ACCT 3309 Final

semi annual bonds

$400,000 x 8% x 6/12 = $16000

1/10, n/30

1% cash discount if paid within 10 days, otherwise full payment due in 30 days

The level of operating leverage a firm selects should be based in part on input from the managers directly involved in the ______________________

production process

LLP is restricted to certain _______________ in many states

professions

in a _________ managers are accountable for both revenue and costs ie brand manager

profit center

ROA

profit margin x asset turnover

ROE measures overall _____

profitability

Sole proprietorship

profits of business=profits of the individual

NPV analysis is used to Determine _____________________ hurdle rate: the required rate of return given risk‐return tradeoff

project-specific

Costs associated with inventory

purchase cost, carrying costs, ordering costs

: The portion that results from using more raw materials or labor for each unit produced than had been anticipated in the budget

quantity variance

Report 10Q

quarterly financials report

• If the present value of the inflows is greater than the outflows, then the project is profitable because by construction it is earning a _____ that is greater than the hurdle rate

rate of return

cash basis accounting

record revenue when cash is received from customers and expenses when cash is paid to acquire resources

Prospectus Form S-1

registration requirement by the SEC that provides details about an investment offering for sale to the public

o if your selling price is lower than your variable cost per unit, you are _____________________________

guaranteed to lose money

out of pocket costs

rent, insurance, losses due to obsolescence, inventory counts, damages

equity shareholders are ______ claimants (debt:primary claim)

residual

Internal "_________________" assumes average firm‐ wide risk, must be adjusted for each individual project

hurdle rate

The _________ shows operating performance between two points in time ("flows")

income statement

cause of unfavorable price variances

increase in raw materials cost

accrual accounting records __________ when goods or services have been provided and the org is entitled to be paid

revenue

in a ___________ managers are accountable primarily for revenues ie sales manager

revenue center

The _______ principle of accounting requires that firms use depreciation and amortization

of accounting

• We may not realize the EV for any one investment, but over a period of time we should achieve the expected value ______________ across all projects

on average

Single Entry Accounting

only affects cash and debt accounts

________ tells us whether the company was able to generate positive (net) cash flow from its core, day ‐to ‐day operations

operating cash flow

The auditor also issues an ______________ letter, which generally has three standard paragraphs that are reproduced almost verbatim in most auditors' reports

opinion

double-entry bookkeeping

originally documented in 1494 by Luca Pacioli

• Operating leverage is concerned with the extent to which a firm commits itself to high levels of fixed costs ________________________________

other than interest payments

The _______ method of analysis evaluates projects based on how long it takes to recover the amount of money put into the project

payback

cause of unfavorable quantity variances

poor manufacturing efficiency

Contribution Margin = ________ - Variable Cost

price

The portion caused by paying a different price for each unit of raw material or hour of labor than had been anticipated in the budget

price variance

Market rate

the rate investors expect to earn on a debt security investment, AKA yield Rate

Coupon Rate

the rate stated in the bond contract

marginal tax rate

the rate you would pay on your next $1 of income, a function of your highest tax bracket

Assumptions inherent in CVP analysis

the selling price per unit does not change with volume

Shareholder approach vs stakeholder approach

the stakeholder view emphasized a corporation's duties towards employees, communities, and creditors as well as other ethical considerations

Financial acct rules make changes to the ___________ of CFs

timings

Fundamental demand for accounting

to help guide exchange

NPER

total number of payment periods in an annuity

AR Turnover

total revenue/average AR

Average tax rate

total tax/ taxable income

effective tax rate

total tax/total income

The ___________ for a production expense is the difference between the budget and the actual costs

total variance

Risk‐return tradeoff: the lower the variability in our sales, the lower the risk associated with high fixed costs

true

An _________ quantity variance means costs are higher because production inputs are unexpectedly high

unfavorable

An ______variance is one that causes operating income to be lower than budgeted

unfavorable

An ________variance means you're paying higher prices per unit than anticipated

unfavorable price

FCF is an alternative measure of_____

value creation

Assumptions inherent in CVP analysis

variable costs (per unit) do not change with volume

Larger fixed costs - higher operating leverage - places pressure on the _____________________

volume of sales

The portion that results from actual sales volume differing from budgeted volume

volume variance

1st major cash flow assumption

weighted average: allocates avg cost to each item sold

S corporation

numerous restrictions including limitations on ownership Harder to raise large amounts of capital

