative expenses
weighted-average unit cost equation
cost of goods available for sale / total units available for sale
inventory turnover
cost of goods sold/average inventory
Factors in computing depreciation
cost, useful life, salvage value
total cost of work in process for the year
costs of the beginning work in process + total manufacturing costs for the current period
deferrals
costs or revenues that are recognized at a date later than the point when cash was originally exchanged; includes prepaid expenses and unearned revenue
period costs
costs that are matched with the revenue of a specific time period rather than included as part of the costs of a salable product - nonmanufacturing costs - include selling and administrative expenses
product costs are
costs that are necessary and integral to producing the finished product
mixed costs
costs that contain both a variable and a fixed-cost element. change in total but not in proportionality with changes in the activity level
differential costs
costs that differ between decision alternatives
variable costs
costs that vary in total directly and proportionately with changes in the activity level
Sales can be made on
credit or for cash
working capital
current assets - current liabilities
working capital =
current assets - current liabilities
current ratio
current assets/current liabilities
current ratio =
current assets/current liabilities
payroll taxes payable
current liabilities
total variable costs has a
curvilinear graph
cost method for treasury stock
debit TS for purchase cost, and credit TS at same cost if shares are reissued no gain or loss can be recognized when reissued
unearned revenues after adjustment
decrease liabilities, increase revenues
accumulated depreciation impact
decreases stockholders' equity by increasing the expense account and will increase every month
Financing section
details the borrowings and repayments projected to take place during the budget period. This section is needed when there is a cash deficiency or when the cash balance is below management's minimum required balance
supplies expense
determined by subtracting the ending balance of supplies from the unadjusted balance in supplies to determine the amount of supplies used
Book value of a plant asset may
differ from its fair value
price variance
difference between actual price and standard price
quantity variance
difference between actual quantity and standard quantity
Total labor variance
difference between the amount actually paid for labor versus the amount that should have been paid
Margin of Safety
difference between your actual or expected profitability and the break even point
the amount deposited in the bank will not agree with the cash recorded in the accounting records
difference is reported in a cash over and short account
Depreciation per financial statements is usually
different from depreciation per tax returns
line position
directly involved in the company's primary revenue-generating operating activities ex: vice president of operations
in an income statement, variances are
disclosed separately and cost of goods sold is stated at the standard cost
Fraud
dishonest act by an employee that results in personal benefit to the employee at a cost to the employer
manufacturing cost per unit
dividing total manufacturing cost by the amount of product produced
recording revenue
do not record until the work has been performed
when input is used to obtain budget data for service revenue
each professional staff member projects their billable time
measure of profitability
earnings per share
Accounting transactions
economic events that require recording financial statements. it occurs when assets, liabilities, or stockholders' equity items change as a result of some economic event
budgets promote
efficiency and serves as a deterrent to waste and inefficiency
labor quantity variances relate to
efficiency of workers. it can be traded to the production department
Rationalization
employees justifying their actions regarding committing fraud
Financial pressure
employees sometimes commit fraud because of personal financial problems caused by too much debt
Indirect labor
employees whose activities that have no physical association with the finished product or for which it is impractical to trace costs to the goods produced.
Salvage value
estimate of the asset's value at the end of its useful life
Useful life
estimate of the expected life based on need for repair, service life, and vulnerability to obsolescence
internal process perspective
evaluates the internal operating processes critical to success. All critical aspects of the value chain—including product development, production, delivery, and after-sale service—are evaluated to ensure that the company is operating effectively and efficiently.
learning and growth perspective
evaluates the internal operating processes critical to success. All critical aspects of the value chain—including product development, production, delivery, and after-sale service—are evaluated to ensure that the company is operating effectively and efficiently.
budgets are important for
evaluating performance
Cash register documents provide
evidence of cash sales
When using horizontal analysis
examine both dollar amount charges and percentage charges
Service companies can obtain budget data for service revenue from
expected output or expected input
required production units equation
expected sales units + desired ending finished goods unit - beginning finished goods unit
revenue expenditures
expenditures that are immediately charged against revenues as an expense
Ordinary repairs
expenditures to maintain the operating efficiency and expected productive life of the unit.
