Accounting 2 Exam 1 Review

3 Cash Flow Classifications

(1st) Operating (2nd) Investing (3rd) Financing

Know how to determine Cost of Goods Manufactured (that whole Cost of Goods Manufactured Schedule thing) and how to determine Cost of Goods Sold (that section of the Income Statement)

(Company) Cost of Goods Manufactured Schedule For the Year Ended December 31,2018 Work in Process, Jan 1 Direct Materials Raw Materials inventory,Jan 1 100 Raw Materials Purchases 400 Total raw materials available 500 Less: Raw materials invent. Dec 31 300 Direct materials used 200 Direct labor 800 Manufacturing Overhead Indirect labor 300 Factory repairs 400 Factory utilities 200 Factory depreciation 100 Total manufacturing OH 1000 Total Manufacturing costs 2000 ------ Total Cost of Work in Progress 2500 Less: Work in Process, Dec. 31 400 Cost of Goods Manufactured 2100 How to find COGS: Beg Inventory + Cost of Goods Purchased/Manufactured - Ending Inventory = COGS Same Formula goes on Income Statement Manufacturing Company Income Statement ( partial ) For the Year Ended December 31, 2018 Cost of goods sold Finished inventory Jan 1 90 Cost of goods manufactured 370 Cost of goods available for sale 460 Less: Finished goods/inventory Dec. 31 80 Cost of goods sold 380

You will need to be able to prepare an entire Statement of Cash Flows similar to those in the homework problems.

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Be able to prepare a horizontal analysis and vertical analysis of both the Income Statement and the Balance Sheet. Remember on the horizontal analysis that the percent change is the change (in dollars) from one year to the next divided by the earlier of the two years. Also remember that the 100% number in the vertical analysis is Net Sales on the Income Statement and Total Assets on the Balance Sheet - everything else is a percentage of those base amounts.

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Three most common activity bases to apply manufacturing overhead

- Direct Labor Hours - Direct Labor Costs - Machine Hours

What is a Current Ratio?

- Measures the relationship between current assets and current liabilities - Measures the ability of the company to pay current liabilities with current assets - Measurement of short term liquidity - Generally, 2:1 is considered adequate

Know the difference between manufacturing and merchandising organizations.

- The basic difference between a merchandising company and a manufacturing company is that a manufacturer creates products and a merchandiser sells them. - Merchandisers include both wholesalers and retailers. Consider, for example a factory that produces widgets and sells them in bulk to distributors, who in turn sell the widgets in smaller lots to stores around the country. In this example, the factory is the manufacturer and the distributors and stores are merchandisers. Merchandiser: Beg. Merchandise Inventory + Cost of Goods PURCHASED - Ending Merchandise Inventory = COGS Manufacturer: Beg. Finished Goods Inventory + Cost of Goods MANUFACTURED - Ending Finished Goods Inventory = COGS

Know the difference between applied manufacturing overhead and actual manufacturing overhead, and to what each is assigned (applied manufacturing overhead is assigned to Work in Process Inventory and actual manufacturing overhead incurred is assigned to the Manufacturing Overhead account).s

Actual Overhead: - The actual overhead refers to the indirect manufacturing costs actually occurring and recorded. These include the manufacturing costs of electricity, gas, water, rent, property tax, production supervisors, depreciation, repairs, maintenance, and more. - Overhead incurred is assigned to the Manufacturing Overhead account Applied Overhead - The applied overhead refers to the indirect manufacturing costs that have been assigned to the goods manufactured. Manufacturing overhead is usually applied, assigned, or allocated by using a predetermined annual overhead rate. - Overhead is assigned to Work in Process Inventory

Know how the inventory accounts appear on the financial statements (i.e. Balance Sheet - all three inventories are current assets).

