ACC 200 Final Exam Study Guide NCSU

17. The account called "Cost of Goods Sold" would be found on which financial statement? A. Income Statement B. Statement of Retained Earnings C. Balance Sheet D. All of the above E. None of the above

A. Income Statement

Tax authorities - External

Would include the: -Internal Revenue Service (IRS) as well as state, county, and city/local agencies. -Securities and Exchange Commission (SEC) is an example of a regulatory agency that would review a publicly held C-Corporation's financial statements in order to ascertain whether securities laws and generally accepted accounting principles (GAAP) are being followed.

Taking into tax effects, how many units does the company need to sell in order to earn an after-tax target profit of $500,000?

Shorter Way: ----ATP units = [FC + BTP] ÷ CM per unit, where BTP = ATP ÷ (1 - tax rate) It can be written as follows: ----ATP units = [FC + (ATP ÷( 1 - tax rate))] ÷ CM per unit Let's apply this formula to our question: ----ATP units = [100,000 + (500,000 ÷ (1 - .30))] ÷ 40 ----ATP units = [100,000 + 714,286] ÷ 40 ----ATP units = 20,357.15 ~ 20,358 units (since a partial unit can not be sold)

What do total sales dollars need to be in order for the company to break-even?

Shorter Way: ---BE sales = BE units x sales price per unit ---BE sales = 2,500 x $70 = $175,000 Alternatively Short Way: ---X = total sales ---X * 57.14% = $100,000 ---X = $100,000 ÷ .5714 ---X = $175,008 (off by $8 due to the rounding of the CM ratio) So, the basic algebraic formula for calculating BE sales dollars is as follows: ----BE sales dollars = Total Fixed Costs ÷ CM ratio

How many units need to be sold in order for the company to break-even?

Shorter Way: ---BE units = Total FC ÷ CM per unit ---BE units = $100,000 ÷ $40 = 2,500 units

How many units need to be sold in order for the company to earn a target profit of $500,000?

Shorter Way: ---TP units = [Total FC + Target Profit] ÷ CM per unit ---BE units = [$100,000 + $500,000] ÷ $40 = 15,000 units

What do total sales dollars need to be in order for the company to earn a target profit of $500,000?

Shorter Way: ---TP sales = TP units x sales price per unit ---TP sales = 15,000 x $70 = $1,050,000 Alternatively Short Way: ----TP sales dollars = [Total Fixed Costs + Target Profit] ÷ CM ratio

Revenue Recognition Principle

States that revenues will be recognized in the accounting period in which they are earned.

Facility-level costs (ABC)

Sustain the organization as a whole. An example would be someone answering phones. *Facility-level costs are often more difficult to allocate to product costs.

Balance Sheet

The Balance Sheet is the third statement in the order of preparation. -The Balance Sheet provides a snapshot of Asset, Liability, and Stockholders' Equity balances at a point in time. ---Equation: Assets = Liabilities + Stockholders' Equity -Asset: Common examples are cash, investments, accounts receivable, notes receivable, inventory, supplies, land, and equipment. -Liability: A creditor claim is represented by a liability account. A creditor can be a bank, vendor, employee, tax authority, or even a customer who is owed services by the company. Liabilities will be satisfied with a future cash payment to the creditor. -Stockholders' equity: Represents owner claims against assets. The ending stockholders' equity balances are shown on the balance sheet. This section of the balance sheet reports the ending retained earnings balance along with common stock's balance. --Stockholders' equity is often called the residual interest in a company. -Residual interest: The amount left over after liabilities have been subtracted from assets. The accounting equation shown above can be re-expressed as: Assets − Liabilities = Stockholders' Equity As you can see, stockholders' equity is what remains after subtracting liabilities from assets. ►Period vs. Point in Time: The income statement, statement of retained earnings, and statement of cash flows report information over a period of time, while the balance sheet reports information for a specific point in time.

Manufacturing Overhead (MOH) -Product

- All other manufacturing costs not easily traced to a specific product or job such as: - indirect materials - indirect labor - factory supplies - factory rent - factory insurance - factory utilities - factory depreciation

Direct Labor (DL) -Product

- Labor costs (including fringe benefits) easily traced to the product being manufactured

Direct Materials (DM) -Product

- Materials cost easily traced to the product being manufactured

Multi-Product Environments

-**The earlier examples assumed a single-product environment. This is not too realistic given that most companies produces many types of products. -Can cost-volume-profit analysis be made in a multi-product environment? ---The answer is yes. In order to calculate break-even and target-profit in a multi-product environment, the company needs to understand its sales mix - that is, what proportion of total sales each product is. -Once the sales mix is known, a weighted-average contribution margin per unit (or ratio) can be calculated. -This weighted-average will be used in the denominator of all our previous formulas to calculate the overall break-even or target-profit point.

How many total products need to be sold in order for the company to break-even?

----------------------Product A--Product B---Total ------Sales price per unit------$40------$25 ------Variable cost per unit----$15-------$8 ------CM per unit------------$25------$17 ------X sales percent--------x25%-----x75% ------Weighted CM per unit--$6.25---$12.75----$19 ---------------------------------------($6.25+$12.75) Next, calculate the break-even point using the following formula: ------BE units = Total FC ÷ Weighted CM per unit ------BE units = $400,000 ÷ $19 = 21,052.63 ~ 21,053 units

Future Value of an Annuity (FVA)

------FVA = R x factor n,r ------FVA = Future value of an ordinary annuity. ------R = A single periodic payment (rent) ------r = Interest rate per compounding period. ------n = Total number of compounding periods. Referring to the factor tables, notice that the factor when r = 8% and n = 3 is "3.2464".

Present Value of an Annuity (PVA)

------PVA = R x factor n, r ------PVA = Present value of an ordinary annuity. ------R = A single periodic payment (rent) ------r = Interest rate per compounding period. ------n = Total number of compounding periods. ----------PVA = $100 x 3.5460 = $354.60.

