WGU C213 Final Exam
Describe current trends that are causing changes in the field of accounting.
Globalization - As more and more business do business globally, capital flows more freely across national boundaries. This means investors can choose to invest in firms all over the planet. To help them make investment decisions, the global accounting and regulatory communities are working to bring accounting standards around the world into agreement the IASB was one step in that direction, but nations still control the accounting standards used within their borders and so much of the standardization is being done through voluntary cooperation Technology - Information technology has speeded up the pace with which accounting data and reports are produced and dramatically increased the volume of accounting information that firms can provide to investors.
Government Agencies
Government agencies use financial statement data to bolster political and regulatory positions for and against companies.
Articulation
In an accounting context, articulation means that the three primary financial statements are not isolated lists of numbers but are an integrated set of reports on a company's financial status. The statement of cash flows contains the detailed explanation for why the balance sheet cash amount changed from beginning of year to end of year. The income statement, combined with the amount of dividends declared during the year, explains the change in retained earnings shown on the balance sheet. Cash from operations on the statement of cash flows is transformed into net income through the accounting adjustments applied to the raw cash flow data.
Explain Accrual Accounting Revenue recognition:
In order for revenue to be recognized in an accrual system, two criterial must be met: The promised work must be done before the revenue is recognized. Cash collection must be reasonable assured before revenue is recognized.
Comparability
Information that becomes much more useful when it can be related to a benchmark or standard. Also, other firm's results or the firm's own history.
Investors
Investors want information to help them estimate how much cash they can expect to directly receive from the business in the future if they invest in it now.
Indirect Labor:
Labor that is necessary to a manufacturing or service business but is not directly related to the actual production of the product.
Company Management
Managers use financial accounting data to formulate company goals, to compute bonuses for employees, and to illuminate company weaknesses.
Indirect Materials:
Materials that are necessary to a manufacturing or service business but are not directly included in or are not a significant part of the actual product.
ABC Method
More accurate because it does a better job of identifying activities that actually drive overhead costs and how different product's production methods drive those costs. While ABC is more complex and costly to implement, it is more accurate. The process of developing an ABC system can also help the firm identify problem areas in their production process. Using ABC tends to be worth the extra cost when a firm produces multiple products that are produced in very different ways (i.e., have fairly complex production processes). If the firm only has one produce or if their products are very similar in how they are produced, then ABC.
Politicians
Politicians use financial statement data to bolster political and regulatory positions for and against companies.
Analyze a statement of cash flows to identify operating, investing, and financing activities. Operating Activities:
All categories that are on the income statement, and all current assets and liabilities. i.e. sales (cash received from customers); cost of goods sold (cash paid for inventory); operating expenses (cash paid for rent);
Manufacturing Overhead:
All factory costs that are not direct materials or direct labor. Examples are factory supervisor salaries, factory building depreciation, and miscellaneous indirect materials such as glue or screws.
Order of assets listed on the balance sheet
Assets are listed in the order of liquidity. Liquidity is the amount of time it would usually take to covert an asset into cash. Obviously, cash would be listed first, followed by marketable investments (a company can quickly convert a short-term investment into cash). Accounts receivable would be listed next followed by inventory, and long-term investments, fixed assets, and intangibles. Current assets are listed before long-term assets. Current liabilities are listed before long-term liabilities, but there is no specific order they are listed in outside of current and long-term. There is also no specific order equity accounts are listed on the balance sheet; although, typically you will see paid-in-capital followed by retained earnings followed by accumulated other comprehensive income, and lastly, treasury stock.
Out-of-Pocket Costs:
Costs that involve the outlay of cash or the use of some other asset (like equipment).
Describe how basic cost behavior patterns change as sales volumes change.