supplies used
expense
accrued expenses
expenses incurred but not yet paid in cash or recorded
ratio analysis
expresses the relationship among selected items of financial statement data
Profit margin measures the
extent by which selling price covers all expenses
customers
external users who are interested in whether a company will be able to honor product warranties and support product lines
creditors
external users who use information to evaluate the risks of selling on credit or lending money
investors
external users who use information to make decisions to buy, hold, or sell stock
taxing authorities
external users who want to know whether the company is complying with tax laws
regulatory agencies
external users who want to know whether the company is operating within prescribed rules
labor unions
external users who want to know whether the owners have the ability to pay increased wages and benefits
Non-financial information relates to
factors as the effect of the decision on the employee turnover, the environment, or the overall image of the company and community
taxes and legal liability
factors to consider when deciding what organization for to use
units-of-activity method is ideally suited to
factory machinery
total contribution margin =
fixed cost = net income of zero = break-even pint
break even point in dollars
fixed cost/contribution margin ratio
once break-even point has been reached
fixed costs are covered
specific period for an income statement
for the month end
budget
formal written statement of management's plans for a specified future time period, expressed in financial terms. It represents the primary method of communicating agreed-upon objectives throughout the organization
the board of directors
formulate the operating policies for the company or organization
profitability is
frequently used as the ultimate test of management's operating effectiveness
leveraging or trading on the equity
gain means that the company has borrowed money at a lower rate of interest than the rate of return it earns on the assets it purchased with the borrowed funds. it enables management to use money supplied by non-owners to increase the return to owners
Free cash flow provides an indication of a company's ability to
generate cash to make in capital expenditures and to pay dividends
retained earnings goes
goes from the retained earnings statement to the balance sheet
under the just-in-time inventory method
goods are manufactured or purchased just in time for sales
Consigned goods
goods held for sale by one party although ownership of the goods is retained by another party
net income equation 1
gross profit - operating expenses
In a period of rising prices
gross profit under FIFO will be higher than under LIFO
gross profit rate
gross profit/net sales
gross profit rate equation
gross profit/net sales
Taking physical inventory
happens at the end of the accounting period
treasurer
has custody of the corporation's funds and is responsible for maintaining the company's cash position
total fixed costs also do not
have a straight-line relationship over the entire range of activity. some fixed costs will not change while others could
just-in-time inventory companies do not
have excess inventory on hand and cannot delay production
just-in-time inventory methods
have significantly lowered inventory levels and costs for many companies, are one innovation that resulted from the value chain
Labor price and labor quantity variances help
help managers determine if they have met their price and quantity objectives regarding labor
Principles of internal control
help to ensure that a company's financial statements are adequately supported by internal control 1. establishment of responsibilities 2. segregation of duties 3. purchasing activities 4. sales activities 5. documentation procedures 6. physical controls
a knowledge of cost behavior
helps management plan operations and decide between alternative courses of action
high current ratio
higher degree of liquidity
income statement + statement of comprehensive income shows
how companies report discontinued operations and other comprehensive income
Asset turnover
how efficiently a company uses its assets to generate sales
asset turnover measures
how efficiently a company uses its assets to generate sales
Return on common stockholders' equity shows
how many dollars of net income the company earned for each dollar invested by the owners
contribution margin ratio indicates
how much every dollar of sales will increase income after the break-even point
liquidity
how quickly an asset can be converted into cash
liquidity ratios are
important for short term creditors like bankers and suppliers
adequacy is judged
in light of the company's income because companies with relatively stable earnings can support higher debt to assets ratios
Interest on bonds payable is computed
in the same manner as interest on notes payable, as explained earlier.