Description of Common Accounts

-----Assets: -Assets: Cash Currency held on the premises of a business entity or at a bank. -Accounts Receivable: Currency owed to a business entity from its customers. -Notes Receivable: Currency owed to a business entity from its customers that are acknowledged with a signed written contract. -Supplies Inventory: Products that are to be used by the business entity and not sold to customers. -Raw Material Inventory: Materials held by the business entity that are planned to be used to make products to be sold to customers. -Work-In Process Inventory: Account that holds the costs of raw material used, direct labor and manufacturing overhead expenses as products are being manufactured by the business entity but are not yet complete and ready for sale to customers. -Finished Goods Inventory: Products that are completed and ready to be sold to customers. -Prepaid (or Deferred) Expenses: Cash paid in advance by a business entity for a service such as property insurance or a building lease. Property, Plant and Equipment Land, buildings and equipment used by the business entity. -Accumulated Depreciation: Captures the total depreciation expense related to PP&E over the life of the asset. ------Liabilities: -Accounts Payable: Amounts owed by a business entity to others for products or services received and for which a bill has been received. -Accrued Liabilities: Amounts owed by a business entity to others for products or services received and not recorded in Accounts Payable because an invoice has not been received. -Unearned (or Deferred) Revenue: Amounts owed by a business entity to others for products or services for which cash was received but the entity has not yet delivered. -Salaries and Wages Payable: Amounts owed by a business entity to employees for the services they have performed but not yet been paid for. -Interest Payable: Amounts owed by a business entity to others for interest on borrowed money or other financed assets. -Notes Payable: Amounts owed by a business entity to others that is acknowledged with a signed written contract. -Taxes Payable: Amounts owed by a business entity to a government agency for taxes. ------Stockholders' Equity: -Common Stock: Amounts received by the business entity from owners. -Retained Earnings: Current and prior year profits or earnings of a business entity that have not been distributed to the owners. ------Revenues -Sales or Service Revenue: Amounts received or due from customers related to the sale of products and/or services. ------Expenses -Cost of Goods (or Services) Sold: Amounts expended that can be directly linked to a sale such as the cost of a product sold to a customer or the labor and materials used to provide a service to a customer. -Advertising Expenses: Amounts due or expended for advertising the business entity. -Salaries and Wage Expenses: Amounts due or expended for services performed by the business entity's employees. -Insurance Expenses: Amounts due or expended for insurance coverage on buildings, equipment and employees. -Utility Expenses: Amounts due or expended for phone, electric and gas services received. -Lease or Rent Expenses: Amounts due or expended for using leased buildings or equipment. -Repair and Maintenance Expenses: Amounts due or expended to maintain and repair buildings and equipment. -Research and Development Expenses: Amounts expended in developing new products or services. -Depreciation or Amortization Expenses: Allocation of the cost of property, plant and equipment (depreciation) and intangible assets (amortization) over the useful life of the asset. -Interest Expense: Amounts due or expended for borrowing resources from another business entity. -Property Tax Expenses: Amounts due or expended on owned property to a government agency. -Income Tax Expenses: Amounts due or expended on profits (net income) generated by a business entity to a government agency.

Accrual Basis

-----Revenue Recognized: Accrual Basis When the revenue is earned from services provided to or inventory sold to a customer (whether cash is received or not). -----Expense Recognized: When expenses are incurred in the ordinary course of business (whether cash is paid or not). -It is believed that the accrual basis of accounting provides a better measure of profitability. -All public corporations must use the accrual basis of accounting. Many private corporations and other business entities choose to use the accrual basis as well. Small non-for-profit companies are the primary users of the cash basis. -***The accrual basis of accounting does not wait until cash has been received or paid before revenues or expenses are recognized. Instead, two accounting principles are followed in the determination of whether or not revenues or expenses have occurred: ---Revenue Recognition Principle: Revenues will be recognized in the accounting period in which they are earned. In order to be considered "earned", the amount is reasonably determinable, the earnings process is complete or virtually complete, and the amount is expected to be collectible. ---Matching Principle: Expenses are recorded as they are incurred to produce revenues - hence, the term "matching". Expenses should be "matched" into the same period they are incurred in order to produce revenue. -The main advantage of the accrual basis is that it captures the profit a company makes in a given period of time more accurately than the cash basis. -Its main disadvantage is considered to be its complexity with respect to the extra steps in the accounting cycle it will require. -An adjustment is not necessarily the same thing as a transaction. But in order to properly reflect revenues and expenses, adjustments are often needed in order to update various account balances so that the revenue recognition and matching principles are correctly applied to the financial statements. Just like transactions, adjustments must balance the balance sheet equation. -Using the accrual basis of accounting, it is still possible for revenues to be collected in cash as they are earned and expenses to be paid as they are incurred. However, there are two types of situations that give rise to revenues or expenses where the cash receipt or payment does not occur at the same time as the revenue or expense. These are called accruals and deferrals. -----ACCRUALS -An accrual is a situation where the company has earned the revenue or incurred the expense before there has been an exchange of cash. -An adjustment will need to be made at the end of the accounting period or at the time the revenue or expense occurred in order to reflect the "accrued revenue" or "accrued expense". Once the adjustment has been made, new account balances are computed, and the financial statements should be correct. -----DEFERRALS -A deferral is a situation where the company has realized an exchange of cash before the revenue is earned or expense incurred. -At the time of the cash exchange, a transaction will need to be recorded that recognizes the receipt or payment of cash. However, the recognition of revenue or expense will be "deferred" (or postponed) until later. -At the end of the accounting period, an adjustment will need to be made to reflect the revenue or expense that has since been earned or incurred. Once the adjustment has been made, new account balances are computed, and the financial statements should be correct. -----Common reasons for Accrued Revenue: Sales or services to customers for which the customer has not yet paid (asset account = Accounts Receivable) Interest earned on a bank account or note receivable for which cash has not yet been paid. (asset account = Interest Receivable) Common reasons for Accrued Expenses: Monthly, recurring, expenses are incurred which have not yet been paid Examples: Accounts payable, Salaries/wages payable, Taxes payable, Interest payable. Common types of Deferred Revenues: Unearned service revenue, unearned sales revenue. Common types of Deferred Expenses: Prepaid advertising, prepaid insurance, prepaid rent, supplies (are prepaid but usually the word prepaid is not included in the account name). Depreciation is a deferred expense. A company purchases a long-term asset (useful life> 1 year). At that point, the company has not yet incurred the expense. As time goes by, the asset will be used up. When this occurs, the asset account will go down and retained earnings will go down (due to depreciation expense being incurred).

Step Cost

-Some costs exhibit what is called a step cost pattern. A step cost is a cost that exhibits either a fixed or variable pattern within a certain range of activity level, but "steps up or down" once this activity level falls outside the range. To simplify the decision-making process, many managers will assume that a certain cost is fixed or variable even though it may actually be a step cost.

"Process Further or Sell As is" Decisions

-Sometimes companies must decide whether they should process their product further (which will likely involve increased costs) in order to be able to meet a variety of customer demands. -***The general rule is if the incremental revenue with further processing exceeds the incremental cost of further processing, then net income will go up with further processing.