Fixed costs (FC) are fixed in total, but as sales volume increases, the per unit FC decreases. Variable costs (VC) are fixed per unit, but as sales volume increases, total VC increases. Stewart Manufacturing produces and sells die cast race cars. VC for each die cast car is $3 and total FC are $300,000 Per Unit Variable costs remains the same Total Fixed Costs remains the same Per Unit Fixed Costs decrease
Service companies
do not produce products but provide services. These companies do not tend to have inventories since inventories are limited to products for resale and they don't produce products.
Describe the purpose of management accounting.
main purpose is to provide a firm's management with information they can use to run the business more efficiently and effectively. However, managers also use financial accounting reports to accomplish these goals as well.
Manufacturing company
produce products for resale.
CPA Accreditation
The American Institute of Certified Public Accountants (AICPA) is the professional organization of certified public accountants (CPAs) in the United States. A CPA is someone who has taken a minimum number of college-level accounting classes, has passed the CPA exam, and has met other requirements set by his or her state. A CPA firm is a company that provides freelance business advice, particularly in connection with accounting issues and executes the vast majority of external audits in the US. The AICPA sets ethical standards for CPAs, provides continuing education for them, writes and grades the CPA exam, lobbies for legislation favored by CPAs, and provides other support to CPAs. Its oversight of the CPA exam is its main role in accreditation. However, to be accredited as a CPA you must meet the requirements of the state in which you plan to practice. The requirements for each state are set by that state's legislature and overseen by that state's Board of Accountancy, which is a state agency.
Identify components of the income statement.
The Income Statement describes a company's financial performance for a period of time. A company's expenses are subtracted from its revenues and gains and losses are also factored in computing net income. Net income helps explain the change in retained earnings between two Balance Sheet dates, along with dividends and unrealized gains and losses. A single step income statement lumps all revenues together and subtracts all expenses to calculate net income. A multiple-step presents subtotals that highlight key performance measures. Its categories include: Sales or revenues - Cost of goods sold (COGS) (Product costs of items sold) = Gross profit - Selling and Administrative expenses (also called operating expenses) = Operating income or earnings before interest and taxes (EBIT) + Other income - other expenses + gains - losses = Earnings before taxes (EBT) - Taxes = Net Income (Profit) If the firm has experienced a discontinued operation or extraordinary item, the effects of these events are subtracted from all the income statement line items and the income statement will include another subtotal - income from continuing operations that will be followed by a single line item that presents to effects of the extraordinary item discontinued operations and then net income.
Public Company Accounting Oversight Board (PCAOB)
The PCAOB determines who can audit public companies regardless of whether the audit firm is accredited by a state Board of Accountancy. Thus, they accredit firms that can audit public companies.
Describe the role of key ethical standards in the field of management accounting.
The main professional association for management accountants is the Institute of Management Accounting (IMA). It has established a code of conduct to help guide management accountants when they fact ethical dilemmas. Their members are ethically required to: -Be competent in their profession -Not disclose confidential information -Act with both actual and apparent integrity in all situations -Maintain objectivity when communicating information to decision maker
Difference between a manufacturing company and a service company. Period Costs Product Costs Service Co. Selling Costs Direct Labor Administrative Costs Service Overhead Manufacturing Co Selling Costs Direct Labor Administrative Costs Manufacturing Overhead Direct Materials (inventory
The only difference is - a manufacturing company has direct materials (inventory).
Materiality
The question of whether an item is large enough to make any difference to anyone.
Describe the purpose of the statement of cash flows.
The statement of cash flows explains how a company's cash was generated during the period and how that cash was used. Explains change in cash account between two balance sheet dates.
Identify components of a balance sheet.
The three main sections of the Balance Sheet are Assets, Liabilities, and Equity. Both assets and liabilities are further separated into current and long term based on whether the asset is expected to be consumed or the liability paid within a year. Assets expected to be consumed and liabilities expected to be paid within a year are current and those that will be consumed or paid after a year are long-term. Equity is separated into paid in capital (also referred to as capital stock) and retained earnings. Paid in capital is created when an owner buys stock from the firm. Retained earnings are the accumulated earnings of the firm (i.e., net income over time) that have not been paid back in dividends. Paid in capital also is referred to as contributed capital while retained earnings is earned capital.
