Intro to Business (Week 14)
Accounting definition
"the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by the users of the information."
Given sales revenue of $600,000 and break-even sales of $500,000 what is the Margin of Safety?
- $100,000
The No Doze Cafe coffee shop sells 50 different types of coffee to its patrons. It costs $4 for a cup of coffee. Each day it sells on average 500 cups of coffee. On the weekends it sells closer to 1000 cups of coffee. Here is a breakdown of the shop's expenses per cup of coffee: What is the contribution margin for the shop selling one cup of coffee on an average day?
- $2.50
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
Whether a business calculates break-even in terms of dollars or units, the first step is to calculate the contribution margin or the portion of revenue that can be used to cover fixed costs. Let's say you're an entrepreneur who makes belts out of recycled bicycle tires. If your variable costs per belt are $5 and you sell your belts for $35, what is the contribution margin?
- $30
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
Achieving break-even is fine as an initial or interim goal, but most businesses and entrepreneurs would prefer to have a margin of safety. Let's assume your start a pie-making business as a side hustle, generating $21,000 in revenue and incurring of $6,300 in variable costs and $6,000 in fixed costs. What is your margin of safety?
- $8,700
The contribution margin ratio expresses the contribution margin as a percentage of sales. Using the data from the prior question—$5/belt variable costs and $35/belt sales price—what is the contribution margin ratio?
- 0.86
Act II Costumes currently has $120,000 in cash, $340,000 in inventory, and $20,000 in accounts receivable. The company also has $20,000 in accounts payable, and $20,000 in other current liabilities. What is its current (or working capital) ratio?
- 12: 1
Act II Costumes currently has $120,000 in cash, $340,000 in inventory, and $20,000 in accounts receivable. The company also has $20,000 in accounts payable, and $20,000 in other current liabilities. What is its current (or working capital) ratio?
- 12:1
An inventory turn ratio of 25 means a company's average quantity of goods in inventory sold within how many days?
- 14.6
A company's inventory turnover ratio shows the number of times its average inventory is sold during a period, where a higher inventory turnover is generally considered to be better. Pulling a COGS of $5,000 from the income statement and calculating average inventory of $300 based on January 1 and December 31 balance sheet data, what is the inventory turnover?
- 16.67
The acid-test is another liquidity ratio that is of particular interest to those who are considering a business' request for a short-term loan or credit. Let's say your $2,000 current asset balance includes $200 in cash, $500 in accounts receivable (net), $300 in a money market account, $700 in supplies and $300 in prepaid insurance. Your current liabilities are $500. What is your current ratio?
- 2:1
Given sales revenue of $500,000, variable costs of $200,000, and fixed expense of $50,000 what is the Margin of Safety?
- 4: 1
The current ratio is a liquidity ratio that serves as an indicator of a company's short-term debt-paying ability. Let's assume your belt company's month-end balance sheet lists $2,000 in current assets, $5,000 in total assets, $500 in current liabilities and $1,000 in total liabilities. What is your current 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
Lid On It hat shop had $1.55 million in annual sales. During the same period its cost of goods sold was $620,000 and held average inventory of $100,000. What is the inventory turnover?
- 6.2
Each financial statement has a specific use and financial components. Which of the following best describes the use and financial information included on a balance sheet?
- A balance sheet is a point in time reflection of assets, liabilities and owner's equity used to determine business solvency.
Financial accounting information is used by both internal and external audiences. Which of the following best describes external users and use?
- A bank officer considering a business' loan application.
Which of the following best describes the use and financial information included on a statement of cash flows?
- A statement of cash flow's reports the change in revenue and expenses over a period of time and is considered an indication of owner/manager expertise.
Which of the following best describes the use and financial information included on a statement of owner's equity?
- A statement of owners equity reports the change in routine earnings between two dates and reflects the net change in the owners investment (equity value) in the business.