Cash Basis

-----Revenue Recognized: Cash Basis When cash is received from a customer. -----Expense Recognized: When cash is paid for costs incurred in the ordinary course of business. -Many businesses consider the cash basis to be easier to apply; however, generally accepted accounting principles (GAAP) require the use of the accrual basis. -Is easier and less time consuming to use. Many sole proprietorships, for example, use the cash basis. Most taxpayers also use the cash basis for purposes of preparing their individual income tax returns. -The main disadvantage of the cash basis of accounting is in its measurement of profitability - that is, a company's ability to make a profit. This disadvantage is due to the timing of the revenue and expense recognition. For example, if a company performs services in late December that will not be collected from customers until early January, then the company's calendar year income statement will not reflect any profit for those services provided. -***Under the cash basis of accounting, revenue is recorded when cash is received from a customer without regard to whether or not the service or product has been delivered to the customer yet. -***Likewise, under the cash basis of accounting, expenses are recorded only when cash is paid without regard to whether or not the cost has actually been used up or incurred.

High/Low Method (Mixed)

---Advantage: Less time consuming to perform than regression analysis. ---Disadvantage: Less accurate in its prediction of fixed and variable costs. -The format of the formula to predict a mixed cost is the same as noted above: -----Total Cost = Total Fixed Cost + Variable Cost per Unit (x) -Because this formula can be depicted by a line graph, the formula for a line is often used as well: -----Y = a + bx -----Where: Y = Total Cost, a = total fixed costs, b = variable cost per unit, and x = activity level -To apply this method, we need to come up with "a" and "b" in the above formula. -----Abbreviation: FC = Fixed Cost VC = Variable Cost --Step 1: Looking at the data given, determine the high and low activity levels. Note that the high/low activity levels should be used and not the high/low costs. -----Example: XYZ Inc. would like to estimate the cost of operating its delivery trucks. The following information is available for the past five months of delivery: Month----------# Miles Driven--Operating Costs January -------------- 800--------$3,500 February ------------- 1,400------$4,700 March --------------- 1,200------ $5,000 April ---------------- 900-------- $4,000 May ----------------- 1,000------ $4,400 --Step 2: Once the high/low activity levels are identified, select the costs that correspond to those levels for purposes of determining your high and low data points. Ignore the other data. Month-----------# Miles Driven--Operating Costs January -------------- 800-------- $3,500 February ------------- 1,400-------$4,700 --Step 3: Solve for the variable cost per unit using the following formula: -----High Cost-Low Cost \ High Activity Level-Low Activity Level = Variable Cost per Unit -----$4,700 - $3,500 / 1,400 - 800 = $2 per unit --Step 4: Using either the high data or low data, solve for fixed costs using the formula to predict total cost: -----Y = a + bx Using High Data: -----$4,700 = a + $2(1,400) -----$4,700 = a + $2,800 -----$1,900 = a Using Low Data: -----$3,500 = a + $2(800) -----$3,500 = a + $1,600 -----$1,900 = a **Notice that FC is the same either way - as it should be since FC do not change as the activity level goes up or down within the relevant range. --Step 5: Write the equation to predict the mixed cost: -----Y = $1,900 + $2x -This equation can be used to predict delivery costs for other levels of activity within the relevant range.

Regression Analysis (Mixed)

---Advantage: More accurate in its prediction of fixed and variable costs. ---Disadvantage: More time consuming to perform than the high/low method. -***Regression analysis, which uses statistical analysis, is the preferable method. -Example: Looking down the report, the 17th and 18th lines give the fixed cost and variable cost per unit amounts. According to this report, total fixed costs are $3,998.25 and the variable cost per unit is $2.09 within the relevant range. -----Total Cost = Total Fixed Cost + Variable Cost per Unit (Number of Units) ---Using the data in the report, the equation to prediction the total cost will be: -----Total Cost = $3,998.25 + $2.09x -----where "x" will equal the activity level (ex. number of units) within the relevant range. -*This same formula format for predicting total costs is used by the high/low method. -Although less accurate, companies often use the high/low method for purposes of quickly analyzing a mixed cost.

Future Value (FV) of a Lump Sum

-A "lump sum" is where a single amount is invested or lent. -There are three different ways that a time value of money problem can be solved. These three ways are as follows: • algebraically, • by using factor tables, or • by using a financial or business calculator or 3% -These equations can be summed up and presented as the following algebraic equation: -------FV = PV (1 + r) n Where: ------FV = Future value of a lump sum ------PV = Present value of a lump sum ------r = Interest rate per compounding period. ------n = Total number of compounding periods. ------FV = PV x factor n,r

Fixed Cost

-A fixed cost is one that stays the same in total as the activity level goes up or down. -However, if expressed on a per unit basis, it goes up or down inversely with production increases or decreases.

Mixed Cost

-A mixed cost is one that has both fixed and variable components. A certain portion of the utilities cost would go up or down as roommates come and go, but another portion of the utilities cost would stay the same regardless of how many people are living in the apartment. -Relevant Range: The normal range of activity level that can be expected. --For example, when 1 - 4 people live in the apartment, rent is a fixed cost. If 5 people wish to share an apartment, they may have to shift to a bigger apartment that has a higher rent cost per month. Rent is considered fixed at $600 per month - but only within the relevant range of 1 to 4 people sharing an apartment. -----MIXED COSTS: -If a company is trying to predict the behavior of a mixed cost, there are several avenues that could be taken: • The company could assume that the mixed cost is all fixed, • The company could assume that the mixed cost is all variable, or • The company could attempt to break out the mixed cost into its fixed and variable components. ---There are two methods for doing this: regression analysis and the high/low method.

Transaction

-A transaction is an economic event that changes a company's financial position. **Each transaction will affect at least two account balances. -The accounting equation elements are divided into subelements called Accounts to capture and report information that will be useful for decision making. --Cash, Accounts Receivable, Inventory, and Supplies are common examples of asset accounts. --Accounts Payable, Notes Payable, and Unearned Revenue are common examples of liability accounts. -- Common Stock and Retained Earnings are examples of owners' equity accounts. --Revenues, expenses and dividends are examples of other accounts that are not on the Balance Sheet; rather, they appear on one of the other financial statements. *However, as revenue, expense, or dividend accounts are affected by a transaction, the Retained Earnings account, which is on the balance sheet, will eventually go up or down.

Variable Cost

-A variable cost is one that goes up or down in total in direct proportion to an increase or decrease in activity level. -However, when expressed on a per unit basis, it stays the same as production increases or decreases.

