Accounting and Finance

Given sales revenue of $600,000 and break-even sales of $500,000 what is the Margin of Safety?

$100,000

What is the breakeven sales revenue in USD when fixed costs are $80,000 and contribution margin is $30,000?

$110,000

The Sabian company manufactures cymbals and sells them to colleges for marching bands. This last quarter, Sabian sold $500,000 with variable costs of $200,000 and fixed costs of $150,000. What was Sabian's contribution margin?

$150,000

Given sales revenue of $80,000 and contribution margin of $60,000 what are the variable costs?

$20,000

Given sales revenue of $500,000, variable costs of $200,000, and fixed expense of $50,000 what is the Margin of Safety?

$250,000

Tom's Hardware has a sales revenue of $150,000 and it's break-even sales are $120,000. Therefore, the margin of safety will be:

$30,000

When 10,000 units are produced and the sales price is $60 per unit, what are the variable costs if the contribution margin is $20?

$400,000

Parker Lane Cafe currently has $160,000 in cash, $380,000 in inventory, and $40,000 in accounts receivable. The company also has $40,000 in accounts payable, and $10,000 in other current liabilities. What is its quick ratio?

4: 1

Given fixed costs of $100,000 and contribution margin of $20 per unit. How many units are needed to break even?

5000

Extotech has sales of $50 million, cost of goods sold for the same period of $15 million, and average inventory of $250,000. What is Exotech's inventory turnover?

60

The Golden Braid Bookstore currently has $340,000 in cash, $280,000 in inventory, and $40,000 in accounts receivable. The company also has $65,000 in accounts payable, and $15,000 in other current liabilities. What is its current (or working capital) ratio?

8.25 :1

Inventory Turnover

A company's inventory turnover ratio shows the number of times its average inventory is sold during a period.

Liability:

A liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events, the settlement of which may result in the transfer or use of assets, provision of services, or other yielding of economic benefits in the future. Liabilities include things like loans, monies owed to suppliers or creditors that the business will use assets (i.e., cash) to settle.

The voluntary organization that provides standards for auditor independence, and integrity and objectivity in the accounting profession is:

AICPA.

Bookkeeping vs. Accounting

Accounting is often confused with bookkeeping. Bookkeeping is a mechanical process that records the routine economic activities of a business. Accounting includes bookkeeping, but it goes further to analyze and interpret financial information, prepare financial statements, conduct audits, design accounting systems, prepare special business and financial studies, prepare forecasts and budgets, and provide tax services.

Acid-Test (Quick) Ratio:

Acid test ratio=Quick assets / Current liabilities

Asset:

An asset is an economic resource. Anything tangible or intangible that can be owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset). Assets include things like cash, vehicles, buildings, equipment, patents, and debts owed to the company.

The accounting equation is as follows:

Assets − Liabilities = Owner's or Shareholders' Equity

Breakeven in Sales Dollars

BE dollars=Fixed costs / Contribution margin ratio

Breakeven in Units

BE units=Fixed costs / Contribution margin per unit

Break-Even Point

Businesses, both large and small, are concerned with determining the point at which their revenues exceed their expenses and they begin to make a profit. The point at which revenue equals expenses (and profit is therefore $0) is called the break-even point.

Ethical Practices in Accounting

Certified public accountants (CPAs) and certified management accountants (CMAs) are bound to the Code of Ethics established by their licensing bodies. Generally accepted accounting principles (GAAP) and the Financial Accounting Standards Board (FASB) have established practices designed to ensure that the financial status of a company is "fairly and accurately" presented. Legislation such as the Sarbanes-Oxley Act has been passed by Congress to strengthen the emphasis on ethical practices in accountancy. Although stories of unethical conduct by companies such as Enron, WorldCom, and HP have made headlines, the overwhelming majority of individuals working as internal or external accountants follow the code of ethics and work hard to ensure that the information provided to stakeholders is fair and accurate.

Financial statement certification:

Chief executive officers and chief financial officers must certify company financial statements, with severe criminal and civil penalties for false certification. If securities fraud results in restatement of financial reports, these executives will lose any stock-related profits and bonuses they received prior to the restatement.