a mixed cost changes
in total but not proportionately with each change in activity level
every adjustment will
include one income statement and one balance sheet account
Operating activities
include the cash effects of transactions that create revenues and expenses and enter into the determination of net income
Equipment
includes assets used in operations, such as store check-out counters, office furniture, factory machinery, and delivery trucks
cost of goods sold is in the
income statement
cash over and short account is an
income statement account
Companies report Bad Debt Expense in the
income statement as an operating expense. they use a contra asset account
purchase of supplies will
increase asset account
accrued revenues after adjustment
increase assets, increase revenues
prepaid expense after adjustment
increase expenses, decreases assets or increase contra assets
Each additional unit sold after the break-even point
increases net income by the amount of the unit contribution margin
All necessary costs incurred in making land ready
increases the Land account
A company can improve its profit margin by
increasing its gross profit rate and/or by controlling its operating expenses and other costs
Purchase invoice
indicates the total purchase price and other relevant information; it provides written evidence of the transaction
operating budgets
individual budgets that result in the preparation of the budgeted income statement. it establish goals for the company's sales and production personnel
confirmatory value
information that confirms or corrects prior expectations
faithful representation
information that is complete, neutral, and free from error. it accurately depicts what really happened
at the financial statement date for insurance
insurance expenses increases and prepaid insurance decreases
accrued interest
interest revenue or expense that is recognized before cash has been exchanged
Use of a voucher system improves
internal control over cash disbursements - Authorization process establishes responsibility - Voucher system keeps track of the documents that back up each transaction
Monitoring
internal control system must be monitored periodically for their adequacies
primary users of managerial accounting
internal users like officers and managers
Corporate life cycle
introductory phase, growth phase, maturity phase, and decline phase
In a merchandising company
inventory consists of many different item. they are owned by the company
If goods are returned
inventory is increased and cost of goods sold is decreased
fixed costs per unit vary
inversely with activity
long-term investments
investments in stocks and bonds of other corporations that are held for more than one year, long-term assets such as land or buildings that a company is not currently using in its operating activities, and long-term notes receivable
staff positions
involved in activities that support the efforts of the line employees
cost of beginning work in process inventory
is based on the manufacturing costs incurred in the prior period
A major advantage of the FIFO method
is that in a period of inflation, the costs allocated to ending inventory will approximate the inventory's current cost
Direct materials price standard
is the cost per finished unit of product of direct materials that should be incurred. the standard is based on the purchasing department's best estimate of the cost of raw materials
bond certificate
issued to the investor to provide evidence of the investor's claim against the company. The bond certificate provides information such as the name of the company that issued the bonds, the face value of the bonds, the maturity date of the bonds, and the contractual interest rate.
financing activities involve
issuing debt
When a merchandiser sells goods
it increases Accounts Receivable and increases Sales Revenue
When the company receives an advance
it increases Cash and increases a current liability account identifying the source of the unearned revenue
when a corporation issues bonds
it is borrowing money
when output is used to obtain budget data for service revenue
it is necessary to determine the expected billings of clients for services performed
company recognizes the unearned revenue when
it performs the service and decreases liability account
once a constraint has been identified
it will be eliminated and the company moves on to fix the next most significant constraint
multiple end products are referred to as
joint products
The balance sheet for merchandising company shows
just one category of inventory
total labor variance equation
labor price variance + labor quantity variance
total direct labor
labor price variance - labor quantity variance
depreciation does not apply to
land
Depreciation applies to
land improvements, buildings, and equipment
cash-basis accounting could
lead to misleading financial statements and may not reflect revenue in the period that a performance obligation is satisfied
par value determined the
legal capital that must be retained in the business for the protection of corporate creditors
CVP analysis does consider
level of activity variable costs per unit sales mix
relevant range of activity refers to
levels of activity over which the company expects to operate
assets =
liabilities + stockholders' equity
discount on bonds payable reduces
liabilities and it is a contra account deducted from bonds payable
unearned revenues before adjustment
liabilities overstated, revenues understated
Inclusion of interest costs in the cost of a constructed building is
limited to the construction period
assets are
listed in order of liquidity
property, plant, and equipment examples
long-term assets vital to business operations like vehicles, furniture, machinery, buildings, and undeveloped land
low current ratio
low degree of liquidity
When the allowance method is used to account for uncollectible accounts, Bad Debt Expense is increased when
management estimates the amount of uncollectibles
finished goods inventory
manufactured items that are completed and ready for sale
overhead costs also include
manufacturing costs that cannot be classified as direct materials or direct labor
indirect labor is classified as
manufacturing overhead
price-earnings ratio
market price per share/earnings per share
total materials variance equation 2
materials price variance + materials quantity variance
chief executive officer
may serve as president or board chair; has a major role in planning and implementing the strategy
Accounts receivable turnover can
measure liquidity by how quickly a company coverts certain assets to cash. it measures the number of times a company collects receivables during a period
Solvency ratio
measure the ability of the company to survive over a long period of time
solvency ratios measures
measure the ability of the company to survive over a long period of time and are important to long-term creditors and stockholders because of its ability to pay interest as it comes
Profitability ratios
measure the income or operating success of a company for a given period of time
profitability ratios measure
measure the income or operating success of a company or a given period of time.
