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