Economic process businesses follow

obtain capital->make investments->generate returns corp finance->managerial acct -> financial acct

accrual accounting does 4 things

1-accrue revenue: accounts receivable 2-defer revenue: unearned revenue 3- accrue expense:interest/wages/taxes payable 4-defer expense:inventory,prepaid expenses,ppe

a company's cost of capital is a function of their

1-cost of equity capital 2-cost of debt capital 3-capital structure debt to equity ratio

semi annual compounding

10 years, 8%, semiannually, then n=20, r=4%

Most common short term investments

CDs, Marketable securities

inventory turnover

CGS/Average inventory

The IRR method corrects weaknesses of NPV method because

Does not require determining the project-specific hurdle rate in advance

3rd method to capital budgeting

the internal rate of return method IRR

Firm Value

FCF/(1+WACC)^n

2nd major cash flow assumption

FIFO, allocates costs of earliest acquisitions to each item sold, so newer goods remain

FV

FV(rate,nper,pmt,[pv],[type])

Present value

FV/(1+r)^n

Break-even Quantity

Fixed costs/(price-variable cost)

Present value

Future Value/(1+r)^n

Use of LIFO is controversial

LIFO is not allowed in EU (IFRS) If used in US LIFO must be used to tax purposes and external reporting purposes

3rd major cost-flow assumption

LIFO, allocates cost of most recent acquisitions to each item sold so older goods remain.

Key debt rating agencies

Moody's investors services, standard & Poor's, Fitch

NPER

NPER(rate,pmt,pv,[fv],[type])

First method to capital budgeting

NPV Method

The _____ method of analysis determines whether a project earns more or less than a stated desired rate of return

Net Present Value

free cash flow

OCF - net capital expenditures

PMT

PMT(rate,nper,pv,[fv],[type])

PV

PV(rate,nper,pmt[fv],[type])

Big 4

PricewaterhouseCoopers(PWC), deloitte, Ernst & Young (EY), KPMG

RATE

RATE(nper,pmt,pv,[fv],[type],[guess])

disaggregation of ROA

ROA=net income/average total assets=net income/total revenue x total revenue/average total assets

inventory is typically placed into 3 categories

Raw materials, work-in-process, finished goods

Why would a company voluntarily choose to use LIFO and report lower earnings?

Tax benefits: lower earnings means lower taxes Reduced political exposure, major oil companies use LIFO

Capital Cost

The amount you have paid out to suppliers for your inventory

Cost of debt capital

The debt's interest rate

Accounting is

The process of recording, summarizing, and analyzing financial transactions

Market Rate

The rate at which your future payments are discounted

The shorter the payback the better

True

request for proposal

a document that solicits potential suppliers to submit proposals to compete with other suppliers for a contract

This margin represents the amount of money available to be used to pay fixed costs and provide the firm with _____________ (also CM% = CM / Revenue)

a profit

• Double‐entry facilitates _________ - the recognition of revenues and expenses with different timing than their cash flows

accrual accounting

accrual accounting refers to ____ made to the cash basis method of accounting

adjustments

variance analysis necessarily takes place

after the fact

To determine our inventory cost, we make assumptions in order to ______________________ to the units we sold and the units still on hand

allocate costs

Depreciation refers to the ________________ of the cost of a fixed asset (PP&E) to expense over the years the organization expects to use it (expense deferral)

allocation

___________________ is a generic term referring to the spreading out of a cost over a period of time

amortization

total income

amounts that are not taxable, i.e. that are excluded from the taxable income

Higher fixed ____________________ increase the BEQ

and variable

Report 10k

annual financials report

equity refers to

the ownership stake, owners hold a reisdual claim on the firm's assets

Earned Value is the budgeted total cost of the work that has ____________________

been completed

Planned Value is the budgeted total cost of the work that has _____________________

been scheduled

end balance

beg balance+inflows-outflows

Planned Value provides ___________ costs over time

budgeted

2nd method to capital budgeting

the payback method

Analysis of investments in long‐term projects is referred to as

capital budgeting

_________ is an analysis tool for investments in long‐term projects (i.e., planning, ahead‐of‐time)

capital budgeting

If the owners sell some of their stock for a gain, this ____________________; if held > 1 year, is taxed at lower rates

capital gain

The operating cycle measures how quickly a company converts its investments in inventory into ______

cash

Most common short term resources are

cash, marketable securities, accounts receivable, inventory

two primary forms of equity are _________ and retained earnings

contributed capital

two primary categories of equity

contributed capital, retained earnings(earned capital)