customer perspective
measures of firm performance that indicate how well firms are satisfying customers' expectations
Liquidity ratio
measures short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash
Profit margin
measures the percentage of each dollar of sales that results in net income
debt to asset ratio measures
measures the percentage of total financial support provided by creditors. it provides some indication of the company's ability to withstand losses without impairing the interest of its creditors
Starting point in cost behavior analysis
measuring the key business activities
Companies frequently issue notes payable
meet short-term financing needs.
buying stock is
more attractive than investing in a partnership because stocks are easy to sell
Gross profit rate is
more informative than gross profit amount
The actual physical movement of goods
need not match the cost flow assumption a company adopts, but the company must use its selected cost flow assumption consistently from one period to the next
Free cash flow =
net cash provided by operating activities - capital expenditures - cash dividends
free cash flow
net cash provided by operating activities - capital expenditures - cash dividends
accounts receivable turnover
net credit sales/average net accounts receivable
asset turnover equation
net sales/average total assets
A change in profit margin is caused by
o A change in the gross profit rate o A change in the amount of operating expenses relative to sales o A change in the number of other items (other revenues and gains, or other expenses and losses) relative to sales
capital expenditures
o Costs that are not expensed immediately but are included in plant asset account
Essentials of effective budgeting
o Depends on a sound organizational structure o Budgets are based on research and analysis and are more likely to result in realistic goals that will contribute to the growth and profitability of a company o The effectiveness of a budget is directly related to its acceptance by all levels of management
How management chooses a depreciation method
o Management selects the method it believes best measures an asset's contribution to revenue over its useful life. o Once a company chooses a method, it should apply that method consistently over the useful life of the asset. o Consistency enhances the ability to analyze financial statements over multiple years.
causes of decline in gross profit
o May have begun to sell products with a lower markup o Company was forced to pay higher prices to its suppliers
Benefits of budgeting
o Requires all levels of management to plan ahead and to formalize goals on a recurring basis o Provides definite objectives for evaluating performance at each level of responsibility o It creates an early warning system for potential problems so that management can make changes before things get out of hand o It facilitates the coordination of activities within businesses by correlating the goals of each segment with overall company objectives o It results in greater management awareness of the entity's overall operations and the impact on operations of external factors o It motivates personnel throughout the organization to meet planned objectives
long-term liabilities
obligations that a company expects to pay more than one year in the future
Current liabilities
obligations that the company is to pay within the next year or operating cycle, whichever is longer
A favorable variance could be
obtained by using inferior materials
Bonding
obtaining insurance protection against theft by employees
budgetary slack
occurs when managers intentionally underestimate budgeted revenues or overestimate budgeted expenses in order to make it easier to achieve budgeted goals
Changes in accounting principle
occurs when the principle used in the current year is different from the one used in the preceding year. a change is permitted when management can show that the new principle is preferable
management discussion and analysis
part of the annual report that includes presents management's views on the company's ability to pay near-term obligations, ability to fund operations and expansion, and results of operations. it highlights favorable or unfavorable trends and identifies significant events and uncertainties
Sarbanes-Oxley Act
passed to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals
amortizing
paying off gradually
on account
perform services for which they are paid for later and are known as an account receivable
direct materials
physically and directly associated with the finished product during the manufacturing process.
