D074 Principles of accounting

What is the role and purpose of Accounting?

-Analysis: Analyze business events to determine if the information should be captured by the accounting system Allows an immediate analysis of events do you have more or less than before. Ex right then and there. . -Bookkeeping: Day-to-day keeping track of things. Allows to record in an organized form what happened. If you can't write down you don't know what happened. - Evaluation: Uses summary information to evaluate the financial health and performance of the business. It also allows for structuring data. Ex Should you pay people more or less. Is it more or less than what I budgeted.

What exactly is a budget and why do we prepare these?

A budge is a dollar based expression of a plan of action that shows how a firm or organization, or an individual will acquire and use resources over a specific period of time. Budgeting allows an individual, company, or other organization to spend its money in a preplanned way and to make sure expenditures are less than revenue.

Merchandising business

A business that purchases and resells goods.Business that purchases finished goods for resale. Merchandiser buys merchandise from varies suppliers and makes this inventory available in one place for the customer. Ex Supermarket, Retailer and furniture retailer.

cost centers

A cost center is a organizational unit in which the manager of that unit has control only over the cost incurred the manufacturing unit In japan operations of IMC is an example of a cost center

What is a cost pool?

A cost pool is a group of indirect costs that are being grouped together for allocation on the basis of some cost allocation base. Cost pools can range from very broad, such as all plant overhead costs, to very narrow, such as the cost of operating a specific machine.

Activity-based Costing (ABC)

A method of cost accounting designed to identify streams of activity and then to allocate costs across particular business processes according to the amount of time employees devote to particular activities.

What is a cost driver?

A numeric measure used to reflect the amount of specific cost that is associated with a particular activity. Ex in healthcare management, cost drivers could include the number of patient served in a hospital or by medical practice. In marketing a cost driver could be the number of customer contacts or the number of direct marketing professional hours spent by each marketing associate on a customer account.

What is the role of ethics in Accounting?

Accounting has moral and economic incentives to be ethical and to conduct themselves ethically. Their product is the information and the value of that information is related to the confidence that users have in its relevance and reliability. Accounting choices often impact real life economic decisions such as granting loans, making investments, or firing employees. Personal ethical standards are paramount of importance. Maintaining high ethical standards is important because accounting decisions often have an impact in real world economic decisions,

Product Costs

All costs that are involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead.

Can you define and explain the purpose of the Statement of Retained Earnings and the components that it contains?

All the earning that have been retained over the whole period of time. It's a running total. The earnings that don't stay are called dividends The components are Beginning retained earning + Net income for the period-the dividends paid during the period = earnings retained earnings.

Example of profit centers

Amazon reports the following segments online store, physical store, third party sellers and amazon web series.

What do responsibility centers represent?

An organizational unit in which a manger has control over and is being held accountable for it's performance.

What is the Accounting Equation?

Assets = Liabilities + Owner's Equity. The accounting equation is the assets a company had and there is a equation to figure out how you will get it. Assets=Liabilities+ Equity this is the source if financing. The cash that the business receives is the assets anything coming into the company. Equity is money that the person or business is investing. Liabilities is borrowing money. So the Assets go up because money comes in. Ex: Buying inventory on credit would increase the liability because it was borrowed and the assets goes up because its what goes into the company.

What is vertical analysis and what information does it provide?

Comparing percentages at the same point in time across companies in the same industry. The income statement divide all the numbers by the biggest number. Typically total revenue. For the balance sheet its divide all numbers by total assets. The results of the analysis don't provide analysis. The results tell what is the next question. Allows you to compare companies of different sizes. The formula is Percentage of Sales = Income Statements Percentage of Sales=Income Statement /Amount Sales

Can you explain and determine the actual overhead?

Cost other than direct material and direct labor actually incurred in the upcoming production period.

What are stepped fixed costs?

Cost that change in total in a stair step fashion (meaning large amounts) with changes in volume activity. Ex the cost of a dental assistant "steps up" as the number of patients increases. Increase in steps instead of smoothly.

What are mixed costs?

