Accounting Terms

Capital Investment Analysis Methods

- Cash Payback - Net Present Value (NPV)

TABULAR ANALYSIS RECORDINGS 1. Paid for advertising 2. Purchased equipment 3. Purchased supplies on account 4. Owner invested 5. Purchased supplies ON ACCOUNT 6. Paid rent 7. Sold services to customers 8. Borrowed from bank / Loan taken from bank 9. Paid employee payroll 10. Received utility bill; will be paid NEXT month 11. Dividend paid to owner 12. Payroll for FACTORY employee 13. Purchased vehicle (e.g. van) 14. Installed loading ramp to van 15. Oil change 16. Depreciating expense 17. Sold vehicle 18. Advanced payment for X months project 19. Insurance 20. Computer

1. (Cash) = (Retained Earnings) 2. (Cash) = Equipment 3. Supplies = Accounts Payable 4. Cash = Common Stock 5. Supplies = Accounts Payable 6. (Cash) = (Retained Earnings) 7. Cash = Retained Earnings 8. Cash = Notes Payable 9. (Cash) = (Retained Earnings) 10. Accounts Payable = (Retained Earnings) 11. (Cash) = (Retained Earnings) 12. (Cash) = Supplies/inventory 13. (Cash) = Equipment 14. (Cash) = Equipment 15. (Cash) = (Retained Earnings) 16. (Accumulating Expense) = (Retained Earnings) 17. Cash = (Equipment) = Accum. Depr. = (Retained Earnings) 18. Cash = Unearned Revenue 19. (Cash) = Pre. Expense 20. (Cash) = Equipment

1. If a company obtained a bank loan, it would record that it received a(n) ______ in exchange for a(n) ______ 2. If a company purchased equipment, it would record that it received a(n) _____ in exchange for a(n) ______ 3. If a company paid for utilities used, it would record that it received a(n) ______ for services used in exchange in a(n) ______

1. Asset, Liability 2. Asset, Asset 3. Expense, Asset

1. Remodel Building 2. Replace brake pads on vehicle 3. Replace engine in vehicle 4. Power wash parking lot 5. Rotate tires on vehicle

1. Capital 2. Ordinary 3. Capital 4. Ordinary 5. Ordinary

1. Cash paid to stockholders (i.e. dividends) 2. Cash paid to suppliers 3. Cash received from customers 4. Cash paid for equipment 5. Cash received from a bank loan

1. Financing = cash outflow 2. Operating = cash outflow 3. Operating = cash inflow 4. Investing = cash outflow 5. Financing = cash inflow

1. Accounts payable 2. Retained earnings 3. Inventory 4. Accounts receivable

1. Liability 2. Stockholder's Equity 3. Asset 4. Asset

Net Present Value (NPV)

LECTURE DEFINITION : Considers both profitability & the time value of money = more informative than cash payback. Is used to make the final evaluation among projects HOW TO CALCULATE (w/ PV table) : 1. Draw time :

Plant Asset Expenditures

ORDINARY REPAIRS - Maintain operating efficiency and expected productive life - Usually fairly small amounts that occur frequently - Record as an expense (e.g. (cash) and (Maintenance Expense) CAPITAL EXPENDITURES - Increase efficiency, capacity, or useful life - Usually large amounts that occur infrequently - Extraordinary repair that extends life - Record as an asset

Total Liability and Equity

WHAT : - Liability = anything payable in the future - Equity = Funds provided by owner HOW TO CALCULATE : Liability = Notes payable + Accounts Payable Equity = Common Stock + Retained Earnings

Standard Cost Variances

WHAT : (1) Price Variances; (2) Quantity Variances LECTURE DEFINITIONS : - Variance : Difference between what is expected and what actually happened - Price : Cost of input (DM or DL) is higher or lower than planned - Quantity : Amount of input (DM or DL) used is higher or lowered than planned

Flexible Budget

WHAT : A budget prepared for various levels of sales volume LECTURE DEFINITION : - Volume is considered - Useful for variable costs - For each variable cost, multiply Variable Cost Unit (VCu) by actual volume achieved for flexed budget EXAMPLES : - Direct materials - Direct labor - Variable Overhead

Straight Line Method

WHAT : A depreciation method that allocates an equal amount of depreciation each year HOW TO CALCULATE : (Cost - Estimated Residual Value) / Estimated Useful Life

Debts to Assets Ratio

WHAT : A measure of solvency calculated as total liabilities divided by total assets. It measures the percentage of total financing provided by creditors. HOW TO CALCULATE : DAR = (Total Liabilities / Total Assets ) x 100 NOTES : - Total Liabilities = Accounts Payable + Other Current Liabilities + Long-Term Liabilities - Answer is in percentage (%) - Lower # = Good!