Financial disclosure:

Companies must clearly disclose all transactions that may have a material current or future effect on their financial condition, including those that are off the books or with unconsolidated entities (related companies whose results the company is not required to combine with its own financial statements under current accounting rules). Management and major stockholders must disclose transactions such as sales of company stock within two days of the transaction. The company must disclose its code of ethics for senior financial executives. Any significant changes in a company's operations or financial condition must be disclosed "on a rapid and current basis."

Break-even determines the point when ________ covers fixed expenses.

Contribution Margin

Contribution Margin Ratio

Contribution margin ratio=Contribution margin per unit / Selling price per unit

Current (or Working Capital) Ratio:

Current ratio=Current assets / Current liabilities

Internal controls:

Each company must have appropriate internal control procedures in place for financial reporting, and its annual report must include a report on implementation of those controls to assure the integrity of financial reports.

Equity:

Equity is the difference between the value of the assets and the amount of the liabilities of something owned. Owner's equity consists of the net assets of an entity. Net assets is the difference between the total assets and total liabilities. When the owners are shareholders, the interest can be called shareholders' equity; the accounting remains the same, and it is ownership equity spread out among shareholders.

Financial Ratios

Financial ratios allow business to represent the relationships between components of their financial operations as ratios. Financial ratios are used to measure a firm's financial health in four areas: liquidity, long-term solvency, profitability tests, and the market. These ratios can be used to compare the company's performance across periods (months, quarters, years) or to similar companies within the same industry.

Accounting in Business

In short, accounting is the language of business—all business. Accounting represents all of the financial transactions of a business in a format that can be interpreted and understood by both internal and external stakeholders.

After all of the income and expenses of the business have been recorded, financial accountants prepare financial statements in the following order:

Income Statement Statement of Retained Earnings—also called Statement of Owner's Equity The Balance Sheet The Statement of Cash Flows

Which of these financial statements explains the changes in a business during a period of time?

Income statement, statement of owner's equity

inventory turnover as follows:

Inventory turnover=Cost of goods sold / Average inventory

Persons outside the company use its financial information for which of the following decisions?

Invest in the business

________ focuses on a range of topics, from production planning to budgets of raw materials.

Managerial accounting

________ provides individuals within an organization with the financial information needed to make good business decisions.

Managerial accounting

Revenues − Expenses = Net Income.

Net income is often called the earnings of the company. When expenses exceed revenues, the business has a net loss.

Accounting is used to communicate financial information to both internal audiences and external audiences. Internal users are:

People within the business like production managers

The AICPA issued guidance to help CPAs solve ethical dilemmas not explicitly addressed in the code. Even though this guidance is for CPAs, it makes sense for anyone facing an ethical dilemma:

Recognize and consider all relevant facts and circumstances, including applicable rules, laws or regulations, Consider the ethical issues involved, Consider established internal procedures, and then Formulate alternative courses of action. After weighing the consequences of each course of action, you select the best course of action based on your own judgment.

In a manufacturing operation fixed costs necessary to keep the operation going include:

Rent

This legislative bill contains 11 sections including more severe penalties for fraudulent financial reporting, and increased requirements for transparency. The bill is:

Sarbanes Oxley (SOX).

Consulting work:

The Act restricts the non-auditing work auditors may perform for a client. In the past, the large accounting firms had expanded their role to include a wide range of advisory services that went beyond their traditional task of validating a company's financial information. Conflicts of interest arose when the same firm earned lucrative fees for both audit and consulting work for the same client

Auditing standards:

The Board must include in its standards several requirements, such as maintaining audit work papers and other documentation for audit reports for seven years, the review and approval of audit reports by a second partner, and audit standards for quality control and review of internal control procedures.

The American Accounting Association refers to accounting as the process of identifying, measuring, and communicating economic information. Accounting is also referred to as:

The Language of Business

current (or working capital) ratio.

The ratio that relates current assets to current liabilities

When a business owner is asked how the business is doing and she replies, "We are breaking even" what does this actually mean?

The revenue earned and costs incurred for a period are equal.