Activity-Based Costing (ABC)

-Allocates overhead to a job based on the different "activities" related to that job which cause overhead costs to be incurred. For example, in a factory setting, supervision is an activity which drives MOH costs because a factory supervisor's salary qualifies as manufacturing overhead. Or, the use of factory supplies would be another activity. -**Typical job order costing does not recognize overhead costs that occur outside the factory as being part of the product's cost whereas ABC does. -Job order costing uses a single cost driver to allocate MOH to a product whereas activity-based costing allows the use of multiple cost drivers. -With ABC, the more machine setups required to fill a particular job order, the more machine setup costs should be assigned to that job. -Here are some typical "activities" that might drive overhead costs: ---Order processing ---Machine setup ---Quality Control ---Training ---Advertising Some generalizations to be made about ABC costing? It is more accurate at predicting product costs than traditional costing. It can even apply costs that we used to think as being "period" costs (like shipping), to a specific product or customer. It costs more to do than traditional costing. It can be used in a JIT environment. It can be used by retailers and service oriented companies as well as manufacturing companies. It eliminates "cross-subsidies" - that is, where a high-volume product is allocated more than its fair share of overhead costs. Companies that have a lot of non unit-level costs are more likely to benefit from ABC. Companies that make many diverse products are more likely to benefit from ABC. Companies that have significant amounts of overhead in relation to DM and DL are more likely to benefit from ABC.

Ordinary Annuities

-An annuity is a series of equal, periodic payments or withdrawals. -When the annuity payment or withdrawal occurs at the end of the time period, it is called an "ordinary annuity". -The equal periodic payments or withdrawals are often referred to as "rents". The following is a list of the conditions that must be met in order for the series of rents to be classified as an "ordinary annuity". 1. The rents (or payments) are equal in amount. 2. The rents (or payments) are equally spaced apart. For example, the rents may occur annually, quarterly, monthly, etc. 3. The rents (or payments) occur at the end of the period. For example, at the end of each year, at the end of each quarter, at the end of each month, etc. 4. The interest rate stays constant over the entire period. 5. Compounding occurs with each rent (or payment). For example, if the rents are annual, the compounding must be annual. If the rents are monthly, the compounding must be monthly. ****An annuity can be thought of as a series of individual lump sum problems added together. ***However, with a lump sum problem (like was shown earlier in this lesson) the lump sum payment occurs at the beginning of the period, whereas with an ordinary annuity, it occurs at the end.

Economic Identity Claims

-An economic entity has economic resources. Claims against those resources also exist. We can say: Economic Resources = Claims against the Resources -There are two ways that claims against a company's economic resources can come about: through creditor claims and owner claims. The expression can be re-written as follows: Economic Resources = Creditor Claims + Owners' Claims -Now, replace the above terms with commonly used accounting terms. Economic resources are Assets, creditor claims are Liabilities, and owners' claims are Owners' Equity (also known as Stockholders' Equity if the business form is a corporation). -----Assets = Liabilities + Owners' Equity

"Resource Utilization" Decisions

-Companies have limited resources. The limited resource may be direct labor hours available, machine hours available, direct materials available, or even physical space. -When a company makes multiple products, each product uses a limited resource differently. The company's dilemma will be how to allocate its limited resources in such a way that profits are maximized. -By maximizing the contribution margin per unit of constraint (DL hours in this case), the company's profits will be maximized. -Companies will attempt to first meet the demand for the product with the highest CM per unit of constraint. Once that demand has been met, then they will focus on the product with the next highest CM per unit of constraint and so forth.

Cost Behavior

-Costs "behave" in a certain way in relation to an activity level change. For example, as a company manufactures more widgets, some costs will go up while others will stay the same. --There are four types of cost behaviors: fixed, variable, mixed, and step. ***Many mixed and step costs are assumed to be either fixed or variable for purposes of management decision-making.

Customers - External

-Customers can also be users of a company's accounting information. -For example, a customer who is about to purchase an expensive automobile may want to determine the likelihood of the manufacturer being around in the future if the automobile proves defective.

Statement of Retained Earnings

-Dividend: Profit given back to the owners is called a dividend. -Retained Earnings: The accumulation over time of profits retained in the business. The main purpose of the Statement of Retained Earnings is to show users where net profits have gone during the year. The statement presents a clear picture of how Retained Earnings changed during a period of time.

Financial Accounting

-It is less flexible. -If the company is a publicly-held corporation, SEC requirements must be followed. -GAAP is usually followed in preparing reports.

Managerial Accounting

-It is more forward looking, often emphasizing the future rather than the past. -It emphasizes segments of an organization more than the company as a whole. -It is more timely, sometimes sacrificing accuracy in the process. -Reports that are generated are used by managers for decision-making in the production process.

Cost-Volume-Profit Analysis

-Recall that most costs behave in a predictable way within the relevant range. Most costs are either fixed or variable. Even if the cost is a "mixed cost", the fixed and variable components can be broken out. ---Rather than formatting the income statement based on cost type (ex. product vs. period), it will be formatted based on cost behavior (ex. fixed vs. variable). -Recall that the traditional format is where cost of goods sold (product costs) are subtracted from sales revenue to get a subtotal called gross margin (or gross profit), and then period costs (commonly called selling and administrative) are subtracted. -However, there is a type of income statement prepared using a contribution margin format that will allow management to answer these as well as other questions.

"Make Internally or Outsource" Decisions

-Sometimes they are referred to as "make or buy" decisions. -In order to increase profits without necessarily raising sales prices, many companies look for ways to cut their variable and/or fixed costs. For some companies, outsourcing part of their manufacturing process may be one way to do this. -When making these types of decisions, the company will compare the incremental cost of making internally to the incremental cost of outsourcing. **Only costs that differ between these two options are considered. **If a cost exists regardless of whether or not a company makes the product internally or outsources all or part of the manufacturing process, it is not relevant to the decision. This cost could be either a variable or fixed cost. -Accounting Approach to the Decision: If the incremental cost to make internally is more than the incremental cost of outsourcing, then from a purely quantitative perspective, profits can go up if the company outsources. -**Assume fixed costs are not relevant to the decision.

"Drop a Product Line or Not" Decisions

-Sometimes, product lines do not appear profitable, but if dropping that product line would not decrease the company's total fixed costs, then dropping the line may actually cause the company's net income to decrease. -The reason for this is because the product line does have a positive contribution margin which is contributing to the overall profit of the company. -Companies often allocate fixed costs to various product lines. Just because the product line goes away does not guarantee the fixed cost will also go away. -If a product line is eliminated, there will definitely be a decrease in the company's overall contribution margin. -*******In order to decide whether a line should be dropped or not, the overall rule of thumb is this: When the product line is dropped, if the decrease in total contribution margin is more than the decrease in total fixed costs, the line should not be dropped.