Profitability Ratio

WHAT : A ratio used to evaluate the earnings performance of a business during the accounting period. LECTURE DEFINITION : Ability to generate profits NOTES : - This is a table that includes : Gross Profit Rate, Net Profit Rate, and Return on Assets (ROA)

Notes Payable

WHAT : A written promise made by the business to pay a debt, usually involving interest, in the future. HOW TO CALCULATE : Given "Assets", Liabilities & Equity equal Assets, so minus everything from the Assets # EX: Assets = Liabilities & Equity - Common Stock - Accounts Payable - Retained Earnings NOTES : - Retained Earnings = RE (Jan 1) + Net Income - Dividends

Salvage Value

WHAT : An estimate of an asset's value at the end of its useful life. LECTURE DEFINITION : Sale or scrap at end of useful life

Balance Sheet Budget (partial)

WHAT : Assets = Liabilities HOW TO CALCULATE : NOTES : - Cash is the ending cash balance - Inventory = next month's units (% of ending inventory as stated) x cost per unit purchased

Operating Cash Flows

WHAT : Cash flows received from the operating of the capital budgeting project. LECTURE DEFINITION : Inflow from customers for operating costs, maintenance, etc.

Income Statement Budget (NET INCOME)

WHAT : Cost of inventory sold in the current period HOW TO CALCULATE : Net Income = Revenue - OPERATING Costs & Less Expenses Operating Costs & Expenses = Costs of Sales (COS) / Costs of Goods Sols (COGS) General & Administrative Rent Advertising Payroll Taxes Tax & other benefits Insurance Interest expense Franchise and property Selling, general, and admin. NOTES : - Make the table : Sales Budget -> Income Stmt Budget - Revenue includes sold services to customers - For BUDGETS, Revenue = # of units planned to sale x sales price - COGS = # of units planned to sale x purchase price - For insurance, take cost of insurance & divide by # of months!!

Initial Investment

WHAT : Funds needed to purchase a capital asset or begin a capital investment project. LECTURE DEFINITION : Cost to buy

Contribution Margin Ratio

WHAT : Gross profitability of each product HOW TO CALCULATE : CM Ratio = (Price of Product SOLD - (Variable Cost / # of units) ) / Price of Product SOLD NOTES: - High % = High profit

Target Cost

WHAT : How much it cost to produce the product HOW TO CALCULATE: Target Cost = Price per unit PURCHASED - (Price per unit PURCHASED x %) NOTES: - Price per unit PURCHASED = what the company is willing to pay per unit - Convert % to decimal (e.g. 30% = 0.30) - Sometimes the Price per unit PURCHASED is named as "market price" - Includes period cost

Solvency Ratios

WHAT : Measures of the ability of the company to survive over a long period of time. LECTURE DEFINITION : Ability to manage long-term debts NOTES : - This is a table including : Debts to Assets Ratio & Times Interest Earned

Liquidity Ratios

WHAT : Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. LECTURE DEFINITION : Ability to convert current assets (CA) to Cash to pay current liabilities (CL) NOTES : - This is a table including : Current Ratio, Days in Inventory, and Average Collection Period

Ending Cash Balance

WHAT : The amount of cash a business has left at the end of the month HOW TO CALCULATE : Ending Cash Balance = Everything profit or loss added together but not including anything on account

Cost Plus

WHAT : What the company should charge for the product being sold HOW TO CALCULATE : Cost Plus = Target Cost + (Target Cost x %) NOTES: - % is still the same from TC

Static Budget

WHAT : a budget prepared for only one level of sales volume LECTURE DEFINITION : - Volume is not considered - Useful for total sales and fixed costs EXAMPLES : - Sales - Advertising (fixed) - Rent on equipment

Cash Budget

WHAT : a budget that estimates cash inflows and outflows during a particular period like a month or a quarter HOW TO CALCULATE : Ending Cash Balance = Beginning cash balance + Sales - Investing + Finance - Purchases (from this month) - Purchases (from previous month) - Advertising Expense - Payroll Expense - Rent Expense NOTES : - Beginning cash balance is 0 for first month unless otherwise stated - Purchases (from this month) = Total Costs of Purchases x % of inventory purchases company paid for that month - Purchases (from last month) = Total Costs of Purchases x remaining % of inventory purchases - Financing Activities can be loans from banks - Investments can be purchases on equipment - Operating Activities can include purchases (last & this month), advertising, payroll, rent, etc.