Cost that contain both variable and fixed cost components. Ex: Sales representative who gets a base salary of $40,000 (fixed cost) plus 3% commission on all the sales her or she makes. The more the sales representative makes, the higher the compensation is.

What are out of pocket costs?

Cost that require an outlay of cash or other resources. Ex a fast food restaurant want to install a drive up window, the cost of construction is an out of pocket cost.

Can you explain the rules for debits and credits?

Debits and credits are systematic ways to track transactions. Debit means left credit means right. Debit means on the right side of an account. The left side is where there are increase cash debit. The right side credit cash to show decrease. Debit is increase credit is decrease.

Example of Income statement use

Ex: Walmart selling products & memberships. Microsoft selling software & hardware. Disney would be media networks, parks and resources. Expense is the amount of assets consumed through business operations. Employee salaries and utilities use during a period are two common examples of expenses. They are also the cost incurred in normal business operations. Ex is Microsoft paying its programmers & equipment. McDonald's would be the food cost & equipment. Net Income (or net loss) is It sometimes called earnings or profits is an overall measure of a company's performance. The net income reflects the company's accomplishments (revenue) in relation to its efforts (expenses) during a particular time. Revenue-Expense= Net income. The income statement usually shows two main categories revenue and expense.

Example of balance sheet used

Examples Cash the amount of cash in a company's bank account. Inventory are the items you see on shelves in Walmart are considered by Walmart as inventory. Buildings the physical store itself is classified by Walmart as buildings. Each asset must be assigned a dollar amount. Liabilities are the obligations to pay cash, transfer other assets, or provide services to someone else. Your personal liabilities might be unpaid phone bills , the remining balance on an auto loan, or any obligation to complete work for which you have already been paid. Some example of liabilities are accounts payable, taxes payable, mortgage payable and unearned revenue. Owners Equity answers the question of how much the owners originally invested in the business. Plus how much profit they have left in the business. Paid in capital (original) retained earning (the amount of profit left in). Examples of owners equity is capital stock the amount given by share holders to obtain shred stock from a company. Retained earnings are earnings that are retained in the business meaning you don't distribute earnings to owners.

Who uses accounting information and why?

External Stakeholders Lenders: Company wants to borrow money and they look into this because they want to look at financial accounting data to see if the loan will be paid. So they look at your current income. Your existing obligations as well as your existing assets. Cash flow in and out of business Investors: Current and potential Investors want to see if the business is profitable and what does it own. If they buy in will they get a return on their investment. Competitors: Businesses use information on competitors because it could help identify strategic opportunities for marketing efforts where potential profits are high or where your competitor is weak. . It also could use financial statements to track its competitors and identify new opportunities to grow and use its market share in retail to increase revenue in other ventures Federal, State, and local government agencies: They use financial information to make sure investors have sufficient information to make informed investment decisions. The Securities and exchange commission (SEC) monitors the financial accounting disclosure of companies whose stock trades in the US. Ex: They use financial accounting to information to determine whether importation of Ecuadorian roses or Chinese textiles is harming the U.S companies through unfair trade practices. The IRS collects taxes and audits fillings for mistakes or fraud. The IRS will notify companies or individuals if their taxes have nor been filed in accordance with the income tax laws. Ex: The justice departments uses financial statement data to evaluate whether companies such as apple are earning excessive monopolistic profits.

What are common-size financial statements and how are they used?

Financial statements of common size divide in number by another to get a percentage. Horizontal analysis compare across analysis across time. Vertical analysis go vertical looking at different components. The financial statement analysis involves examining both the relationships among financial statement numbers and the trends in those numbers over time.

· Can you explain what a fixed cost is and why that is important to Cost-Volume-Profit (C-V-P) Analysis?

Fixed cost are cost that remain the same no matter what level of production a example would be factory rent. This is important to the analysis because it allows a manager to answer the question how much do you need to sell in order to make a profit.

What are the important influences on Accounting?