Describe cost-volume-profit analysis.
a technique for determining how changes in revenues, costs, and level of activity affect the profitability of an organization.
Traditional Costing Method
applies overhead costs to products based on a predetermined overhead rate. The rate is usually based on a general cost driver like direct labor hours. In short, the traditional method allocates over to products based on a single cost driver. That is, it treats overhead costs as a single pool of overhead costs and only uses one cost driver.
Internal auditors
are company employees whose role in the organization is structure to keep them as independent as possible from management. They are a group of experts (in controls, accounting, and operations) who monitor operating results and financial records, evaluate internal controls, assist with increasing the efficiency and effectiveness of operations, and detect fraud. Internal auditors are not sufficiently independent to express opinions on the firm's financial statements, but their role is much broader than external auditors in that they are the firm's front link defense against fraud and they can engage in operational audits that analyze a firm' operating efficiency and effectiveness and external auditors don't do these types audits.
External auditors
are independent accountants (usually but not always CPAs) who are retained by organizations to perform audits of financial statements to determine if they are prepared and presented in accordance with GAAP and are free from material misstatement.
Financing cash flows
are those associated with someone investing in your firm, either stockholders (buying and selling your stock and paying dividends) and creditors (borrowing and paying back debt). However, any interest expense on loan payments is an expense and therefore an operating cash flows. Dividends are not an expense but a transfer of retained earnings back to the owners and is not an operating but a financing cash flow.
Investing cash flows
are those related to a firm investing in itself (purchasing and selling property, plant and equipment or other businesses) and investing in others (buying the stocks and bonds of another firm or lending another firm money). However, any revenues earned (i.e., interest and dividend income) from investments in other firms is income on the income statement and, therefore, are operating cash flow.
Merchandising companies
buy finished goods and resell them to customers. This category includes wholesalers and retailers.
Operating cash flows
cash flows are those associate with any activity on the income statement. The operating section of the cash flow statement is what the income statement would show if the income statement were prepared on a cash basis and not accrual basis. In addition, since current assets and current liabilities tend to be linked to revenues and expenses on the income statement, any cash flows associated with current assets and liabilities tend to be operating cash flow.
Product Costs:
A cost incurred as part of the production process. These costs are first reported as an asset (inventory) and then as an expense (cost of goods sold) when the product is sold.
Period Costs:
A cost incurred outside the factory or production facility. These costs are reported as an expense in the period in which they are incurred.
Variable Costs:
A cost that changes directly with changes in the level of sales or production. Examples are direct materials costs and sales commission.
Fixed Costs:
A cost that doesn't change based on changes in the level of sales or production. Examples are building rent and executive salaries.
Differential Costs:
A future cost that can be changed by a decision made now. An example is monthly rent for an apartment.
Sunk Costs:
A past cost that cannot be changed by any decision made now. An example would be last month's paid rent.
Conservatism
A pervasive factor in accounting that can be summarized as follows: when doubt exists concerning two or more reporting alternatives, users should select the alternative with the least favorable impact on reported income, assets, and liabilities.
Compare and Contrast Traditional Costing to Activity-Based Costing (ABC).
ABC is a more accurate product costing system than traditional product costing systems. ABC requires more time and expense to administer than do traditional costing systems. Companies with diverse products involving substantially different production processes, an ABC system yields better cost data and better management decisions.
Describe the purpose of accounting.
Accounting is the recording of the day-to-day financial activities of a company and the organization of that information into summary reports used to evaluate the company's financial status. Bookkeeping is a part of accounting. Bookkeeping refers to the process of recording transactions into various accounts, which is the first step in accounting. The next step is to analyze the accounts and organize them into financial statements and other useful reports.
Describe the purpose of an external audit.