Sales Budget

WHAT : a detailed schedule showing expected sales expressed in both dollars and units HOW TO CALCULATE : Total Sales = Sales (in units) x Price per unit sold NOTES: - "Sales (in units)" simply means the amount of units forecasted/sold for that specific month

Plant Assets

WHAT : assets that will be used for a number of years in the operation of a business LECTURE DEFINTION : - Tangible, used in normal operations and not offered for sale - Costs include purchase price, related fees (e.g. freight, assembly, installation), and taxes - Generally referred to as : Property and Equipment or fixed assets - EX : Delivery vehicles, production machinery, buildings, and land - All plant assets (except land) decline in service potential over their useful life

Purchases Budget

WHAT : budget showing the purchases (in units) required in each month to make the expected sales in that month (from the sales budget) and to keep inventory at desired levels HOW TO CALCULATE : Purchases (or productions) = Sales (in units) - Beginning Inventory + Ending Inventory Total Cost of Purchases = Purchases (^calculated above) x Price cost per unit NOTES : - You have to draw out the table (Sales Budget -> Purchase Budget) - Beginning Inventory is always 0 for first month unless stated otherwise. - Beginning Inventory for the following months is negative last month's ending inventory - Ending Inventory = Next month's units x % of next month's (as stated in problem)

Horizontal Analysis

WHAT : comparison of a company's financial condition and performance across time LECTURE DEFINITION : Measures relative change over time HOW TO CALCULATE : HA = ( (# of Year - Previous Year #) / Previous Year # ) x 100 NOTES - Formula is generalized. Use specific numbers for questions (e.g. revenue # when asking about revenue) - Net income is both a product of revenue and expenses - Answer is in percentages

Variable Cost Per Unit

WHAT : constant price HOW TO CALCULATE : Variable Cost Per Unit = (All classified as VC added together) / # of units

Net Income

WHAT : difference between total revenue and total expenses when total revenue is greater HOW TO CALCULATE : Net Income = Revenue - Expenses NOTES: - Expenses are rent, payroll, tax, maintenance, COGS - For COGS questions, period is included too - For Fixed & Variable Cost questions, Net Income = (# of units x sold price) - VC - FC

Cost of Goods Sold (COGS)

WHAT : the cost of the merchandise inventory that the business has sold to customers HOW TO CALCULATE: COGS = CGM x % of units sold = (OH+DL+DM) x % of units sold COGS = # of units produce for that month x purchase price of unit EXAMPLE: If a company sold 75% of the 30,000 units with produced for a total of $45,000, record the sale. (14,400 + 5,700 + 13,200) x 0.75 = $24,975

Budget Variance

WHAT : the difference between the budgeted amount and the actual amount that you spend HOW TO CALCUATE : Budget Variance = Actual Sales - Budget Sales NOTES : - FOR SALES : Actual > Budget = F - FOR OVERHEAD : Actual > Budget = U

Break-Even Point

WHAT : the point at which the costs of producing a product equal the revenue made from selling the product(total fixed costs equals total contribution margin.) HOW TO CALCULATE: Break-Even Point = Fixed Costs / (Price of product SOLD - (Variable Cost/# of units) )

Ending Inventory

WHAT : what remains unsold at the end of the period HOW TO CALCULATE : Ending Inventory = CGM - COGS

Net Cash Flow

WHAT: Total inflows - Total outflows HOW TO CALCULATE: Net Cash Flow of financial activities = Investments/Common stock + loans RECEIVED/notes payable - dividends Net Cash Flow of investing activities = (Equipment) NOTES: - Sometimes it asks for specific types (e.g. financial activities)

1. Rent of billboard to help advertise the product 2. Rent on factory (and equipment) 3. Total payroll for hourly paid factory workers 4. Tomatoes, onions, spices, and bottles 5. Total payroll for salaried admin staff 6. Hourly pay for cleaning crew 7. Product delivery cost 8. Packaging 9. Rent on office space 10. Corn oil 11. Rent for office building 12. Rent on equipment 13. Utility bill 14. Production Associate 15. Production Manager 16. Division Vice President 17. Accounting Manager 18. Customer Service Rep 19. Sales Manager