Important influences on accounting are the development of the "generally accepted accounting principles" (GAAP), international business and ethical consideration. The GAAP are authoritative guidelines that define accounting practices at a particular time in the U.S. The GAAP is set by a private nongovernmental group called the Financial Accounting Standards Board. The international Accounting Standards Board (IASB) was committee formed to develop international accounting Standards to harmonize conflicting national standards.

Who uses accounting information and why?

Internal Stakeholders Management: Have to make a business plan about what they are going to do. To be able to see if things are going to plan. They use managerial accounting information which is available to those only within the firm. They also use general financial information that is made available to outsiders Company goals are often stated in terms of financial accounting numbers such as target sales, growth in excess of 5%. Suppliers and Consumers: They both want to know the staying power of a company. For example on the suppler side if Boeing gets an order from an airline for 30 new 777's over the next ten years they want to know if the company will still be around in the future to take the delivery od and pay for the planes. On the customer side a homeowner who has foundation repair work done wants to know whether the company making the repair will be around long enough to honor the 50 year guarantee. Financial statements provide information that . suppliers and customers can use to assess the long run prospects of the company. Employees: Financial statements are used to determine employee bonuses. In addition the financial accounting information can help the employee if the employer will be able to fulfill its long term promises like pensions and retiree health care benefits. Financial statements are also important in contract negotiations between labor unions and management.

What is horizontal analysis and what information does it provide?

Involves comparing percentages over time for the same company. Looking for large percentage changes and directional changes compared to sales. It is used to note general trends that might be occurring or to highlight one time events that might require further investigation.

Can you explain and determine the applied overhead?

It's the amount of manufacturing overhead that is assigned to the goods produced during that production period. It is used to predetermined annual overhead rate to apply manufacturing overhead to completed production during that period.

What is job-order costing?

Job order costing is used when products are made on specific customer orders and when each product produced is considered a separate job. In job order costing are tracked by job. The job can be either a specific product or a specific service rendered. Ex When using job order costing the system must be captured and tracked all cost of producing each job. The manufacturing firm the cost would include material labor and manufacturing overhead. You want to use it when you want to track the direct material, direct labor, and method to allocate overhead.

Who uses accounting information?

Management uses the accounting information to make a variety of business decisions. For example managers would need an analysis of managerial accounting data to choose whether to make (product in house) or buy (out sourced production to third party suppler). Managers could also use accounting information to decide whether to keep an existing division or sell it.

how does it Managerial accounting differ from Financial Accounting?

Managerial accounting is used primarily by managers inside a business. It is tailored to the needs of the business and can provide a substantial competitive advantage. Financial accounting is data that primarily used by outsiders such as creditors and investors

What is Managerial Accounting

Managerial accounting is used primarily by managers inside a business. It is tailored to the needs of the business and can provide a substantial competitive advantage.They key purpose of management accounting is fulfilling the competitive needs of the company. The accounting system is used to support the management process of planning, controlling, and evaluating.Key component of managerial accounting the analysis of cost.

How are product costs handled by a merchandising business?

Merchandising business product cost when a inventory is sold the cost of the inventory is credited from the merchandise inventory and debited to cost of goods sold. The accounting transaction is simply reversed when a customer returns merchandise that can be sold account is credited and the inventory account is debited. The cost for merchant sold should also include all cost required to purchase inventory, transport it to the merchant place of business and prepare for sale.

What are organizational segments?

Parts of an organization require separate reports for evaluation by management.

How are period costs recorded?

Period cost are recorded and reported immediately on the income statement in the period in which they occur. Period cost are non-manufacturing, non-product related cost including administrative cost.

Can you explain the concepts of planning, evaluating, and controlling, as it relates to decision-making?

Planning-What do you want to do. What are you choices. Recognize needs, Control-Budgets performance measures. Establish Expectations. Evaluating-See how you did. Did what was asked. See what you could've don't differently. Identify alternatives. Rewards performance and provide feed back.

How are product Reported?

Product cost are reported in the income statement as part of cost of goods sold once the product is sold to the customer. Product cost also include purchasing a product from suppliers for retailers

How are product costs handled by a manufacturing business?

Production cost in a manufacturing business are divided into three components Direct Materials, Direct Labor, and Manufacturing overhead.