"Special Order" Decisions

-Special order decisions are often "one-time" or "unique" decisions that a company must make with respect to a certain customer or job. --Both qualitative and quantitative considerations are needed. - Qualitative Perspective: Non-numerical characteristics. Example: Red shoes will be so eye-catching that other customers might wish to place their own special orders. -Quantitative Perspective: Numerical expression of some sort - such as dollars. Example: Your company would want to address the additional (relevant) costs that would be incurred if the special order was accepted. -Excess capacity: Whether or not there are enough resources available to make this special order without turning away other customers. -Accounting Approach to the Decision: Without regard to qualitative factors, how will special order decisions be decided? **In general, if net profits go up, then the special order will be accepted. If net profits go down, the special order will not be accepted. -The incremental approach: only takes into account the information that will be different between the two alternatives (i.e. taking or not taking the special order). -The word "incremental" refers to the difference in choosing one action over another. **Only relevant data is taken into account with the incremental approach. **Revenues and expenses would be relevant if one or both changes as a result of the decision.**Another word that is often used to describe relevant expenses or costs is Avoidable. -If the incremental revenue is greater than the incremental cost, then incremental profit will result and the special order will be accepted.

Internal Rate of Return (IRR)

-The IRR is the actual rate of return earned by an investment. -It can also be used as a screening decision whereby a company only selects investments that generate a certain predetermined rate of return. ------PVA = R x DFA n,r ------487.71 = 300 x DFA (n = 2, r = ?%) ------1.6257 = DFA (n = 2, r = ?%) ------r = 15%

Sales Budgets

-The Sales Budget is prepared first. -Budgets that are continuously updated are called Revolving (or Perpetual) Budgets and allow managers to better be able to manage their resources. -Sales Forecast: Predicts what managers believe sales will be in the future. Based on the sales forecast, a sales budget can be prepared. -The sales budget will compute sales revenue (in dollars) by taking the expected number of units to be sold and multiplying those units by the sales price per unit. -Once total sales have been estimated, a chain reaction of other questions opens up.

Contribution Margin Format Statement

-The contribution margin format statement does not group costs by their type - that is, product or period. Instead, costs are grouped by their behavior (variable or fixed). -Variable costs are often described on a per unit basis because the variable cost per unit will stay the same at all levels of activity (within the relevant range). -Fixed costs are often shown on a total basis. Recall that total fixed costs do stay the same at all levels of activity (within the relevant range). -The format of the contribution margin statement is as follows: Sales Revenue $ Less: Variable Costs ( ) = Contribution Margin Less: Fixed Costs ( ) = Net Income $ -In addition, this format can be expressed on either a total or per unit basis.

Time Value of Money

-The passage of time affects the value of money. A dollar is worth more today than it will be worth in the future for two reasons. ---One reason is due to inflation. Because of inflation, the price for the same good rises over time. ---The second reason is due to interest. -Interest revenue: The difference between the amount received and the amount originally invested. -Interest expense: The difference between the amount paid back and the amount originally borrowed. -Inflation and interest over time affect the value of money - hence, the term time value of money (tvm).

Tax Effects

-There are two different aspects to taxes that companies should consider when making their investment decisions: 1. After-tax Cash Inflows: Taxes have to be paid on most cash inflows from operations. Therefore, the company should convert the before-tax flow into an after-tax flow before doing the present value calculations. -If the before-tax flow is $300,000 each year and the company has a marginal tax rate of 40%, what is the after-tax flow? -----After-tax flow = Before-tax flow ( 1 - tax rate) -----After-tax flow = $300,000 (1 - .40) -----After-tax flow = $180,000 2. Depreciation Tax Shield: Taxes are lowered when companies take a deduction for depreciation expense, but depreciation in and of itself does not have a cash outflow associated with it. If you can save on taxes without having to pay cash first, then you've actually created cash! This is called a "tax shield". -The outflow of cash occurs when the initial purchase is made. However, there is no tax deduction at this time. Instead, the tax deduction occurs over time as depreciation expense is taken. -Way to compute the depreciation tax shield is to use this formula: ------Depreciation tax shield = Annual depreciation expense x Tax rate ------Depreciation tax shield = $260 x .30 = $78 ---For NPV purposes, the depreciation tax shield is a cash inflow with characteristics of an annuity because it occurs each year. ****The depreciation expense calculation ignores residual value for tax purposes. In this course, we will assume the straight-line depreciation method is being used.

Creditor - External

-Unlike an investor, a creditor is a lender. A lender could be a bank, a vendor, or even an individual. -Creditors do not own stock in a corporation. A creditor typically makes either a cash loan to the company or allows the company to purchase an asset on credit.

Relevant Costs and Product Planning Decisions

-When making product planning decisions, managers should consider relevant costs. -Recall from earlier chapters that relevant costs are costs that differ among alternatives. -Relevant costs: Costs that differ among alternatives, and can include actual as well as opportunity costs. -Opportunity costs: The benefits foregone by choosing one action over another. -Sunk costs: Not relevant to decisions. Is a cost that has already occurred. It is a cost that can not be changed based on future decisions. As a consequence, sunk costs are usually not relevant to decision-making. -Variable costs: tend to be relevant to decision-making because variable costs go up or down as the activity level goes up or down. -Fixed costs: Not usually relevant within a relevant range. In this course, unless told otherwise, total fixed costs are not relevant to product planning decisions. If a fixed cost would be affected by a product planning decision, it is relevant and must be considered in those types of decisions.

Budgeting

-While many different budgets are addressed in the chapter reading, this course specifically requires students to be able to prepare the following budgets: • Sales Budgets • Production Budget • Direct Materials Purchases Budget • Cash Receipts Budget • Cash Disbursements Budget • Flexible Budget

Net Present Value (NPV)

-With Net Present Value (NPV) calculations, the PV of the cash outflows are compared to the PV of the cash inflows. -When the NPV is zero, the investment is earning its minimum required return. -A positive NPV means the investment has met the initial screening and is actually earning a return greater than 10%.

Other Question Relationships

1. All else being equal, if the variable costs per unit increase, what happens to the break-even point? ---CM will decrease, so BE point increases. 2. All else being equal, if the variable costs per unit decrease, what happens to the break-even point? ---CM will increase, so BE point decreases. 3. All else being equal, if fixed costs increase, what happens to the break-even point? ---BE point will increase. 4. All else being equal, if fixed costs decrease, what happens to the break-even point? ---BE point will decrease.

Consistency

A company's consistent treatment of similar accounting items and consistent application of accounting policies over time . That is ... do not change accounting practices every year.