1. Period , Fixed Cost 2. Overhead , Fixed Cost 3. Direct Labor , Variable Cost 4. Direct Materials , Variable Cost 5. Period , Fixed Cost 6. Overhead, Variable Cost 7. Period , Variable Cost 8. Direct Materials , Variable Cost 9. Period , Fixed Cost 10. Overhead , Variable Cost 11. Period , Fixed Cost 12. Overhead , Fixed Cost 13. Overhead, FixedCost 14. Direct Labor , Variable Cost 15. Overhead , Fixed Cost 16. Period , Variable Cost 17. Period , Fixed Cost 18. Period , Variable Cost 19. Period , Fixed Cost

Creating a tabular analysis for next year

1. Remember to start with last year's endings!!!!!!! 2. Anything on account payable does NOT go in cash!! Only take away from RE

Correct order of preparation of budget

1. Sales Budget 2. Purchases Budget 3. Budgeted Income Statement 4. Cash Budget 5. Budgeted balance sheet

1. Sales to customers 2. Rent 3. Sale of equipment 4. Bank loan payment 5. Salaries OPTION 1: - operating - investing - financing OPTION 2: - cash receipt (i.e. inflow) - cash disbursement (i.e. outflow).

1. operating/receipt 2. operating/disbursement 3. investing/receipt 4.financing/disbursement 5. operating/disbursement

Return on Assets (ROA)

HOW TO CALCULATE : ROA = (Net Income / Total Assets) x 100 NOTES : - Total Assets = Cash + A/R + Inventory + Prepaid Expenses + Property & Equipment + Other Assets - Answer is a percentage (%) - Higher # = good!

What does a bank look at to determine whether a company is able to make a loan payment in the next thirty days?

Balance Sheet WHY : Contains a company's position in regard to debt & assets

Manufacturing Cost Variances - Standards

HOW TO CALCULATE : (Standard quantity allowed for production) x (Standard cost per unit) DIRECT MATERIALS CALCULATIONS : (# of units produced) x (lb of each unit) x (price per lb for each unit) DIRECT LABOR CALCULATIONS : (# of units produced) x ((# of SEC/60)/60) x (cost per hour of direct labor for each unit) OR (# of units produced) x ((# of MIN)/60) x (cost per hour of direct labor for each unit) NOTES : - lb of each unit is usually in fractions - (# of seconds/60) is done FIRST before dividing by another 60 !!! Add parenthesizes !!

Next month's purchased units

HOW TO CALCULATE: Use Purchase budget sheet

NEWS COLLECTION

FINANCIAL STATEMENTS (FS) - Target : - General Motors : - Netflix : ACCOUNTING INFORMATION (AI) - McDonalds : - Boeing : MANAGERIAL ACCOUNTING AND PRICING (MAP) - Walmart : - Peloton : - Disney : COST-VOLUME-PROFIT (CVP) - Mondelez International : - Ford : - Burger King : BUDGETARY PLANNING (BP) - Ford : - Gravity Payments : LONG-LIVED ASSETS AND ACCRUAL ACCOUNTING CONCEPTS (LAAC) - Emirates : Received last Airbus380 - Taco Bell : Subscription plan "The Taco Lover's Pass" = 1 taco per day for 30 day subscriptions = make guests come back 2-3x more frequently and spend 25%-30% more BUDGET CONTROL (BC) - Tesla : Q3 earnings top estimates after deliveries set record high but revenue came in short after expected consensus expectations - Red Bull : Price predicted to skyrocketed due to margins decline versus plan as aluminum and sugar costs increase FINANCIAL ANALYSIS (FA) - GM : Amid a computer chip and car parts shortage = 3rd quarter profits plummet 40% = Significant decline in net income TIME VALUE OF MONEY (TVM) - Royal Caribbean = new "Symphony of the Seas" = largest cruise ship = large $ invest

Manufacturing Cost Variances - Actual Quantity

HOW TO CALCUALTE : (Actual Quantity used in production) x (Standard cost per unit) DIRECT MATERIALS CALCULATIONS : (lb of direct materials) x (price per lb for each unit) DIRECT LABOR CALCUATIONS : (# of direct labor hours) x (cost per hour of direct labor for each unit) NOTES : - In DM, lb is from actual results and price is from standards !! - In DL, # of direct labor hours is from actual results and cost is from standards

Manufacturing Cost Variances - Total Budget Variance

HOW TO CALCUALTE : Actual Results - Standards NOTES : - Actual Results > Standards = U