CVP in equation form

Profit=(Sales-Variable Expenses)-Fixed Expenses

Balance sheet(statement of financial positions)

Provides users with a list of a companies resources and the claims on the resources (items that a business owns and controls) which are assets. , The company's obligations (liabilities) and the differences between what is owned (assets) and what is owed (liabilities), called owners equity.

Direct materials

Raw Materials that are used directly in the manufacturing of product and are kept in the raw material warehouse until they are moved from warehouse and put in manufacturing process. Ex: Raw material for laptop computer include computer screen, keyboard letters and the component of printer.

Statements of cash flow(Cash in & out)

Reports the amount of cash collected and paid out by a company in operating, investing, and financial activities. The statement of cash flow is for the same period of time as the income statements, again with the annual and quarterly statements of cash flow being the most common. The statement of cash flow represents the accountants best effort at showing change in cash during a period of time.

What is responsibility accounting and how does it impact an organization?

Responsibility accounting is a system in which mangers are assigned and held accountable for certain cost, revenue. Or assets. It impacts an organization because if a manager become aware of a cost variance which is a difference between actual cost and budget cost, the manger is responsible for taking corrective action to eliminate the variance. But vice versa if the actual cost is less than the budget amount it might indicate that there is additional assets that could leveraged more effectively. If the actual cost is more than the budget the manager must modify operations to make the budget and actual cost more similar.

The profit Center

Responsibility for both cost and revenue. They are usually found in higher levels in an organization

How are product costs handled by service business?

Service business use direct labor also large amount of overhead cost are allocated to individual products. Service business adds value through creativity and the effort of people. This is also classified as direct labor. Cost of maintain infrastructure is classified as over head. The over head of a service firm can involve nearly any kind of management cost. Allocated overhead to service activities involves factoring into the billing rate used to charge the customer. Ex charging you services by the hour.

How is overhead assigned to products or services using ABC?

Suppose you estimate the cost pool associated with the number of flavors to be $270,000. And suppose that you estimate that 100 different ingredients are used across all your different flavors of ice cream. The overhead cost per driver, or activity rate, would be $2,700 per ingredient ($270,000/100).That would mean that for every ingredient in a different flavor of ice cream, an overhead charge of $2,700 per ingredient would be allocated to that flavor. Vanilla, with four ingredients, would be charged $10,800, while Tootie Fruitee Sundae Cheesecake, with 18 ingredients, would be charged $48,600.This analysis shows that not all gallons of ice cream cost the same. Those with more ingredients incur more overhead costs and should be allocated a larger portion of overhead.Watch the following video to see another example of using ABC to assign overhead—this time for an auto mechanic.

Can you explain the Accounting Cycle?

The accounting cycle is the procedure for analyzing, recording, summarizing and reporting the transactions of a business or the bookkeeping part of accounting. The process of capturing financial information from transactions is the purpose of financial accounting cycle. The purpose of the cycle is to see how the accounting process (including the recording) turns transactions into financial statements. Step 1: Analyzing transactions. Design the business "documents" figuring out the essence of happened. EX Invoices. Confirming the transaction, determine the amount, and structure the data. Thinking about the economic essence. If you earned or loss money. Have a system in place to see what happened. The second step is to record the effects of the transaction Designing a code or a system that efficiently capture the essence of the transaction. The codes are debits and credits. The third step is to summarize the effects of the transaction how much money was made or lost. Posting journal entries and having trial balances. Getting general picture of what happened. The fourth step is preparing the reports so decision makers can have paper in hands. Adjusting statements. Preparing financial statements closing the books.

Can you explain and determine the estimated overhead?

The amount of overhead cost that management had budgeted for the upcoming production period. The predetermined overhead is created by dividing estimated overhead by the estimated expense level of activity (ex direct labor) to be used to allocate overhead during the year.

Can you define and explain the purpose of the Balance Sheet and the components that it contains?