Audit conducted by external (independent) qualified accountant(s). These accountants are usually CPAs, but they may not be. Each state determines who can be a CPA in that state and states have slightly different requirements. The independent accounting firm conducts tests to determine whether the financial statements fairly reflect the financial status of the company issuing them and whether the financial statements were prepared using Generally Accepted Accounting Principles (GAAP). The tests include an examination of the original documents underlying key transactions, a spot check to verify that reported inventory actually does exist, and contact with a sample of customers and suppliers to confirm the sales and purchases reported by the company. The external auditor would also carefully review the system of procedures and controls within the company to determine whether the accounting records are maintained in a reliable fashion. Firms hire independent external auditors for a variety of reasons. In some cases, laws and regulations mandate that they do so. Aside for regulations, firms benefit when raising funds through stock sales or by borrowing by being able to show the potential investor or creditor that their financial statements have been audited because that increases the credibility of those financial statements.
Analyze a statement of cash flows to identify operating, investing, and financing activities. Financing Activities:
Balance sheet accounts i.e. Long-term liabilities and equity accounts i.e. mortgage payable; common stock and additional-paid-in capital (cash received from stockholders); retained earnings (cash paid for dividends)
Analyze a statement of cash flows to identify operating, investing, and financing activities. Investing Activities:
Balance sheet accounts: Long-term assets. i.e. property, plant, and equipment; investments i.e. cash paid for equipment, cash paid for investments (stock, loans)
Lenders
Banks use companies' financial statements in making decisions about commercial loans. The financial statements are useful because they help the lender predict the future ability of the borrower to repay the loan.
Evaluating a historical income statement to project a future income statement. Projected growth for 2017 = 10% increase over 2016 sales. Step 1: Convert the income statement into a common-sized income statement. Step 2: Multiply 2016 sales by 1.10 (10% growth) to get the forecasted 2017 sales. Then multiply the projected 2017 sales by the percentages from step 1. Now, what would you do if you were given the 2017 sales figure and you need to calculate the 2016 sales figure based off the 10% growth for 2017?
Calculation for 2016: 110,000 / 1.10 = 100,000
Competitors
Competitors use financial accounting information to reveal strategic opportunities within their industry.
Employees
Financial statement data, as mentioned earlier, are used in determining employee bonuses. In addition, financial accounting information can help an employee evaluate the employer's ability to fulfill its long-run promises, such as for pensions and retiree health care benefits. Financial statements are also important in contract negotiations between labor and management.
Identify motivations and common techniques used to manage earnings.
Earnings management occurs when management attempts to manipulate the impression the financial statements present to users. They can change the timing of transactions, use aggressive accounting procedures, and alter transactions to achieve these goals. Earnings management, exclusive of using fraud to management earnings, is a gray area where there are no clear ethical rules to determine when it is ethical or not. Managers manage earnings to: Meet internal targets - sometimes people that can influence the financial results are also given bonuses based on those results, which gives those employees an incentive to manage earnings. Meet external expectations - Most publicly traded firms are followed and stock analysts who make predictions about future performance for their clients. Firms try to guide these analysts' expectations to prevent surprises that might lower the firm's stock price. Income smoothing - Investors like predictable earnings because they make determining the firm's future performance easier to predict. Managers many manage earnings to smooth out fluctuations that make future earnings harder to predict. Window dressing for an IPO or a loan - If a firm plans to raise outside capital by selling stock or borrowing money, the firm's management has an incentive to make the financial statement results more attractive to those outside creditors and investors.
Explain Accrual Accounting Expense recognition:
Expenses are matched to the revenue that is generated from the expense. Direct matching, as with cost of goods sold (COGS) However, some expenses are extremely difficult to match with specific revenue, and are more aligned to a specific time period. Systematic allocation, as with deprecation Moreover, some expenses are difficult to match with specific revenue or specific time periods. Immediate recognition, as with advertising
Calculate the cost of a product Product costs = Direct labor + Direct Materials + Factory Overhead Factory overhead = Indirect labor + Indirect materials + "Factory expenses" Can you calculate the product costs for September?