Sarbanes-Oxley Act

This law, one of the most extensive pieces of business legislation passed by Congress, was designed to address the investing public's lack of trust in corporate America. It redefines the public corporation-auditor relationship and restricts the types of services auditors can provide to clients. The Act clarifies auditor-independence issues, places increased accountability on a company's senior executives and management, strengthens disclosure of insider transactions (an employee selling stock based on information not known by the public), and prohibits loans to executives.

Key Financial Statements

When businesses present their financial condition to external stakeholders, taxing authorities, investors, and the general public, the most common format for this information is one of four key financial statements. These four statements are the Balance Sheet, Income Statement, Statement of Owners Equity, and Statement of Cash Flows. These four statements, although representing different facets of the company's finances, are all interconnected and create a birds-eye view of the company's financial position.

Profitability test

an important measure of a company's operating success rate of return on operating assets; net income to net sales; net income to average common stockholders' equity; cash flow margin; earnings per share of common stock; times interest earned ratio; and times preferred dividends earned ratio

Generally Accepted Accounting Principles (GAAP)

are a uniform set of accounting rules that allow users to compare the financial statements issued by one company to those of another company in the same industry

Expenses

are the costs incurred to produce revenues. Expenses are costs of doing business (typically identified as accounts ending in the word "expense").

Revenues

are the inflows of cash resulting from the sale of products or the rendering of services to customers. We measure revenues by the prices agreed on in the exchanges in which a business delivers goods or renders services.

The ________ provides a snapshot of the company's financial position at a specific point in time.

balance sheet

The accounting equation for a given point in time can be calculated using which financial statement?

balance sheet

The formula for contribution margin ratio is:

contribution margin per unit divided by sales price per unit.

The four accounting statements are said to be inter-connected because:

details for account balances on one report, may be found on one of the other reports.

The acid-test (quick) ratio is different from the current ratio in that it:

emphasizes assets that are quickly and reliably turned into cash.

statement of retained earnings,

explains the changes in retained earnings between two balance sheet dates. We start with beginning retained earnings (in our example, the business began in January, so we start with a zero balance) and add any net income (or subtract net loss) from the income statement. Next, we subtract any dividends declared (or any owner withdrawals in a partnership or sole-proprietor) to get the ending balance in retained earnings (or capital for non-corporations)

What sort of information is provided by the accounting process?

financial data

Financing activities

generally include the cash effects (inflows and outflows) of transactions and other events involving creditors and owners. Cash inflows from financing activities include cash received from issuing capital stock and bonds, mortgages, and notes, and from other short- or long-term borrowing. Cash outflows for financing activities include payments of cash dividends or other distributions to owners (including cash paid to purchase treasury stock) and repayments of amounts borrowed. Payment of interest is not included because interest expense appears on the income statement and is, therefore, included in operating activities. Cash payments to settle accounts payable, wages payable, and income taxes payable are not financing activities. These payments are included in the operating activities section.

Operating activities

generally include the cash effects (inflows and outflows) of transactions and other events that enter into the determination of net income. Cash inflows from operating activities affect items that appear on the income statement and include: (1) cash receipts from sales of goods or services; (2) interest received from making loans; (3) dividends received from investments in equity securities; (4) cash received from the sale of trading securities; and (5) other cash receipts that do not arise from transactions defined as investing or financing activities, such as amounts received to settle lawsuits, proceeds of certain insurance settlements, and cash refunds from suppliers.

Investing activities

generally include transactions involving the acquisition or disposal of noncurrent assets. Thus, cash inflows from investing activities include cash received from: (1) the sale of property, plant, and equipment; (2) the sale of available-for-sale and held-to-maturity securities; and (3) the collection of long-term loans made to others. Cash outflows for investing activities include cash paid: (1) to purchase property, plant, and equipment; (2) to purchase available-for-sale and held-to-maturity securities; and (3) to make long-term loans to others.