The balance sheet is a summary of the financial position of a company at a particular date. It represents a snapshot of a point in time ruled by the accounting equation. The balance sheet reports the resources of a company (The assets), the company's obligations( the liabilities), and the owners equity which represents the differences between what is owned (assets) and what is owed (liabilities). The accounting equation is Assets=Liabilities Equity. An asset are the resources that is owned or controlled by a company that will provide probable future benefit.

What are opportunity costs?

The benefits lost or forfeited as a result of selecting one alternative course of action over another. Ex. Choosing going to a movie instead of working two hours at $8 per hour has an opportunity cost of $16. As well as the out of pocket cost of $9 for the ticket. Installing the drive up window may have several opportunity cost such as losing seating or lost parking availability.

Can you explain breakeven in sales dollars and in units and how they are calculated?

The break even point the volume of activity at which total revenue equals total cost, or where profit is zero. The break even point is where total revenue=Total cost. Total cost=Total variable cost +total fixed cost.

What is contribution margin and how is it calculated?

The contribution margin analysis enables a company to make informed business decisions. Ex company could use contributed margin to determine whether it should continue to sell a product line in the future. It's also used to decide whether to outsource the manufacturing of a product instead of manufacturing the product in house. The difference between total sales and variable cost, the portion of sales revenue available to cover fixed cist and provide profit.

Who provides accounting information?

The cost accountant or the cost accounting manager. They are specially trained to prepare and analyze accounting information for internal decision making.

Can you define and explain the purpose of the Income Statement and the components that it contains?

The income statement shows the result of a company's operation for a period of time (month, quarter, or year). The income statement summarizes the revenues generated and the cost incurred (expenses) to generate those revenues. The income statement is net income (or net loss), the difference between revenue and expenses. The income statement assess the companies profitability and provides information relating to their long term earning potential. The elements of an income statement Revenue, Expenses and Net income.

Explain what a master budget is and why it is important?

The master budget is a network of many seperate schedules and budgets that together constitute the overall operating and financing plan for the coming operation period. It is important because it serves as framework for changes in plans if the events of the period are not exactly what was expected.

Can you explain the importance Notes to the Financial Statements and what is included in these notes?

The notes to the financial statement give information about the assumptions and methods used in preparing financial statements and are more detail about specific item. There are four general categories. 1. Summary of significant accounting policies this is the revenue recognition, Inventory methods, depreciation method, and use of estimates. 2. Additional information about the summary totals found in the financial statements Inventory make up-raw materials, work in process, finished goods. Receivables-Gross amount and the allowance for bad debts. Pension liability-assumptions about interest rates 3. Disclosure of important information that is not recognized in the financial statements. Status of legal proceedings. 4. Supplementary information required by the financial accounting standard board (FASB) or securities and exchange commission (SEC) Subsequent events information in addition to what is contained. Business segments breaking sales into segments. Showing domestic/international sales breakdown.

Do you understand how to interpret profit and cost center performance results?

The operating profit figure provides management with concrete information for the performance company as a whole. Second the segmented margins enables managements to analyze company results by evaluating performance of each segment.

Can you explain how segment margin statements work and what purpose do they serve in performance evaluation?

The segments margin statement compares the revenue and cost of the profit centers being evaluated. It's a profit and loss statement that identifies cost directly chargeable to a segment and further divides them info variable and fixed cost behavior patterns. It is important because it evaluates the performance of profit centers and helps decide how limited resources will be resources will be divided among profit centers.

Can you define and explain the purpose of the Statement of Cash Flows and the components that it contains?

The statement of cash flow shows the cash inflow (receipt) and cash outflow (payments) of an entity during a period of time. The result of the sources and uses of cash over a period of time.The three main activities Operating activities are those activities that are part of the day to day activities . Investing activities are those activities associated with buying and selling long term assets. Primarily purchase and sale of land, buildings and equipment. Financing activities are those activities whereby cash is obtained from or repaid to owners and creditors

Statement of retained earnings

The statement that summarizes the income earned and dividends paid over the life of a business.accumulated profits or losses of a business. since the business started. This is important because it links the income statements and balance sheet together.

Can you calculate an activity rate using ABC?

