accounting final exam

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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


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