Market test

help investors and potential investors assess the relative merits of the various stocks in the marketplace earnings yield on common stock; price-earnings ratio; dividend yield on common stock; payout ratio on common stock; dividend yield on preferred stock; and cash flow per share of common stock

Eliza has just opened a new business near campus that is a combination of a laundromat, a nail salon, and a tanning studio. At the end of the first quarter (three months of business), Eliza wants to see if she has made a profit so she makes an appointment to meet with her accountant. When she gets to the appointment, her accountant will review which of the following financial statements with Eliza?

income statement

The ________ shows the income and expenses of a company over a period of time.

income statement

The ________, sometimes called an earnings statement or profit and loss statement, reports the profitability of a business organization for a stated period of time.

income statement

Liquidity ratio

indicate a company's short-term debt-paying ability current (or working capital) ratio; acid-test (quick) ratio; cash flow liquidity ratio; accounts receivable turnover; number of day's sales in accounts receivable; inventory turnover; and total assets turnover

Tax accounting

information includes financial accounting information, written and presented in the tax code of the government—namely the Internal Revenue Code. Tax accounting focuses on compliance with the tax code and presenting the profit and loss story of a business to minimize its tax liability.

Managerial accounting

information is for internal use and provides special information for the managers of a company. The information managers use may range from broad, long-range planning data to detailed explanations of why actual costs varied from cost estimates.

Working capital

is the excess of current assets over current liabilities.

Contribution margin

is the portion of revenue that is not consumed by variable cost.

Acid-Test (Quick) Ratio:

is the ratio of quick assets (cash, marketable securities, and net receivables) to current liabilities.

balance sheet

lists the company's assets, liabilities, and equity (including dollar amounts) as of a specific moment in time. That specific moment is the close of business on the date of the balance sheet. Notice how the heading of the balance sheet differs from the headings on the income statement and statement of retained earnings. A balance sheet is like a photograph; it captures the financial position of a company at a particular moment in time. The other two statements are for a period of time. As you learn about the assets, liabilities, and stockholders' equity contained in a balance sheet, you will understand why this financial statement provides information about the solvency of the business.

In a manufacturing operation a variable cost necessary to produce the finished product includes:

parts.

Financial accountants:

provide information to external entities that allows them to evaluate business performance.

The Accounting Equation

represents the relationship between assets, liabilities, and the owner's equity of a business. It's the foundation for the double-entry accounting system, accepted to be the most reliable and accurate method of recording the financial transactions of a business. The accounting equation must always "balance": The left and right side of the equation must be equal.

Equity (long-term solvency) ratio

show the relationship between debt and equity financing in a company equity (or stockholders' equity) ratio; and stockholders' equity to debt ratio

Eliza has just opened a new business near campus that is a combination of a laundromat, a nail salon, and a tanning studio. There is an accounting firm located just down the street and Eliza is paying them to do all of her accounting. At the end of the first quarter (three months of business), Eliza has several questions about how things are going. If she wants to understand how much total cash has come into the business this quarter, then she should look at the ________ that her accountant has prepared.

statement of cash flows

Eliza has just opened a new business near campus that is a combination of a laundromat, a nail salon, and a tanning studio. There is an accounting firm located just down the street and Eliza is paying them to do all of her accounting. At the end of the first quarter (three months of business), Eliza has several questions about how things are going. If she wants to understand how much money she has put into the business so far, then she should look at the ________ that her accountant has prepared.

statement of owner's equity

Financial accounting is utilized by ________ in order to make investment decisions:

stockholders and creditors

statement of cash flows

summarizes the effects on cash of the operating, investing, and financing activities of a company during an accounting period; it reports on past management decisions on such matters as issuance of capital stock or the sale of long-term bonds. This information is available only in bits and pieces from the other financial statements. Since cash flows are vital to a company's financial health, the statement of cash flows provides useful information to management, investors, creditors, and other interested parties.

Eliza has just opened a new business near campus that is a combination of a laundromat, a nail salon, and a tanning studio. There is an accounting firm located just down the street and Eliza is paying them to do all of her accounting. At the end of the first quarter (three months of business), Eliza has several questions about how things are going. If she wants to understand how much debt the business has right now, then she should look at the ________ that her accountant has prepared.

the balance sheet

The accounting equation represents the relationship between assets, liabilities, and:

the owner's equity of a business

Although a business has had record sales it is having a hard time paying the bills each month. As a manager you are uncertain why this is occurring and ask the financial accountant to explain this situation to you. When the accountant comes to your office they will bring which of the following financial statements as supporting documentation?

the statement of cash flows