Balance Sheet: - all three inventories are current assets like: - Raw Materials - Work in Process - Finished Goods Inventory Income Statement: Merchandising Cost of Goods Sold Merchandise inventory, Jan 1 ----- + Cost of Goods Purchased ----- = Cost of Goods Available for sale ---- - Merchandise Inventory Dec. 31 ---- = Cost of Goods Sold = -------- Manufacturing: Cost of Goods Sold Work in Process, Jan 1 ------------ + Cost of goods manufactured ------------ = Cost of goods available for sale = ------------ - Finished goods inventory --------------- = Cost of Goods Sold ---------------- - Inventory is reported as a current asset on the company's balance sheet. - Inventory is a significant asset that needs to be monitored closely. Too much inventory can result in cash flow problems, additional expenses (e.g., storage, insurance), and losses if the items become obsolete. Too little inventory can result in lost sales and lost customers. - Because of the cost principle, inventory is reported on the balance sheet at the amount paid to obtain (purchase) the merchandise, not at its selling price.

Know the characteristics of financial and managerial accounting and how they differ

Comparisons of Financial and Managerial: Users of Reports: Financial Managerial Internal/Extern. Internal ONLY Type of Report: Financial Managerial Financial Statements Any relevant report Report Frequency: Financial Managerial Quarterly/Annual As needed Purpose of Report: Financial Managerial General Purpose Special Purpose Reporting Detail: Financial Managerial Summary Very Detailed Included Data: Financial Managerial Financial (Costs) Any relevent data Rules: Financial Managerial G.A.A.P. Relevance Verification: Financial Managerial Independent Audit Internal Verification (if any)

Know how to determine Cost of Goods Sold in a merchandising environment and Cost of Goods Sold in a manufacturing environment. Know how they differ (i.e. in Cost of Goods Manufactured vs. Cost of Goods Purchased)

Cost of Goods Sold: Manufactured - Total Work in Process - (1) cost of beginning work in process AND (2) total manufacturing costs for the current period. - Total Manufacturing Costs - sum of direct material costs, direct labor costs, and manufacturing overhead in the current year. Calculations: Beg. Finished Goods Inventory + Cost of Goods Manufactured ( DM + DL+MO) = Cost of Goods Available for Sale - Ending Finished Goods Inventory ----------------------------------------- = Cost of Goods Sold Cost of Goods Sold : Merchandising Calculations: Beg. Inventory + Cost of Goods Purchased = Cost of Goods Available for Sale - Ending Inventory ---------------------------------- = Cost of Goods Sold

What each Ratio Does / Is

Current Cash Debt Coverage: - Compares cash provided by operating activities to current liabilities - More reliable measurement ability to pay current obligations with cash generated by operations - 1:1 (or close to it) would be considered good Net Cash Flow From Operating Activities Inventory Turnover: - Measures how quickly the company sells inventory - Number of times a year the company acquires and then sells inventory - The higher the ratio, the faster the company is selling its inventory Days in Inventory: - Converts Inventory Turnover into a number of days - Represents the number of days it takes to sell inventory - Must be evaluated based on the nature of the product and the company's cash flow A/R Turnover: - Measures how quickly the company is collecting accounts receivable - Number of times a year that the company extends and collects accounts receivable - The higher the ratio, the faster the company is collecting accounts receivable Avg Collection Period: - Converts Accounts Receivable Turnover into a number of days - Represents the number of days it takes to collect accounts receivable - Must be evaluated based on the credit term period given to customers Debt to Total Assets: - Measures the relationship between liabilities and assets - Measures the percentage of assets financed by creditors - Generally, 50% or less is considered good Cash Debt Coverage: - Measures the ability to repay all liabilities from operating cash flow - Measures the amount of sales that is generated by each dollar of assets being used in the generation of that revenue - Generally, anything above .20 times is considered good Earnings Per Share - Measures the amount of Net Income associated with each share of common stock - Subtracts dividends on preferred stock from Net Income because that amount is not available to common stockholders Price Earnings (P/E) Ratio: - Measures the number of times the earnings of the stock people will pay to buy it - One measure of owner confidence in the company - The higher the multiple, the more times its earnings the owners are willing to pay to buy the stock (evidences greater confidence) Profit Margin: - Measures Net Income as a percentage of sales This is the percentage of sales that becomes Net Income Return on Assets: - Measures the percentage rate earned on assets in use by the company - Measures what the company is earning on investment in assets Asset Turnover: - Measures how effectively the company is using assets to generate revenue - The higher the multiple, the more effectively the company is using assets to generate revenue - Generally, this should be greater than 1 Return on Common Stockholder's Equity: - Measures how effectively the company uses owner's investments to generate profit - Measures the amount of return the owners earn on their investment in the company - The higher the percentage, the more the company is earning using the owner's investment

Know what managerial accounting is designed to do (provide support for management decision making in its three functional areas).