management functions
planning, organizing, controlling
Control activities
policies, procedures, and rules that provide reasonable assurance that control objectives are met and risk responses are carried out. this reduces the occurrence of fraud by designing policies and procedures to address specific risks faced by the company
standard costs are
pre-determined unit costs which companies use as a measure of performance
standard costs
predetermined unit costs which companies use as measures of performance
creditors use net income to
predict future earnings
sales budget is
prepared first and represents the management's best estimate of sales revenue for the budget period
sales revenue
primary source of revenue for a merchandising company
managerial accounting
provides economic and financial information for managers and other internal users
Quality of earnings
provides full and transparent information that will not confuse or mislead users of the financial statement
value chain
refers to all business processes associated with providing a product or performing a service
Must make sure that past income numbers
reflect its sustainable income
vertical analysis helps users compare
relationships between financial statement items with those of last year or of competitors
enterprise resource planning systems have
replaced individual software packages. they focus on improving efficiency in the value chain resulting in automated manufacturing processes
when there is a cash shortfall
reported as an expense
when there is a cash overage
reported as miscellaneous revenue
certain gains and losses that bypass net income are
reported as part of a more inclusive earnings measure called comprehensive income
Normal standards
represent efficient levels of performance that are attainable under expected operating conditions
Full disclosure principle
requires that companies disclose all circumstances and events that would make a difference to financial statement users
Specific identification method
requires that companies keep records of the original cost of each individual item
Revenue recognition principle
requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. a company satisfies its performance obligation by performing a service
assets
resources owned by a business
Plant assets
resources that have physical substance (a definite size and shape), are used in the operations of a business, and are not intended for sale to customers
budget committee
responsibility for coordinating the preparation of the budget
retained earnings =
revenues - expenses - dividends
net loss
revenues < expenses
net income
revenues > expenses
Financial information is related to
revenues and costs and their effects on the company's overall profitability
Sales returns reduce
revenues and receivables
accrued revenue
revenues for services performed but not yet received in cash or recorded
companies deduct period costs from
revenues in the period in which they are incurred
debt financing is
riskier than equity financing because debt must be repaid at specific points in time
Physical controls
safeguarding of assets and enhance the accuracy and reliability of accounting records
Sales forecast
shows potential sales for the industry and the company's expected share of such sales
debt to equity ratio
shows relative use of borrowed funds compared with resources invested by the owners
The use of a bank contributes
significantly to good internal control over cash
classified balance sheet groups together
similar assets and similar liabilities using a number of standard classifications and sections. these groupings help financial statement readers determine whether a company has enough assets to pay its debts as they are due and the claims of short and long-term creditors on the company's total assets
Sound Tax System
simplicity, transparency, neutrality, and stability
In a manufacturing company
some inventory may not be ready for sale yet
managerial accounting reports can be described as
special purpose
revenue increases
stockholders' equity
costs included for buildings
such costs include the purchase price, closing costs (attorney's fees, title insurance, etc.), and real estate broker's commission. interest costs for the construction period are also included
total manufacturing costs for the current period
sum of direct material costs, direct labor costs, and manufacturing overhead incurred in the current year
Total manufacturing costs
sum of the product costs incurred in the current period
joint product costs are
sunk costs and they are irrelevant for sell-or process further decisions
Short-term assets
supplies, inventory, and accounts receivable
Sales invoice provides
support for each credit sale
Horizontal analysis (trend analysis)
technique for evaluating a series of financial statement data over a period of time. the purpose is to determine the increase or decrease that has taken place, expressed as an amount or percentage. it helps users compare a company's financial position and operating results with those of the previous period
a major shortcoming of the LIFO method
that in a period of inflation, the costs allocated to ending inventory may be significantly understated in terms of current cost
The objective should be to choose a cost flow assumption
that most clearly reflects periodic income.
depreciation
the allocation of the cost of an asset to a number of years; systematically assigning a portion of an asset's cost as an expense each year
insurance expense
the amount of insurance used during the period that is determined by dividing the balance in Prepaid Insurance by the number of remaining months covered by the policy to get the monthly expense
face value of the bond
the amount of principal due at the maturity date.
contribution margin
the amount of revenue remaining after deducting variable costs that is often stated both as a total amount and on a per unit basis
authorized stock
the amount of stock that a corporation is authorized to sell as indicated in its charter
cash budget shows
the anticipated cash flow
normal capacity
the average activity output that a company should experience over the long run
operating cycle
the average time required to go from cash to cash in producing revenue
ending cash balance of one period is
the beginning cash balance for the next period
a standard is
the budgeted cost per unit of product
The cost of equipment consists of
the cash purchase price, sales taxes, freight charges, and insurance during transit paid by the purchaser.