Corporation

A corporation is a business whose owners are called stockholders. To become a stockholder, one would give a personal asset (most likely cash) in exchange for an ownership interest in a company. -There are two types of corporations - C- Corporation and S- Corporation. -Unless told otherwise, a corporation is assumed to be a C-Corporation. -Both types of corporations have advantages over the partnership and sole proprietorship forms as follows: -----Advantages Greater access to additional funding. Unlike the sole proprietorship form, a corporation has the ability to raise additional capital by issuing additional shares of stock. Transfer of ownership is easier than with a partnership. In most cases, if a stockholder decides to sell his stock, he may do so without getting the corporation involved. Limited legal liability. One of the most attractive attributes of the corporate form of business is the limited legal liability of its stockholders. In most cases, a stockholder cannot be held personally liable for the debts of the corporation. -The maximum amount a stockholder can lose on his investment is what he paid for his stock. -----Disadvantages Both types of corporations have both similar and unique disadvantages. A similar disadvantage that both types have is high organizational expenses relative to other forms of businesses. -In addition, if the corporation is publicly-held, there are significant financial disclosure requirements. A publicly-held corporation is one whose shares of stock are issued to anyone in the public willing to pay the market price per share. -Publicly-held corporations are closely monitored by the Securities and Exchange Commission (SEC): the governmental regulatory agency whose main job is to protect the public by overseeing and enforcing federal securities laws. The SEC requires all publicly-held corporations to have annual audited financial statements prepared in accordance with generally accepted accounting principles (GAAP). -NOT all C-Corporations are publicly-held! A privately-held corporation is one whose shares of stock are issued to select owners. For example, a corporation may be formed as strictly a family-owned business where shares of stock will not be issued to anyone outside the immediate family. ***The SEC does not have the legal power to oversee privately-held corporations. -Income Tax Treatment: The C-Corporation has a significant disadvantage that is not seen with the other forms, including S-Corporations. The main disadvantage of a C-Corporation is double taxation. A C-Corporation must file a tax return and pay tax with that return. The profits that still remain will eventually be distributed to owners in the form of a dividend. When these owners receive their dividend, they will report it on their personal tax return as a taxable item. Thus, the profits of the corporation are essentially taxed twice - once at the corporate level and again at the individual level. -S - Corporation: S-Corporations are unique in that they enjoy the advantage of limited liability (like a C-Corporation) but are taxed similar to a partnership. As you will recall, partnership profits are taxed once. It is understandable corporations would prefer to have their profits taxed once, but that would not help the government bring in sufficient tax dollars. Therefore, tax laws make it fairly difficult for a corporation to qualify as an S-Corporation. ***For example, the main rule that disqualifies many corporations from being an S-Corporation is a rule that says an S-Corporation must have 100 or fewer shareholders!

Partnership

A partnership is a business owned by two or more people (called partners). A partnership will often be one of these specific types: a general partnership, or a limited partnership (LP). -----Advantages Each of these types have some advantages in common including greater access to funding, greater access to owner skills, and the sharing of losses. -----Disadvantages The general partnership form has a significant disadvantage in that all partners have unlimited personal legal liability for debts incurred by the partnership. -A limited partnership (LP), on the other hand, imposes a limit on the legal liability of its limited partners. A LP must have at least one general partner who is actively engaged in the business. A limited partner, unlike the general partner, is a passive investor. -A limited partner has invested his or her money in the partnership but does not actively participate in the day-to-day running of the business. While a general partner has unlimited personal liability, a limited partner's personal liability is limited to the amount of his or her investment. Both control and profits are shared by the owners. In addition, transfer of ownership from one partner to another is more difficult than with the corporate form. -Income Tax Treatment: From a tax perspective, the partnership form is relatively attractive. A partnership must file a tax return (Form 1065) for information purposes, but it is not required to pay taxes with the return. Instead, the profits or losses are passed-through to the individual partners and subsequently reported on their own personal tax returns.

Sole Proprietorship

A sole proprietorship is a business owned by one person (the sole proprietor). -----Advantages Relative ease of formation. Control. The sole proprietor is his or her own boss. All earnings (or profits) flow to the sole proprietor. Lower income tax consequences relative to the corporate form. -----Disadvantages Unlimited legal liability. This is the main disadvantage of the sole proprietorship form. Limited access to funds. Either the sole proprietor could invest his personal funds in the business or a business loan could be taken out. All losses flow to the sole proprietor. If the business is unsuccessful, the sole proprietor bears the full weight of the loss. -Income Tax Treatment: For income tax purposes, the profits of the sole proprietorship are reported on the owner's own personal income tax return (Form 1040). These profits are reported on what is known as a "Schedule C" and attached to the individual's income tax return. It is important to note that the business profits are only taxed once.

Reliability

Accounting information is truthful, accurate, complete (nothing significant left out) and capable of being verified (e.g. by an auditor or a potential investor).

The Annual Report

All publicly-held as well as many privately-held corporations present their financial statements as part of a financial package called the annual report. The following items are part of a company's annual report: Set of four financial statements (as discussed earlier) Management Discussion and Analysis (MD&A) Notes to the financial statements Independent auditor's report -In the management discussion section, management is able to present and summarize information they feel is relevant for decision-makers.In order to be able to compare one company to another, decision-makers need to understand how different accounting methods affect a company's financial statements. --The first section of a company's notes is devoted to accounting policies which describe the various accounting methods used by the company. Here, financial statement balances can be detailed out further and may include important information that is not presented elsewhere in the annual report. For example, a possible loss due to an ongoing lawsuit may be disclosed only in the notes. -Lastly, the independent auditor's report is presented. All publicly-held as well as many privately-held corporations are required to have their financial statements audited on an annual basis by an independent CPA. Upon completion of the audit, the CPA firm will give the company a report which states its opinion with respect to the fairness of the financial statements. When the auditor is satisfied that the company fairly applied generally accepted accounting principles as well as maintained an adequate system of internal controls over their financial reporting, they issue what is called an unqualified opinion in their report. If the auditor finds that a company did not fairly apply generally accepted accounting principles or maintain an adequate system of internal controls, they issue what is called a qualified opinion in their report. -Decision-makers are often wary of investing in or lending to a company that has a qualified auditor's opinion letter. For this reason, it is important that decision-makers carefully read the auditor's report.

Product costs

Also known as manufacturing costs, are the costs incurred to manufacture a product. There are three categories of product costs: direct (or raw) materials, direct labor, and manufacturing overhead.

Period costs

Also known as non-manufacturing costs, are all the other costs incurred by a company to sustain its business. Period costs are often called selling, general, and administrative costs.

Investor - External

An investor is an owner. Depending on the legal form of the business, an investor can be called a sole proprietor, partner, shareholder, or member.

3. When comparing financial and managerial accounting, which of the following statements is true? A. Financial accounting is more flexible than managerial accounting. B. Managerial accounting is more forward looking, often emphasizing the future rather than the past. C. Financial accounting is more timely, often sacrificing accuracy in the process. D. Managerial accounting reports are required to follow generally accepted accounting principles. E. Financial accounting often emphasizes segments of an organization rather than the company as a whole.

B. Managerial accounting is more forward looking, often emphasizing the future rather than the past.

2. Operational planning: A. is the same as strategic planning. B. addresses long-terms goals and objectives. C. involves the development of short-term objectives and goals. D. all of the above

C. involves the development of short-term objectives and goals.

Understandability

Business transactions should be accounted for and presented in the financial statements in a way that is easily understandable by someone who has a reasonable level of knowledge of the business, economic activities and accounting.

