WGU D074 Principles of Accounting

Comparative Financial Statements

Financial statements that include information for both the current year and preceding year(s) that are prepared for users to identify any significant changes in particular items.

Pro Forma Financial Statements

Financial statements that show a forecast of a company's future performance based on certain assumptions rather than historical data.

Operating Capital

Funds available for use in financing the day‑to‑day activities of a business.

Differential Costs

Future costs that change as a result of a decision; also called incremental or relevant costs.

Finished Goods Inventory

Inventory that has completed the production process and is ready for sale to customers.

Work-in-process Inventory

Inventory that is partly completed in the production process, but not yet ready for sale to customers.

Current Liabilities

Liabilities expected to be satisfied within a year or the current operating cycle, whichever is longer.

Segments

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

Business Documents

Records of transactions used as the basis for recording accounting entries; include invoices, check stubs, receipts, and similar business papers.

Financial Statements

Reports such as the balance sheet, income statement, and statement of cash flows, which summarize the financial status and results of operations of a business entity.

Retailers

Second-tier merchants who typically purchase products from wholesalers to distribute to end-user customers.

Capital Budgeting

Systematic planning for long-term investments in operating assets.

(Sales Price×Units)−(Variable Cost×Units)−Fixed Costs=Target Income or Sales Revenue−Variable Costs−Fixed Costs=Target Income

Target income equation

Retained Earnings

The amount of accumulated earnings of the business that have not been distributed to owners.

Expenses

The amount of assets consumed through business operations; the costs incurred in normal business operations to generate revenues.

Break-even Point

The amount of sales at which total costs of the number of units sold equal total revenues; the point at which there is no profit or loss.

Applied Manufacturing Overhead

The amount of the manufacturing overhead that is assigned to the goods produced. This is usually done by using a predetermined annual overhead rate.

Opportunity Costs

The benefits lost or forfeited as a result of selecting one alternative course of action over another.

Gross Profit

The difference between sales and cost of goods sold; gross margin.

Segment Margins

The difference between segment revenue and direct segment costs; a measure of the segment's contribution to cover indirect fixed costs and provide costs; in effect, the operating profit created by the segment.

Contribution Margin

The difference between total sales and variable costs; the portion of sales revenue available to cover fixed costs and provide a profit.

Financial Statement Analysis

The examination of both the relationships among financial statement numbers and the trends in those numbers over time.

Overapplied Manufacturing Overhead

The excess of applied manufacturing overhead (based on a predetermined application rate) over the actual manufacturing overhead costs for a period.

Statement of Cash Flows

The financial statement that reports the amount of cash collected and paid out by a company during a period of time.

Income Statement

The financial statement that reports the amount of net income earned by a company during a period.

Securities and Exchange Commission (SEC)

The government body responsible for regulating the financial reporting practices of most publicly owned corporations in connection with the buying and selling of stocks and bonds.

Articulation

The interrelationships among the financial statements.

Financial Accounting Standards Board (FASB)

The organization responsible for studying accounting issues and establishing accounting standards to govern financial reporting in the United States.

Contribution Margin Ratio

The percentage of net sales revenue left after variable costs are deducted; the contribution margin divided by net sales revenue.

Capital Stock

The portion of stockholder's equity that represents investment by owners in exchange for shares of stock; also referred to as paid-in capital.

Accounting Cycle

The procedure for analyzing, recording, summarizing, and reporting the transactions of a business.

Accounting System

The procedures and processes used by a business to analyze transactions, handle routine bookkeeping tasks, and structure information so it can be used to evaluate the performance and health of the business.

Variable Cost Ratio

The ratio of variable costs to sales.

Owners' Equity

The remaining claim against the assets of a business after the liabilities have been deducted.

Segment-margin Ratios

The segment margin divided by the segment's net sales revenue; a measure of the efficiency of the segment's operating performance and, therefore, its profitability.

Book Value

The value of a company measured by the amount of owner's equity in the company.

Cost Behavior

The way a cost is affected by changes in activity levels.

Stockholders

Those who own a corporation by owning shares of stock in that corporation; also called shareholders.

Break Even

To make just enough income to cover costs without any profit or loss.

Controlling

Tracking the actual performance of a company.

Variable Cost Ratio = Variable Cost Per Unit / Sales Price per Unit

Variable Cost Ratio equation

How does the SEC influence the FASB?

While the FASB is charged with creating the rules that dictate financial reporting practices, the SEC is always looming in the background, legally authorized to take over the setting of U.S. accounting standards should the FASB lose its credibility with the public

Direct Labor Budget

A schedule of direct labor requirements for the budget period.

Direct Materials Budget

A schedule of direct materials to be used during the budget period and direct materials to be purchased during that period.

Manufacturing Overhead Budget

A schedule of production costs other than those for direct labor and direct materials.

Production Budget

A schedule of production requirements for the budget period.

Cost of Goods Manufactured Statement

A schedule supporting the income statement that summarizes the total cost of goods manufactured and transferred out of the work-inprocess inventory account during a period. These costs include direct materials, direct labor, and applied manufacturing overhead.