Factory overhead = 5,000 + 3,000 + 7,000 + 8,000 = 23,000 Total product costs = 20,000 + 25,000 + 23,000 = 68,000 Total non-product costs = 2,000 + 5,000 = 7,000
Role of the U. S. Securities and Exchange Commission (SEC) in financial reporting.
Regulates the U.S. Stock exchanges. Seeks to create a fair information environment in which investors can buy and sell stocks. Congress created the first securities act in 1933 and the second securities act in 1934 in response to the stock market crash of 1929. The Securities Act of 1933 requires most companies planning to issue new debt or stock securities to the public to submit a registration statement to the public for approval. The Securities Act of 1934 requires a public company to file detailed periodic reports including audited financial statements (form 10-K is the annual report; Form 10-Q is the quarterly report). Granted the legal authority to establish accounting standards. Currently the SEC accepts the pronouncements set by FASB. The SEC can suspend trading of a company's stock, and if hearings show that the issue failed to comply with the securities laws, the SEC can de-list the security. Congress strengthened the SEC through the enactment of Sarbanes-Oxley (SOX), which was enacted after the massive frauds that occurred in the late 1990s and the early 2000s.
The Press
Reporters use financial accounting data as background information and to indicate which companies are undergoing significant changes in financial status.
Frauds
Result from intentional errors. Fraudulent financial reporting occurs when management chooses to intentionally manipulate the financial statements to serve their own purposes, such as meeting Wall Street's earnings forecasts as was the case with WorldCom.
Disagreement
Result when different people arrive at different conclusions based on the same set of facts. Because accounting involves judgment and estimates, opportunities for honest disagreements in judgment abound. These disagreements often come about because of the different incentives that motivate those involved with producing the financial statements. For example, there might be differing views about what percentage of reported receivables will be collected or how long equipment and other assets will last.
Errors
Result when unintentional mistakes are made in recording transactions, posting transactions, summarizing accounts, and so forth. Errors are not intentional and when detected are immediately corrected. Errors can result from sloppy accounting, bad assumptions, misinformation, miscalculations, and other factors.
Suppliers and Customers
Suppliers, customers, and employees use financial statements to tell them about the long-run prospects of a company.
Identify components of the cash flow statement.
The Statement of Cash Flows details how a company obtained and spent cash during a certain period of time. Thus, the cash flow statement explains the change in the firm's cash account for a period of time. All of a company's cash transactions are categorized as either operating, investing, or financing activities. i) Operating cash flows are those associate with any activity on the income statement. The operating section of the cash flow statement is what the income statement would show if the income statement were prepared on a cash basis and not accrual basis. ii) Investing cash flow are those related to a firm investing in itself (purchasing and selling property, plant and equipment or other businesses) and investing in others (buying the stocks and bonds of another firm or lending another firm money). iii) Financing cash flows are those associated with someone investing in your firm, either stockholders (buying and selling your stock and paying dividends) and creditors (borrowing and paying back debt).
Describe the purpose of net income on an income statement.
The accountant's attempt to summarize in one number the overall economic performance of a company for a given period.
Describe the three financial statements.
The balance sheet reports a company's assets, liabilities, and owners' equity. It reports the financial position of a firm at a point in time. The income statement reports the amount of net income earned by a company during a period. Net income is the excess of a company's revenues over its expenses. It reports the financial performance of a firm over a period of time. The statement of cash flows reports the amount of cash collected and paid out by a company in the following three types of activities: operating, investing, and financing over a period of time.
Opportunity Costs:
The benefits not received because of actions NOT taken. For example, the opportunity cost of going to a basketball game is the increased points that you could have received on the next day's accounting exam if you had spent that time studying.
Direct Materials:
The cost of the primary raw materials used in production. In producing French fries, the direct materials cost is the cost of the potatoes.