Revolves around providing information to management to make decisions Provides support for decisions made in management's functional areas: - Planning - Directing - Controlling

Know what Gross Profit is and how is it determined in manufacturing.

Sales - Cost of Goods Sold = Gross Profit - Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. - Gross profit will appear on a company's income statement, and can be calculated with this formula: - Gross profit is also called sales profit and gross income.

Chapter 13 Ratio Equations

Current Ratio: Current Assets --------------------- Current Liabilities Current Cash Debt Coverage: Net Cash Flow From Operating Activities ------------------------------------------------- Average Current Liabilities Inventory Turnover: COGS -------------- Avg. Inventory Days in Inventory: 365 ---------- Inventory Turnover Accounts Receivable Turnover: Net Credit Sales ------------------------- Average A/R Average Collection Period: 365 ----------- A/R Turnover Debt to Total Assets: Total Liabilities ------------------- Total Assets Cash Debt Coverage Net Cash Flow From Operating Activities -------------------------------------------------- Average Total Liabilities Earnings Per Share: Net Income - Dividends on Preferred Stock ------------------------------------------------------ Average Common Shares Outstanding Price-Earnings Ratio: Market Price per Share --------------------------------- Earnings per Share Gross Profit Rate: Gross Profit --------------------- Net Sales Profit Margin Net Income ---------------- Net Sales Return on Assets: Net Income ----------------- Average Total Assets Asset Turnover: Net Sales ---------------- Average Total Assets Return on Common Stockholder's Equity: Net Income - Dividends on Preferred Stock --------------------------------------------------- Average Common Stockholder's Equity

Know the differences between direct materials, direct labor, and manufacturing overhead.

Direct Materials: - Raw Materials - Basic materials and parts used in manufacturing process - Direct Materials - Raw materials that can be physically and directly associated with the finished product during the manufacturing process. Direct Labor: - Work of factory employees that can be physically and directly associated with converting raw materials into finished goods. - Indirect Labor (I/L) - All other factory labor Does not convert raw materials into products: - Supervision - Maintenance - Janitorial - Quality Control Manufacturing Overhead: - Costs that are indirectly associated with manufacturing the finished product. - Includes all manufacturing costs except direct materials and direct labor. - Also called factory overhead, indirect manufacturing costs, or burden. - Indirect Materials - Indirect Labor - Factory Utilities - Factory Repairs - Factory Insurance - Factory Property Taxes - Factory Rent - Depreciation on Factory Building - Depreciation on Factory Machines

Know the basic difference between the two methods for preparing the operating activities section of the statement of cash flows (Direct and Indirect); know that both are Generally Accepted Accounting Principles (although the direct method is recommended by Generally Accepted Accounting Principles). Know that both methods provide the exact same net cash flow from operating activities.

Direct Method : (GAAP recommends) Go through the accounts and list each item of operating cash inflow and outflow: - Cash Sales - Collection of Accounts receivable Payments for Expenses - Payments for Inventory - Payments on Accounts Payable - Receipt of Interest Indirect Method : Start with Net Income and make adjustments for cash or non-cash items: - Depreciation Expense - Amortization Expense - Gains - Losses - Payments for purchases of Current Assets - Collection of Cash - Payment for Current Liabilities - Non-cash items that change Net Income The Direct and Indirect Methods for preparing the Operating Activities section will both produce THE SAME Net Cash Flow from Operating Activities

Know the required disclosures on the Statement of Cash Flows (significant non-cash investing and financing activities, cash paid for income taxes, and cash paid for interest). Know also that the cash paid for interest is not necessarily the amount of Interest Expense (on the Income Statement), and the same is true for income taxes. You only have to present the significant noncash investing and financing activities on the actual Statement of Cash Flows, but you have to know the other two.