Cash Budget

A short-term schedule of expected cash inflows and outflows during a period of time.

Cost of Goods Sold Statemen

A statement that sums the cost of goods sold for an accounting period based on the cost of goods sold formula.

Dividends

A sum of money distributed to the owners (stockholders) of a corporation.

Balance Sheet

A summary of the financial position of a company at a particular date.

Accounting

A system for providing quantitative, financial information about economic entities that is useful for making sound economic decisions. Accounting provides the means of recording and communicating business activities and the results of those activities.

Arm's-length Transaction

A transaction in which a buyer and seller act independently to get the best possible deal.

Internal Transaction

A transaction that occurs within a company, does not involve an external party, and is not recorded in the company's financial records.

Investing Activities

Activities associated with buying and selling long-term assets.

Operating Activities

Activities that are part of the day-to-day business of a company.

Batch-level Activities

Activities that take place in order to support a batch or production run, regardless of the size of the batch.

Certified Public Accountant (CPA)

An accountant who has met specified professional requirements established by the AICPA and local and state societies. A key service provided by CPAs is the performance of independent audits of financial statements.

Cost Accountant

An accountant who is specially trained to prepare and analyze accounting information for internal decision-making.

Account

An accounting record in which the results of transactions are accumulated; shows increases, decreases, and a balance.

Decentralized Company

An organization in which managers at all levels have the authority to make decisions concerning the operations for which they are responsible.

Business

An organization operated with the objective of making a profit from the sale of goods or services.

Cost Center

An organizational unit in which a manager has control over and is held accountable for cost performance.

Cost Objects

An output of a business, such as a product, service, or division

Evaluating

Analyzing results, rewarding performance, and identifying problems.

Service Business

Any organization whose main economic activity involves producing a nonphysical product that provides value to a customer.

Long-term Assets

Assets that are illiquid and that are needed to operate a business over an extended period of time.

Illiquid

Assets that take time and effort to convert into cash

Generally Accepted Accounting Principles (GAAP)

Authoritative guidelines that define accounting practice at a particular time in the United States.

Sales Revenue−Variable Costs−Fixed Costs=$0

Break-Even Point equation

Sales Revenue−(Variable Cost Ratio×Sales Revenue)−Fixed Costs=Profit ($0) Break-Even Point in Sales Dollars equation

Break-Even Point in Sales Dollars equation

Estimated Manufacturing Overhead

Budgeted manufacturing overhead costs that are used to establish the predetermined overhead rate.

Period Costs

Costs not directly related to a product, service, or asset. They are charged as expenses to the income statement in the period in which they are incurred.

Controllable Costs

Costs over which a manager has direct authority and can change.

Noncontrollable Costs

Costs over which a manger does not have direct authority and cannot change.

Sunk Costs

Costs that are past costs and do not change as a result of a future decision.

Stepped Costs

Costs that change in total in a stair-step fashion (in large amounts) with changes in volume of activity.

Variable Costs

Costs that change in total in direct proportion to changes in activity level.

Mixed Costs

Costs that contain both variable and fixed costs components.

Fixed Costs

Costs that remain constant in total, regardless of activity level, over a certain range of activity.

Out-of-pocket Costs

Costs that require an outlay of cash or other resources.

Assets

Economic resources that are owned or controlled by a company.

Accounting Equation

An algebraic equation that expresses the relationship between assets (resources), liabilities (obligations), and owner's equity (net assets, or the residual interest in a business after all liabilities have been met): Assets = Liabilities + Owners' Equity.

Budget

A quantitative expression of a plan that shows how a firm or organization will acquire and use resources over some specified period of time.

Classified Balance Sheet

A balance sheet that distinguishes between current and long-term assets.

International Accounting Standards Board (IASB)

A committee formed to develop international accounting standards.

Annual Report

A document that summarizes the results of operations and financial status of a company for the past year and outlines future plans.

Statement of Retained Earnings

A financial statement that identifies the changes in accumulated investments by owners and earnings or profits since day one.

Internal Revenue Service (IRS)

A government agency that prescribes the rules and regulations that govern the collection of tax revenues in the United States.

Net Income

A line on the income statement that reports a company's operating income minus interest expense and taxes.

Activity-based Costing (ABC)

A method of attributing overhead costs to products based on measurable factors that relate to activities that create overhead costs.

Vertical Analysis

A method of financial statement analysis in which each line item is displayed as a percentage of another item to allow for comparison to other companies within the same industry.

Horizontal Analysis

A method of financial statement analysis that compares a firm's results from year to year.

Master Budget

A network of many separate schedules and budgets that together constitute the overall operating and financing plan for the coming operating period.

Cost Drivers

A numerical measure used to reflect the amount of a specific cost that is associated with a particular activity.

Economy of Scale

A pattern of decreasing costs per unit as unit volume increases.

American Institute of Certified Public Accountants (AICPA)

A professional organization for CPAs in which membership is voluntary.

Target Income

A profit level desired by management.

Actual Manufacturing Overhead

Manufacturing costs other than direct materials and direct labor.

Indirect Materials

Materials that are necessary to a manufacturing or service business but are not directly included in or are not a significant part of the actual product.