Growth phase
the company strives to expand its production and sales - Expect to see the company start to generate small amounts of cash revenue from operations - Net income exceeds cash flow from operations during this period because cash paid for inventory and amount expensed as cost of goods sold - Size of inventory purchases increases - Collections on accounts receivable lag behind sales - Accrual sales exceed cash collections during the period
stockholders own
the corporation, but they manage it indirectly through a board of directors they elect
expense
the cost of assets consumed or services used in the process of generating revenues
under the fifo method
the costs of the earliest goods purchased are the first to be recognized in determining cost of goods sold
internal audit staff
the department responsible for monitoring and evaluating the internal control system - review the reliability and integrity of financial information provided by the controller and treasurer - investigate compliance with policies and regulations
financial perspective
the difference between the actual amount paid and the amount that should have been paid for the number of hours - return on assets - net income - credit rating - share price - profit per employee
Working capital
the difference between the amounts of current assets and current liabilities
Variances
the differences between total actual costs and total standard costs
Discontinued operations
the disposable of a significant component of a business, such as the elimination of a major class of customers or an entire activity ex: a company wanted to downsize operations by selling its missiles business to another company and will put it in its income statement as discontinued operations
salvage value
the estimated value of a fixed asset at the end of its useful life
marginal tax rate
the extra taxes paid on an additional dollar of income
most assets must follow
the historical cost principle because the market values may not be representationally faithful
net income goes from
the income statement to the retained earnings statement
unit contribution margin indicates
the increase in income that results from every additional unit sold after the break-even point
accounting
the information system that identifies, records, and communicates the economic events experienced by a company and about the parties with whom the company engages (suppliers and customers)
Cost of goods manufactured
the manufacturing costs associated with the goods that were finished during the period
time period involved
the maximum length of a budget is usually one year and are often prepared for shorter periods of time
Opportunity cost
the most desirable alternative given up as the result of a decision
operating activities category is
the most important
Sustainable income
the most likely level of income to be obtained by a company in the future
cash
the most liquid asset owned by companies
corporation has
the most rights and priviledges
unit contribution margin is
the net amount by which each sale exceeds the variable cost per unit
Comparative balance sheets show
the net increase in property, plant, and equipment during the year but don't show how the additions were financed or paid for
inventory turnover measures
the number of times average inventory was sold during the period. it also measures the liquidity of the inventory.
Relevant costs and revenues
the only factor that is considered is costs and revenues that differ across alternatives. ones that do not differ across alternatives can be ignored
Return on assets measures
the overall profitability of assets in terms of the income earned on each dollar invested in assets
payout ratio measures
the percentage of earnings distributed in the form of cash dividends
when a plant asset is fully depreciated
the plant asset and related accumulated depreciation should continue to be reported on the balance sheet without further depreciation
break-even point
the point at which the costs of producing a product equal the revenue made from selling the product
value is measures by
the price of the company's stock and by the potential selling price of the company
Depreciation
the process of allocating the cost of an asset to expense over its useful life
Depreciation regarding PPE
the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner
Planning
the process of anticipating future events and determining strategies to achieve organizational objectives in the future
direct labor budget is determined from
the production budget
contractual interest rate
the rate used to determine the amount of cash interest the issuer pays and the investor receives
Price-earnings ratio is
the ratio of the market price of each share of common stock to the earnings per share
amortization
the reduction of a loan balance through payments made over a period of time
current ratio expresses
the relationship of current assets to current liabilities, computed by dividing the current assets by current liabilities. it allows someone to evaluate the company's liquidity and short-term debt paying ability
vertical analysis shows
the relative size of each category on the balance sheets and can show the percentage change in the individual asset, liability, and stockholders' equity items
stockholders' equity
the remaining amount of assets available to shareholders after all liabilities have been paid. it is common stock and retained earnings
primary source of revenue for merchandising companies
the sale of merchandise
Cost behavior analysis
the study of how specific costs respond to changes in the level of business activity
Cost-volume-profit analysis
the study of the effects of change in costs and volume on a company's profit
income statement reports
the success or profitability of the company's operations over a specific period of time
Compressive income
the sum of net income and other comprehensive income items
Total standard cost per unit
the sum of the standard costs of direct materials, direct labor, and manufacturing overhead
Accounting information system
the system of collecting and processing transaction data and communicating financial information too decision-makers
Direct labor quantity standard
the time that management determines should be required to make one unit of the product. this is critical for labor intensive companies
accumulated depreciation is