16. The account called "Work-in-Process" would be found on which financial statement? A. Income Statement B. Statement of Retained Earnings C. Balance Sheet D. All of the above E. None of the above

C. Balance Sheet

Income Statement

Captures a company's revenue and expense information for a period of time. -Revenues: the increases in a company's economic resources (ex. cash) that result from operating activities in the normal course of business. -Sales Revenue: Revenue generated by the selling of merchandise inventory -Service Revenue: Revenue generated by providing a service to customers. -Interest Revenue: Revenues generated from transactions incidental to operations. -Expenses: The costs incurred, or economic resources consumed, as a result of operating activities. Expenses are costs incurred in order to produce revenues. -By taking the difference between revenues and expenses, the Income Statement conveys to users the company's ability to make a profit. This profit is often called "net income". If expenses exceed revenues, a "net loss" would result.

Full Disclosure Principle

Companies are required to follow the full disclosure principle with respect to their financial statements. This principle dictates that the financial statements should disclose all relevant information that users might need in order to form their own opinions about a company.

Contribution Margin Per Unit

Contribution margin per unit is $40. -This means that for each additional unit that is sold, the company makes a profit of $40 after fixed costs have been covered.

Contribution Margin Ratio

Contribution margin ratio is 57.14%. -This means that for each additional dollar in sales, the company makes $ .5714 (57.14 cents) in profit after fixed costs have been covered. Contribution Margin Ratio = Contribution Margin ÷ Sales --Using the "total": Contribution Margin Ratio = $200,000 ÷ $350,000 = 57.14% (rounded) --Using the "per unit" information: Contribution Margin Ratio = $40 ÷ $70 = 57.14%

Cost per unit

Cost of Goods Manufactured / Total number of units manufactured

Cost per unit

Cost of Goods Sold / Total number of units sold

4. Sunk costs: A. have already been incurred. B. can not be avoided C. are not relevant. D. all of the above.

D. all of the above.

Internal Users

Internal users of accounting information would include various types of managers and possibly lower-level employees.

Matching Principle

Expenses are recorded as they are incurred to produce revenues - hence, the term "matching". Expenses should be "matched" into the same period they are incurred in order to produce revenue.

Relevance

Financial information should be relevant to the decision making needs of the user. Information is relevant if it helps users of the financial statements in predicting future trends of the business or confirming or correcting any past predictions they have made.

Limited Liability Companies (LLC) and Limited Liability Partnerships (LLP)

In recent times, many S-Corporations are being replaced with a relatively new business form with fewer restrictions called the limited liability company (LLC) or limited liability partnership (LLP). LLC's are allowed an unlimited number of members whereas S - Corporations are limited to 100 or few shareholders. -It is important to note that LLC's are not corporations. The owners of a LLC are called members rather than stockholders or partners. -Unlike a partnership, each member in a LLC has limited liability with respect to the debts of the business. -From a tax perspective, LLC's are taxed like a partnership - in other words, the profits are taxed once at the member level. -The limited liability partnership (LLP) form is different from the limited partnership form. All the partners in an LLP are actively engaged in the business. Many states require businesses that choose this form to be involved in professional services such as doctors, lawyers, and accountants. -The LLP form is attractive for these businesses because the partners are not held liable for malpractice related claims related to the actions of the other partners. However, the partners are still held liable for claims related to the debts of the partnership.

Materiality

Materiality has to do with the significance of transactions, balances and errors in an organization's financial statements. Something is "material" if it is relevant to the decision making needs of financial statement users.

Batch-level costs (ABC)

Result in overhead costs going up with the production of each "batch" of product produced. -For example, machine setups would be batch-level costs because machine calibration costs only occur with each batch of product and not with each unit of product.

Unit-level costs (ABC)

Result in overhead costs going up with the production of each additional unit of product. -Examples include factory supplies and factory depreciation.

Product-level costs (ABC)

Result in overhead costs going up with the production of each type of product (in the overall sense). -For example, research and development costs or Advertising costs are product-level costs.

On Income Statement:

Sales Revenue = Number of units sold x sales price per unit Cost of Goods Sold = Number of units sold x cost per unit Gross Profit = Sales revenue minus cost of goods sold Net Income = Gross profit - period costs

What if the company believes they can cut fixed costs by $20,000 and also cut variable cost per unit by $4 (by outsourcing some of their labor cost to foreign countries), yet only sell 10,000 units - what should be the price per unit in order to have net income of $500,000? (ignore taxes)

Sales Revenue($ ? per unit x 10,000 units) $840,000 (solved for) Less: Variable Costs ($26 per unit x 10,000 units) $(260,000) = Contribution Margin = $580,000 Less: Fixed Costs $(80,000) = Net Income = $500,000 (desired TP) ---If sales revenue needs to be $840,000, and only 10,000 units can be sold, the sales price per unit needs to be $84 per unit.

What if the company believes they can cut fixed costs by $20,000 yet only sell 10,000 units - what should be the price per unit in order to have net income of $500,000? (ignore taxes)

Sales Revenue($ ? per unit x 10,000 units) $880,000 (solved for) Less: Variable Costs ($30 per unit x 10,000 units) $(300,000) = Contribution Margin = $580,000 Less: Fixed Costs $(80,000) = Net Income = $500,000 (desired TP) ---If sales revenue needs to be $880,000, and only 10,000 units can be sold, the sales price per unit needs to be $88 per unit.

If the company believes they can only sell 10,000 units, what should be the price per unit in order to have net income of $500,000? (ignore taxes)

Sales Revenue($ ? per unit x 10,000 units) $900,000 (solved for) Less: Variable Costs ($30 per unit x 10,000 units) $(300,000) = Contribution Margin =$600,000 Less: Fixed Costs $(100,000) = Net Income =$500,000 (desired TP) ---If sales revenue needs to be $900,000, and only 10,000 units can be sold, the sales price per unit needs to be $90 per unit.

Statement of Cash Flows

The Statement of Cash Flows is about one item - cash. The purpose of the Statement of Cash Flows is to summarize for users the various sources and uses of cash during a period of time. The Income Statement is not about cash, but, rather, about profit. A company could find itself very profitable according to its Income Statement yet be in a poor cash position according to its Balance Sheet. For Statement of Cash Flow purposes, any transaction that affects cash is described as either: -Financing activities: deal with activities that surround how a company obtains obtains the funds it needs to get started or to expand. Financing activities do not include the day-to-day activities the company performs to stay in business. Examples of financing activities include borrowing (or repaying) cash from (or to) a lender and issuing shares of stock to investors. -Investing activities: deal with non-operating activities that surround what a company does with the money received through financing activities. For example, a company that borrowed $25,000 to get started (a financing activity) might take that money and purchase several different machines to be used in the business (an investing activity). -Operating activities: deal with the day-to-day transactions a company engages in during the normal course of business. Examples include buying and sellingOperating, investing, or financing activity.