Disclosures required under IAS 7 include: - A reconciliation of the ending cash balance to the statement of financial position headings. (e.g. cash, bank overdraft, bank deposits) - Cash flows relating to the acquisition and disposal of business entities - Changes in assets and liabilities which are related to non-cash financing or investing activities. (e.g. assets acquired under finance leases) - Cash which is not available for use. The amount and nature of any cash held by the entity, which is not available for use should be disclosed. The reason for any restriction should also be disclosed. Required note The following is also required as a disclosure note in the financial statements regarding cash: - A note showing the components of cash and cash equivalents, and - A reconciliation of the amounts in the statement of cash flows with the amounts in the statement of financial position

Format of Statement of Cash Flow

Each section must identify each item of cash flow and present Net Cash Flow From (the activities) After all sections, present Net Change in Cash, Beginning Cash Balance and Ending Cash Balance Significant Non-Cash Investing and Financing Activities (disclosure after ending cash balance)

Understand what financial statement analysis is, and its purpose

Financial Statement Analysis takes the Financial Statements of a company and makes comparisons: - Same company's past - Related items within the financial statements - Other companies - Industry averages - Economy as a whole

Financing Activities

Financing Activities: Cash transactions that involve :ong Term Liabilities and cash transactions with owners Borrow or repay Long Term Liabilities Issue or Reedem Bonds Payable Issue Stock Purchase or sale of Treasury Stock Cash Dividends

Understand the basic tools and techniques of financial statement analysis (vertical analysis, horizontal analysis, and ratio analysis).

Horizontal Analysis: Compares current year results to prior year results - Compute the dollar amount change from prior year to current year (current year amount - prior year amount) - Compute the percent change from prior year to current year (dollar change ÷ prior year amount) Vertical Analysis: Computes each item on the financial statement as a percentage of the "total" (highest amount; this is the "key amount" on statement, and will be the 100% amount) - Income Statement - Net Sales - Balance Sheet - Total Assets Ratio Analysis: Expresses a mathematical relationship between two items in the Financial Statements (that are related): - Liquidity Ratios - Analyze the ability of the company to meet current obligations and meet other needs for cash - Solvency Ratios - Analyze the ability of the company to meet long term obligations - Profitability Ratios - Analyze the ability of the company to earn a profit

Know some of the information the Statement of Cash Flows provides the reader (especially things that can't be found on the other financial statements)

Information about the cash effects of the company's transactions A reconciliation of accrual and cash basis accounting Measurement of cash performance The ability of the company to pay obligations and pay dividends The ability of the company to generate future cash flows

Investing Activities

Investing Activities: -Cash transactions that involve any Non Current Asset -Purchase or sale of: -Fixed Assets -Intangible Assets -Natural Resources -Long Term Investments

Be able to recognize and identify examples of each type of activity.

Investing: Cash inflows: - From Sale of property, plant, and equipment - From sale of investments in debt or equity - From collection of principal on loans to other entities Cash Outflow: - To purchase property, plant or equipment - To purchase investments in debt or equity securities - To make loans to other entities Financing: Cash inflows: - From sale of common stock - From issuance of debt ( bonds and notes ) Cash outflows: - To stockholders as dividends - To redeem term debt or require capital stock (treasury stock) Operating: Cash inflows: - From sale of good or service - From interest received and dividends received Cash outflow: - To suppliers for inventory - To employees for services - To lenders for interest - To others for expenses

Calculate the amount of applied manufacturing overhead

Manufacturing Overhead Rate x Activity Base Used

Know what a Cost of Goods Manufactured Schedule is and how to prepare one. You will also need to be able to complete the partial Income Statement (through Gross Profit). You will need to know how to compute (and present) direct materials used, direct labor costs, manufacturing overhead costs and total cost of work in process, Cost of Goods Manufactured, are Cost of Goods Sold. On the exam, calculation of Cost of Goods Manufactured and Cost of Goods Sold will be more important than presentation

Morrison Pet Shop (Partial) Income Statement For the Year Ended June 30, 2018 Sales Revenues: Sales Revenue 534,000 Less: COGS 4,200 Net Sales $529,800 Cost of goods sold Finished good, July 1 96,000 COG Manufactured 386,910 COG available for sale 482,910 Less: Finished goods inv. 75,900 Cost of Goods Sold 407,010 Gross Profit $122,790 Direct Materials Used: Beginning Direct Materials Inventory + Direct Material Purchases - Returns of Direct Materials - Purchase Discounts on Direct Materials + Freight In on Direct Materials Purchases = Direct Materials Available for Use - Ending Direct Materials Inventory = Direct Materials Used COGS : Beg Inventory + Cost of Goods Purchased/Manufactured = COG Available for Sale - Ending Inventory = COGS COGM: Beg Inventory + Total Manufacturing Costs: ( DM, DL, MOH ) = Cost of Work in Process - Ending Work in Process Inventory = COGM