the total amount of depreciation expense that has been recorded since the purchase of an asset
Expenses definition
those that have already been paid
balance sheet for manufacturers has
three inventory accounts to help managers determine whether sufficient inventory exists to meet demand
accrued
to accumulate over time
vertical analysis - base for asset items
total assets
debt to assets ratio
total liabilities/total assets
Accrual-basis accounting
transactions that change a company's financial statements are recorded in the periods in which the events occur even if the cash was not exchanged. companies recognize revenues when they perform services
determining sustainable income requires
understanding discontinued operations, comprehensive income, and changes in accounting principles
horizontal axis of a CVP graph
unit of sales
unit contribution margin equation
unit selling price - unit variable costs
sustainable income does not include
unusual revenues, expenses, gains, and losses
the linear assumption produces
useful data for cost-volume-profit analysis as long as the level of activity remains within the relevant range
discontinued income alerts
users to the sale of any of a company's major components of its business
Investing activities
uses the cash raised through financing activities to purchase resources needed to operate
High-low method
uses the total costs incurred at the high and low levels of activity to classify mixed costs into fixed and variable components
A company safeguards its cash by
using a bank as a depository and clearinghouse for checks received and checks written
manufacturing overhead budget distinguishes between
variable and fixed overhead costs
selling and administrative budget classifies expenses as
variable or fixed
total actual overhead equation
variable overhead + fixed overhead
three categories companies classify the behavior of costs
variable, fixed, or mixed
average collection period is
variant of accounts receivable turnover that converts it into days and is done by dividing accounts receivable by 365 days
to compute quantity variance
we hold the price constant at standard price but vary the quantity (actual vs. standard)
to compute price variance
we hold the quantity constant (actual quantity) but vary the price (actual vs. standard)
Finished goods inventory is
what inventory is to a merchandiser
Total quality management
what many companies now focus on is to reduce defects in finished products, with the goal of zero defects
Direct-write off method for uncollectible accounts
when a company determines receivables from a particular company to be uncollectible, it charges the loss to Bad Debt Expense. - Decreases accounts receivable and expenses - Not acceptable for financial reporting purposes
Unrealized loss
when an asset has experienced a change in value but the owner has not sold the asset
revenues will increase
when the services are performed
If prices are falling FIFO
will report the lowest net income and LIFO the highest.
Report the cumulative amount of other comprehensive income
§ from all years as a separate component of stockholders' equity as accumulated other comprehensive loss/gain
sales forecasts consider
· General economic conditions · Industry trends · Market research studies · Anticipated advertising and promotion · Previous market share · Changes in pricing · Technological developments
objectives are often diverse
· Maximizing short-term profits and market share · Maintaining a commitment to environmental protection · Contributing to social programs key objective is to add value to the business under its control
characteristics of indirect materials
· They do not physically become part of the finished product · They are impractical to trace to the finished product because their physical association with the finished product is too small in terms of cost
direct materials quantity standard
the quantity of direct materials that should be used per unit of finished goods
Direct labor price standard
the rate per hour that should be incurred for direct labor
standard hours allowed
hours that should have been worked for the units produced
break even point equation
sales - variable costs - fixed costs fixed costs/unit contribution margin
freight costs
sales agreement should indicate who is to pay for transporting the goods to the buyer's place of business
Decline phase
sales of the product decrease due to a weakening in consumer demand. net cash provided by operating activities decreases
gross profit equation
sales revenue - cost of goods sold
Discounts reduce
sales revenue and accounts receivable
Sales Returns and Allowances is subtracted from
sales revenue on the income statement to determine net sales
retained earnings statement has the
same time period as an income statement
Available-for-sale securities
securities that are held with the intent of selling them sometime in the future
directing also involves
selecting executives, appointment managers and supervisors, and hiring and training employees
inventory becomes part of cost of goods sold when a company
sells the inventory.
The results of operations of the discontinued division must be
separated from the results of continuing operations. the company must also report the gain or loss on disposal of the division
plant assets decline in
service potential over their useful lives
inventory
short-term asset that is goods available for future sales to customers
Account receivable
short-term asset that states the right to receive money in the future
supplies
short-term assets used in day-to-day operations
split-off point
that point in the manufacturing process where some or all of the joint products can be recognized as individual products
Work in process
that portion of manufactured inventory that has begun the production process but is not yet complete.
FOB shipping point
that the seller places the goods free on board the carrier, and the buyer pays the freight costs.
expenses decrease
stockholders' equity
depreciation affects the
balance sheet through accumulated depreciation
market rate > contractual rate
bond is selling at a discount
a standard is concerned with
each individual cost component that makes up the entire budget
current ratio is a
liquidity ratio
The use of a bank checking account minimizes
the amount of currency that must be kept on hand