Comparability

The ability to compare similar companies in the same industry group and to make comparisons of financial performance.

Cost of Goods Manufactured (CGM)

The cost of completed products transferred out of WIP and into the FG account

Cost of Goods Sold (CGS)

The cost of products sold that are transferred out of FG and into the CGS account

Double-Entry System of Accounting

The double-entry system simplifies the way transactions are recorded in the accounting system. On the transaction worksheet, we used plus and minus signs (or up and down arrows) to indicate whether an account balance was increasing or decreasing. In the double-entry system, neither plus and minus signs nor up and down arrows are used; rather, words called "debits" and "credits" are used. Depending on the type of account being affected by a transaction, both debit and credit can mean increase or decrease. Assets are increased with debits and decreased with credits. Liabilities are increased with credits and decreased with debits. Expense accounts are increased with debits and decreased with credits.

Time Period Assumption:

The economic life of a business is assumed to continue indefinitely. However, in order to best measure a company's financial position over time, arbitrary time periods are used to compile information for financial reporting purposes. -Companies will select a year-end and prepare an income statement for that year. -Companies will report balances on the balance sheet as of the year-end date. Companies may also do interim financial reports covering less than one year. -"calendar year-end": When a company's year-end falls on December 31. -"fiscal year-end": When a company's year-end falls at the end of any other month.

Present Value (PV) of a Lump Sum

The future value of a lump sum algebraic equation can be re written so that the present value notation is on one side: ------FV = PV (1 + r) n divide both sides by "(1 + r) n": ------FV = PV (1 + r) n ------(1 + r) n (1 + r) n reduce further to the following: ------FV * 1 = PV ------(1 + r) n Like the future value algebraic formula shown earlier, the present value formula can also make use of a factor table. ------FV * 1 = PV ------(1 + r) n ------FV * factor n,r = PV The present value of a lump sum factor will be the inverse of the future value of a lump sum factor.

Conservatism Principle

The general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but to only recognize revenues and assets when they are assured of being received. This serves to assure readers of financial statements that management is not overstating their performance (e.g. income) nor overstating the value of their assets such as inventory that is old and obsolete.

Going Concern (Continuity) Assumption

The statements are reporting on what happened in the past; however, decision-makers are often looking at these financial statements for its predictive value. -Unless there is evidence to the contrary, users of a company's financial statements can assume that the business will continue in the foreseeable future.

Cost Flow

The transfer of product costs from one account to another.

External Users

There are many different types of external users of accounting information including investors, creditors, tax authorities, customers, labor unions, and regulatory agencies.

What if we wanted our answer to be in terms of sales dollars instead of units?

We could either take our answer in terms of units and multiple it by the sales price per unit, or use the formula where the CM ratio is used in the denominator rather than the CM per unit. ---ATP sales dollars = [FC + (ATP ÷ (1 - tax rate))] ÷ CM ratio ---ATP sales dollars = [100,000 + 714,286] ÷ .5714 ---ATP sales dollars = $1,425,071.75

The Structure of Taxes

There are two key components in determining an individual or corporation's tax liability - the tax base and the tax rate. -In order to determine the tax liability, the tax base is multiplied by the tax rate. Tax Liability = Tax Rate x Tax Base -Tax base: The amount or value of the item subject to tax. -----There are three primary tax bases: Transaction Property or wealth Income -----Type of Tax Base: -Sales taxes (transaction taxes): Dollar amount of the sale transaction. --Excise taxes (transaction taxes): Units of the product purchased (gasoline taxes and cigarette taxes). --Estate and gift taxes (transaction taxes): The value of the estate or the gift transferred to another person. --Employment taxes (transaction taxes): The amount of wages earned. --Property taxes: Assessed value of the property (house, car, occasionally intangible property like stocks and bonds) --Individual income tax: Taxable income --Corporate income tax: Taxable income -Tax rates: Set by various levels of government (federal, state, and local) and follow a certain pattern. These patterns typically fall under one of the following three types: -Progressive: A progressive tax is one in which the tax rate, expressed as a percentage, increases as the tax base increases. The most common example of this pattern is the individual income tax rate. In general, as a taxpayer's taxable income rises, the tax rate that will be applied against that taxable income also rises. -Proportional: A proportional tax (also called a flat tax) is one in which the tax rate stays constant as the tax base increases. The overall tax amount can go up, but the tax rate expressed as a percentage has stayed the same. -Regressive: A regressive tax is one in which the tax rate goes down as the tax base increases. While regressive taxes are uncommon, the social security tax can be viewed as a type of regressive tax. Corporate Income Taxes: -Easier to compute than that of an individual. The formula for calculating a corporation's taxable income is as follows: -----Total Income $XX -----Less: Exclusions from Taxable Income (XX) -----Gross Taxable Income XX -----Less: Allowable business deductions (XX) -----Taxable Income (XX) -The corporation's taxable income is its tax base. A tax rate or rates will be applied to this taxable income in order to calculate the amount of federal income tax the corporation will owe. Marginal and Average Tax Rates: -For both individual and corporate taxpayers. -Marginal Tax Rate: This is the rate of tax paid on the next dollar of taxable income earned. The marginal tax rate will always be the tax percentage of the highest income level for the taxpayer. -Average Tax Rate: The average income tax rate is calculated by dividing the total tax by taxable income. Knowing the average tax rate allows an individual or corporation to see how much, on average, they pay for each dollar earned. -Average and marginal tax rates are different. The marginal tax rate is what ABC would have to pay in tax on an additional dollar of income earned. The average tax rate does not look at an additional dollar, but rather, all the dollars together.

Monetary Unit Assumption:

This assumption states that only those transactions that can be expressed quantitatively in terms of money are included in the financial statements. For a United States based company, the monetary unit would be the U.S. dollar.

Economic Entity Assumption

This assumption states that the personal assets and liabilities of a company's owners should be kept separate from the company's own assets and liabilities for financial reporting purposes.

In accounting, there is a systematic and orderly process in which costs get recorded in the accounting system:

• The cost of the direct materials purchased gets recorded in the DM Inventory account • The cost of the direct materials used gets recorded in the WIP Inventory account • The direct labor and manufacturing overhead costs (ex. factory rent, indirect materials, etc...) get recorded in the WIP Inventory account • The cost of the products that are completed in the factory and transferred out until the time in which they are sold get recorded in the FG Inventory account • The cost of the products that are sold are transferred out of the FG Inventory account and into the Cost of Goods Sold (CGS) account.