Operating Activities

Operating Activities: Cash transactions that ARE NOT investing or financing activities Cash related transactions that involve current assets and current liabilities, AND items that are included in the computation of Net Income Cash sales or other revenue Cash Cost of Goods Sold and Operating Expenses Cash used to purchase Current Assets Cash received from receivables Cash used to pay Current Liabilities

Be able to calculate the predetermined manufacturing overhead rate

Predetermined Manufacturing Overhead Rate: Total Estimated Manufacturing Overhead ---------------------------------------------------- Total Estimated Activity Base

Know what product costs and period costs are, and the difference between the two

Product Costs: ( Manufacturing Costs ) - Costs associated with making products - Direct Materials (D/M) - Direct Labor (D/L) - Manufacturing Overhead (MOH / Indirect Materials, Indirect labor, other indirect costs) - Recorded in "inventory" account - Not an expense (COGS) until the goods are sold. Period Costs: ( Non-manufacturing Costs) - Period Costs are reported as operating expenses. - Charged to expense as incurred - Costs not associated with making products - Costs associated with selling products and administration of the company - Freight Out - Sales Commissions - Marketing - Advertising - Any Office Related Cost - Any Sales Related Cost - Any Clerical Related Cost

Know the three basic characteristics that are analyzed: liquidity, solvency, and profitability and what each measures.

Ratio Analysis expresses a mathematical relationship between two items in the Financial Statements (that are related): - Liquidity Ratios - Analyze the ability of the company to meet current obligations and meet other needs for cash -Liquidity measures the company's ability to pay current obligations - Solvency Ratios - Analyze the ability of the company to meet long term obligations (without liquidating necessary resources) and meet needs for cash. - Profitability Ratios - Analyze the ability of the company to earn a profit

Know that there are three inventory accounts in manufacturing (Raw Materials Inventory, Work in Process Inventory, and Finished Goods Inventory), and what type of items would be recorded in each account.

Raw Materials Inventory (RMI): - Component parts that go into the products Work In Process Inventory (WIPI): - Products that are being worked on, but are not completed Finished Goods Inventory (FGI): - Completed products that are ready to be sold to customers

Know the primary purpose of the Statement of Cash Flows

The Statement of Cash Flows is one of the four basic Financial Statements required by Generally Accepted Accounting Principles: Details sources and used of cash during the time period Provides to the reader: Information about the cash effects of the company's transactions A reconciliation of accrual and cash basis accounting Measurement of cash performance The ability of the company to pay obligations and pay dividends The ability of the company to generate future cash flows

Be able to calculate whether manufacturing overhead is over applied or under applied (and know the difference between the two)

The over or under-applied manufacturing overhead is defined as the difference between manufacturing overhead cost applied to work in process and manufacturing overhead cost actually incurred during a period. Over-Applied: - If the manufacturing overhead cost applied to work in process is MORE than the manufacturing overhead cost actually incurred during a period, the difference is known as over-applied manufacturing overhead. - MOH work in Process > MOC actually incurred Under-Applied - On the other hand; if the manufacturing overhead cost applied to work in process is LESS than the manufacturing overhead cost actually incurred during a period, the difference is known as under-applied manufacturing overhead. - MOHC < MOHC actually incurred during a period

Know how to determine a Production Cost Per Unit.

Total Manufacturing Costs ---------------------------------- Number of Units Produced

what Significant Non-cash Investing and Financing Activities are

Transactions that are significant, and would be either investing for financing had they involved cash, but do not involve cash Stock Purchase a Non-Current Asset by issuing a Long Term Liability or Stock Exchange one Non-Current Asset for another Conversion of Bonds Payable into Common Stock Stock Dividends These transactions are not reported in the body of the statement, but in a note section at the bottom