When a business owner states that he or she is operating at a break-even point, we know that:
- Business revenues are equal to total cost, including both fixed and variable costs
Break-even determines the point when ________ covers fixed expenses.
- Contribution Margin
Which of the following best describes users and uses of managerial accounting information?
- Department managers developing their budgets and business plans for the next year.
The four accounting statements required by GAAP are prepared in a certain order. What is the order?
- Income Statement, Statement of Owner's Equity, Balance Sheet, Statement of Cash Flows.
Which of the following statements are true about the contribution margin ratio?
- It shows how much profit a company will make on each dollar of sales
Which of the following statements are true about the contribution margin ratio?
- It shows how much profit a company will make on each dollar of sales.
__________ provides individuals within an organization with the financial information needed to make good business decisions.
- Managerial accounting
Passed by Congress in 2002, the Sarbanes-Oxley Act was designed to address the investing public's lack of trust in corporate America. Which of the following statements best summarizes the impact of SOX on accounting practices?
- SOX clarifies and enforces auditor independence and placed increased accountability on a company's senior executives and management
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).
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
In order to manage costs effectively (and to calculate the break-even point), a business owner or manager needs to be able to distinguish between fixed and variable costs. Which of the following statements accurately illustrates a fixed or variable cost?
- The bakery would consider the cost of flour, yeast, sugar and other ingredients a variable cost
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
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
According to GAAP, businesses are required to prepare four financial statements. Which of the following statements accurately summarizes the required statements and the relationship between the statements?
- businesses are required to prepare an income statement, statement of owners equity, balance sheet, and statement of cash flows, in that order, since the calculations for one are inputs for the next
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.
Financial ratios allow a business, potential creditor or investor to:
- determine the health of a company individually and relative to similar businesses or alternate investment options
The main purpose of the statement of cash flows is to report on the cash receipts and cash disbursements of an entity:
- during an accounting period
The acid-test (quick) ratio is different from the current ratio in that it:
- emphasizes assets that are quickly and reliably turned into cash.
Accounting is referred to as the language of business. In reality, accounting information is communicated in multiple languages, including:
- financial, managerial, and tax
The formula for calculating the break-even point is:
- fixed cost divided by the contribution margin per unit
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
The four financial statements a company is required to prepare according to GAAP are:
- income statement, balance sheet, statement of cash flows, and statement of owner's equity.
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.
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
The ________ provides users of the financial statements with a reconciliation of the company's beginning and ending equity accounts.
- statement of owner's equity
The ________ provides users of the financial statements with a reconciliation of the company's beginning and ending equity accounts.
- statement of owners equity
Financial accounting is utilized by ________ in order to make investment decisions:
- stockholders and creditors
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 break-even point for a business is:
- the point where income is equal to expenses
A lack of due diligence, "creative" accounting and outright fraud has tarnished the reputation of accounting professionals and eroded the public's trust in corporations. Which of the following might be the most effective in eliminating unethical accounting practices?
- the sarbanes-Oxley act (SOX)
The cost to taxpayers is estimated at billions of dollars for:
- unethical practices in financial reporting
The cost to taxpayers is estimated at billions of dollars for:
- unethical practices in financial reporting.
Ingredients consumed in the manufacture of packaged food products are considered:
- variable cost
Employees who come forth with incriminating information are protected in the Sarbanes Oxley (SOX) by which provision?
- whistleblower protections
You have a small business selling hand-knit scarves through the internet. You sell each of your scarves for $35. Your variable expenses are as follows for one scarf: What is your contribution margin for selling one scarf?
-$12
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 quick ratio?
4.75: 1
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
Which of the following best describes the use and financial information included on a income statement?
An income statement reports a business' revenue and expenses over a period of time and reflects the profitability of the business
The accounting equation is the foundation for the double-entry accounting system accepted as the most accurate and reliable method of recording a business' financial transactions. The equation is expressed as:
Assets - liabilities = owners's equity
________ focuses on a range of topics, from production planning to budgets of raw materials.
Marginal