Variance analysis is primarily a tool to aid _________

control

LLC

corporation's owner's personal assets are not at risk

in a ______ managers are accountable for costs only, ie the dept does not generate revenue ( accounting, legal)

cost center

TVM-> importance of

cost of capital

equity increases your

cost of capital

Using arrow diagrams, network analysis finds a _______________________ that determines the least amount of time for project completion

critical path

• A bond is a ________ instrument in which investors (bondholders) lend money to the company

debt

______and/or large amounts of mandatory payments can limit scope of investment opportunities

debt covenants

Mezzanine Financing

debt equity hybrid

cause of favorable volume variance

declining product demand

Tax Base

defines what is subject to the tax i.e. taxable income

The Net Present Value method of analysis

determines whether a project earns more or less than a stated desired rate of return

equity issuances______existing ownership shares

dilute

• The NPV method compares the present value of a project's cash inflows to the present value of its cash outflows ______________________________

discounted at the project's hurdle rate

Fixed costs are those that __________________ with changes in the volume of production

do not change

When corporations pay dividends to their owners, the owners must also pay personal income taxes, creating ______________________ on the same income

double taxation

Big Bath

downwards earnings management in a period of already depressed income

is a technique used to manage long‐term projects, to evaluate progress during the life of the project

earned value management

________ Value - _______________ = Cost Variance

earned, actual costs

________ Value - _________ Value = Schedule Variance

earned, planned

income smoothing

earnings are managed to maintain a steady improvement in income each year perceived cost of capital benefit (lower risk)

Types of fraud

embezzlements, bribes, writing bad checks

The data needed to evaluate an investment opportunity are the _________________________ related to the investment

expected cash flows

Decision analysis techniques used to improve decisions

expected value, network cost budgeting

• The Internal Rate of Return (IRR) is the rate the project is _______________________ to return

expected/forecasted

accrual accounting records ______ in the same period as the revenues they help generate (matching)

expenses

A ____ variance is one that causes operating income to be higher than budgeted

favorable

• A ____________ volume variance means that the (likely variable) expense item is lower than budgeted (in total dollars) because sales volume is lower than budgeted

favorable

designed primarily for decision makers outside the company

financial accounting

The Balance Sheet shows the statement of __________ at a single point in time ("stocks")

financial position

Assumptions inherent in CVP analysis

fixed costs are constant

Break-even quantity

fixed costs/contribution margin

net income is a _______

flow

The greater the _______________ in sales and profits, the less leverage you can safely afford

fluctuation

Actual cost measures the costs ___________________

incurred over time

Corporate finance

informs capital acquisition/maintenance

managerial accounting

informs investment decisions

tax benefits of debt

interest is tax deductible, dividend payments are not

to manage working capital Cash not immediately needed should be ____________, earning a return for the organization

invested

Form 1120

irs income tax form

The degree to which a firm locks into fixed costs is referred to as its

leverage position

The expected value is an average of the possible outcomes, weighted by their ________________

likeliehoods

Expected value analysis is a technique that estimates the costs or revenues based on the _______________ of each possible outcome

likelihood

LLP

limited liability partnership, liable for your own wrongful actions

CDs

low risk, low return, decreased liquidity

cost of debt is ____ than cost of equity

lower

The auditor issues an internal control memo, often called a _________________ letter, which points out the internal control weaknesses to management

management

managers will only investigate budget variances that are relatively large

management by exception

designed primarily for decision ‐ makers within the company

managerial accounting

Assumptions inherent in CVP analysis

managers can classify each cost as fixed or variable

Focus on __________________ for short ‐term decisions (CM)

marginal costs

free cash flow

measures the cash flows generated by operations that are available to pay creditors and equity holders or be re-invested

financial accounting

measures the returns

to manage working capital excess inventory should be

minimized

The crucial aspect of network analysis is identifying those activities that _________________________ before some other activity or activities can star

must be completed

ROE

net income/average stockholder's equity

• During periods of ________________, reported earnings are lower under LIFO; since ________________ are the natural state of the world, using LIFO typically results in lower reported earnings for your company

rising costs

The more highly leveraged a firm, the ___________ it is because of the obligations related to fixed costs that must be met even if the firm is having a bad year with low sales

riskier

Different industries tend to have different base rates of return, as many risks are _______________

shared/common

_______ are the residual claimants - they claim the entire return earned by the company after its other obligations (like repaying debt) are satisfied

shareholders

If your firm is a ___________, noncyclical firm, then use of debt will improve the rate of return earned by your shareholders

stable

stockholder's equity is a ______

stock

Marketable Securities

stocks, bonds, high returns, high risk, greater liquidity

Speed

stride length x stride frequency

Accounting is

system for providing financial information

The IRR method corrects weaknesses of Payback method by

taking cash flows after payback period into account taking time value of money into account

C Corporation

taxed separately from its owners

Face value

the amount that will be repaid at the maturity date