To calculate the ABC you divide the amount of the estimated cost pool by the estimated number of cost drivers to find the activity rate. Ex. The cost pool, then, would be the costs that are driven by the number of flavors in a gallon of ice cream. Those costs would include a flavor chemist who is charged with getting the flavor just right—and the more flavors there are, the more the chemist would be involved. Another cost would relate to ordering. The more flavors, the more ingredients to be ordered, processed, and received.

What is overapplied and underapplied overhead and how is it accounted for?

Underapplied means the amount of actual overhead expenses incurred during the period exceeded the amount of overhead applied during the period. The over applied means the amount of actual overhead expenses incurred during the period was less the amount of overhead applied during the period.

Can you explain what a variable cost is and why that is important to C-V-P Analysis?

Variable cost are go up when you have more demand. The more that your serve the more staff and utilities you will need. Direct material and direct labor cost in a manufacturing firm increase in direct proportion to the of products or services. The CVP analysis is important because the cost changes in direct proportion to the change in activity level.

Service business

a business that performs an activity for a feeorganization that provides customers with a non physical product such as a new marketing plan or a cleaner house. Ex Law firm and an architecture firm.

What are sunk costs?

a cost that has already been incurred and cannot be recovered

Direct materials Budget

a detailed plan showing the amount of raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories

Production Budget

a detailed plan showing the number of units that must be produced during a period in order to satisfy both sales and inventory needs

Direct Labor Budget

a detailed plan that shows the direct labor-hours required to fulfill the production budget

What are differential costs?

a difference in cost between two alternatives.They are sometimes called avoidable cost, incremental cost, or relevant cost are future cost that change as a result of that decision. The term differential is commonly applied to future revenues that will be affected by the decision.

Manufacturing overhead

all manufacturing costs except direct materials and direct labor

Manufacturing overhead

all manufacturing costs except direct materials and direct labor.Ex. Wages for the factory managers , utility cost any cost associated with the manufacturing facilities.

manufacturing business

an organization whose main activity involves using components of raw material to make finished goods for sale to a customer. Ex constructing physical products like machines, refrigerators, and furniture.

Example of statment of Cash Flows

cash received from owners investments, cash proceeds from loan or cash payment to repay loans would be financing activities.

Managerial Accounting Example

construction company making buildings keeps track of cost to make sure they use money correctly and don't drive clients away.

What are period costs?

cost associated with activities that occur outside production facility. An example in the fast food setting would be the president salary, advertising and office cost incurred in the corporate headquarters. They are directly associated with the sandwich that you bought. The most common period cost are selling and administrative cost. Example of selling cost is are sales personnel salaries. Advertising, and delivery cost.

Can you describe the flow of product costs for a manufacturing business

costs are accumulated in work-in-process inventory, then are transferred to finished goods inventory, and then to cost of goods sold

Can you identify indirect labor

labor that is necessary to the manufacturing or service business but it is not directly related to the actual production of the product. Ex waged paid to factory supervisors and management.

Can you identify indirect materials

materials that are necessary to a manufacturing or service business but are not directly in or significant of the actual product. Ex are glue and nails, so minor and difficult to trace to a specific product.

Selling and Administrative Expenses budget

outlines planned expenditures for nonmanufacturing activities

Income statement (Statement of earnings)

reports the amount of net income earned by a company during a period, with annual and quarterly income statements being the most common. The income statements represents the accountants best effort at measuring the economic performance.

Can you explain the 'expanded' accounting equation and the impact of debits and credits to revenues and expenses?

revenues minus expenses equals net income; and net income is a major source of change in owners' equity from one accounting period to the next. Revenues and expenses, then, may be thought of as temporary subdivisions of owners' equity.

Sales Budget

schedule of projected sales over the budget period, which often include a measure of revenue earned and cash collected from used from customers.

Can you describe the flow of product costs for merchandising business

such as a supermarket, inventory costs come into the business when goods are purchased from suppliers. There is no production process, so the same costs flow out as cost of goods sold when inventory is sold to customers.

Can you describe the flow of product costs for service business

the cost flow is the same except that a service business typically does not inject many direct materials into the production process.