Average Collection Period

HOW TO CALCULATE : ACP = 365 / (Sales / Average AR) NOTES : - AR = Accounts Receivable = (A/R in question + Previous Year's A/R) / 2 - Sales come from revenue # - Low ACP = good

Assets

HOW TO CALCULATE : Assets = Cash + Equipment + Supplies/Inventory + Accounts Receivable + Accumulating Depreciation

Cost of Goods Manufactured (CGM)

HOW TO CALCULATE : CGM = OH + DL + DM NOTES : - Period cost not included

Current Ratio

HOW TO CALCULATE : CR = CA / CL NOTES : - CA = current assets = Cash + Accounts Receivable + Inventory + Prepaid Expenses - CL = current liabilities = Accounts Payable + Other Current Liabilities + Unredeemed gift cards - Higher CR = good !

Days in Inventory

HOW TO CALCULATE : DI = 365 / (COGS / Average Inventory) NOTES : - 365 refers to days in a year - COGS = cost of goods sold (also can be cost of sales) - Average Inventory = (Inventory of Year in Question + Previous Year's Inventory) / 2 - Lower Days in Inventory # = getting rid of inventory debt faster = good

Gross Profit Rate

HOW TO CALCULATE : GPR = ( (Sales - COGs) / Sales ) x 100 NOTES : - Sales come from revenue # - COGs can be also called cost of sales - Answer is a percentage (%) - Higher # = good!

Profit Margin

HOW TO CALCULATE : PM = (Net Income / Sales) x 100 NOTES : - Sales come from revenue # - Answer is a percentage (%) - Higher # = good!

Retained Earnings

HOW TO CALCULATE : Retained Earnings (Jan 1.) = Retained Earnings (Dec 31 of last year) - Net Income + Dividends NOTES: - Retained Earnings of Dec 31 last year = Retained Earnings of Jan 1. the following year - RE (Dec 31.) = usually 0 if not given

Times Interest Earned

HOW TO CALCULATE : TIE = (NI + Interest Expense + Taxes) / Interest Expense NOTES : - NI = Net Income - Int. = Interest Expense - Higher # = good!

Manufacturing Cost Variances - Variances

HOW TO CALCULATE : PRICE VARIANCE = Actual results - Actual quantity QUANTITY VARIANCE = Actual quantity - Standards NOTES : - Actual results > Actual quantity = U - Actual quantity > Standards = U

Manufacturing Cost Variances - Actual Results

HOW TO CALCULATE : (Actual quantity used in production) x (Actual cost per unit) DIRECT MATERIALS CALCULATIONS : (lb of direct materials) x (cost per lb) DIRECT LABOR CALCULATIONS : (hours of direct labor) x (cost per hour of direct labor) NOTES : - Usually VERY obviously stated for variables above

Cash Payback

LECTURE DEFINITION : Time needed to recover cost of capital investments; the shorter the paycheck period = the better the investment Ignores profitability & time value of money, and is used as an initial screen of many projects HOW TO CALCULATE : 1. Draw timeline : Start w/ original cost/value at beginning and draw how many dashes (years) after that first original dash. Under each dash after original, put the value expected to gain or lost for each year. 2. Calculate Cumulative Cash Inflow : 1st yr = how much is expected to gain or lost ; following yrs = add onto the prior year. When getting close to the original cost/value, do a fraction of the remaining to reach value over the amount of that year of the timeline (NOT what we are currently adding), if any remaining. 3. Add the fraction to the prior year's number = cash payback period!!' QUICK AND EASY WAY : Cash Payback = (Year 0 + all the following years until barely reaches Year 0) / the following year's cash inflow) + that prior year NOTES : - If it reaches Year 0, it is in exact years, no decimal = no fraction needed - For timeline, value is not always the same for each year, so be careful when calculating step 2!!! - Step 2 is performed right under timeline

Return on Investment (ROI)

LECTURE DEFINITION : Measures effectiveness of utilizing assets to generate net income HOW TO CALCULATE : ROI = Controllable Net Income / Invested Assets NOTES : - High ROI = good bc company is good at using investments to generate income

Intangible Assets

LECTURE DEFINITIONS : Patent : Exclusive right to produce and sell goods with one or more unique features for 20 years R&D : Usually recorded as an expense when incurred Copyrights : Exclusive right publish artistic work for 70 years beyond author's death Trademarks : Right to use a name or symbol to identify a business Goodwill : Excess fair value of purchased business above net asset value

Depreciation

LECTURE DEFINTION : - Physical and/or functional loss of ability to provide usefulness - Allocate cost over useful life - Straight line method