Direct Labor:
The cost of the wages of the workers who are assembling the direct materials into the finished product. In producing an automobile, the direct labor cost is the compensation cost of the auto workers on the assembly line.
Indirect Costs:
The costs that are assigned to a particular product or segment but that are not actually caused by that product or segment. If a product or segment is dropped, the indirect costs assigned to that product or segment will remain.
Direct Costs:
The costs that are created by a particular product or segment that is being analyzed. If a product or segment is dropped, the direct costs created by that product or segment will disappear.
Describe the differences between the direct and indirect methods of the cash flow statement.
The direct and indirect method only apply to the operating section of the cash flow statement. The investing and financing are always prepared using a direct method. The operating activities section of a statement of cash flows prepared using the direct method is, in effect, a cash-basis income statement. Unlike the indirect method, the direct method does not start with net income. Instead, this method reports directly the major classes of operating cash receipts and payments of an entity during a period. The direct method is favored by many users of financial statements because it is easy to understand. The indirect method begins with net income as reported in the income statement and then details the adjustments needed to arrive at cash flow from operations. The indirect method is favored and used by most companies because it is relatively easy to construct from existing balance sheet and income statement data. In addition, the indirect method highlights the reasons for the difference between net income and cash from operations. In addition, GAAP required this reconciliation and so if a firm uses the direct method, they must present the indirect method in the footnotes anyway, thus having to do the calculations twice.
Identify the order of assets, liabilities, and stockholders' equity accounts on a balance sheet.
The three main sections of the Balance Sheet are Assets, Liabilities, and Equity. Both assets and liabilities are further separated into current and long term based on whether the asset is expected to be consumed or the liability paid within a year. Assets expected to be consumed and liabilities expected to be paid within a year are current and those that will be consumed or paid after a year are long-term. Equity is separated into paid in capital (also referred to as capital stock) and retained earnings. Paid in capital is created when an owner buys stock from the firm. Retained earnings are the accumulated earnings of the firm (i.e., net income over time) that have not been paid back in dividends. Paid in capital also is referred to as contributed capital while retained earnings is earned capital. The Balance Sheet equation - Assets = Liabilities + Equity. Whenever any transaction is recorded in the firm's accounting records, the recording must always maintain this balance. However, some transactions only affect one side of the equal sign with two offsetting entries. For example, selling an asset for cash would only affect the asset side of the equation but would create a net zero effect on Assets since one asset is being converted to another. Liquidity or the speed with which it can be turned into cash. Current assets come before long-term assets because they are expected to be liquidated in one year. Within current assets, cash comes first because it is already cash. Accounts receivable usually comes next because all the firm has to do is collect the receivable to receive the cash. Inventory usually follows accounts receivable because it has to be sold and then the money has to be collected to convert it into cash.
Explain the purpose of notes to financial statements.
There are four main areas that must be covered in the financial statement footnotes: A summary of significant accounting policies. GAAP frequently allows firms to make choices in preparing their financial statements and so GAAP requires that those choices be reported in the footnotes. For example, the firm must report the method they are using to calculation depreciation along with the average useful lives for major classes of depreciable assets. Additional information about the summary totals found in the statements. For example if a firm as a notes payable account in their long-term liabilities, they must list all the individual notes that make up the balance and present the life of the loan and its interest rate. Disclosure of important information not recognized in the statements. For example, if the firm is the defendant in a lawsuit but the outcome of the suit is unclear, the firm must report the existence of the suit in the footnotes. Since the outcome is uncertain, GAAP does not require the firm to accrue a liability for the possible loss thus the possible loss has not been recognized in the financial statements (i.e., no liability has been reported on the balance sheet). Supplementary information required by the Financial Accounting Standards Board (FASB) or the Securities and Exchange Commission (SEC). This is a broad category. One example is reporting summary financial data for different segments of the firm operates in different industries.
