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What is the purpose of the statement of cash flows? reports the amount of cash collected and paid out by a company in the following three types of activit... [Show More] ies: operating, investing, and financing. What information is provided on the statement of cash flows? explains the change during the period in cash and cash equivalents. Cash equivalents are shortterm, highly liquid investments such as Treasury bills, commercial paper, and money market funds 00:35 01:30 What are the three main categories found on the statement of cash flows? Operating, investing, and financing Operating activities All transactions relating to a company's delivering or producing its goods for sale and providing its services are called operating activities. Investing activities ... Financing Activities ... Net Amount of Cash provided or used by operating activities is THE key figure in a statement of cash flows. In the same way that net income is used to summarize everything in an income statement, net cash from operations is the "bottom line" of the cash flow statement. Which items are recorded as operating activities on the statement of cash flows? Cash Reciepts - Sale of Goods, Interest revenues, dividend revenue Cash Payments - Inventory purchases, Wages salary, Tax, interest expense Statement of Cashflows Which items are recorded as financing activities on the statement of cash flows? include the issuance of notes, bonds, mortgages, and other short- or long-term borrowings, and the issuance of stock. [Show Less]
The statement of cash flows provides information that is not readily apparent by looking at just the balance sheet and the income statement. T/F True ... [Show More] Cash flows are partitioned into what three categories? operating, investing, and financing. In normal circumstances, a company has positive cash from operations and negative cash from investing activities. T/F True Knowledge of how the three primary financial statements tie together allows one to forecast how interactions among management decisions might affect a company's future financial position. T/F True When a company files for Chapter 11 bankruptcy, the courts allow the company to cease making interest payments on its old debts. True Statement of Cash Flows The financial statement that summarizes a company's cash receipts and cash payments during the period from operating, investing, and financing activities. Operating Activities Things the company does routinely every day, the reason the company is in business. Investing Activities Expanding the productive capacity of the business Financing Activities Getting the cash for new expansion and distributing cash to those who have provided financing in the past. Why was the statement of cash flows created? It puts everything on one page. Is a forecasting tool. Pro Forma A prediction of what the actual cash flow statement will look like in future years if the operating, investing, and financing plans are implemented. A forcasted statement of cash flows imposes practical __________________ ____________________ on exciting entrepreneurial plans for the future. numerical discipline The statement of cash flows replaces the * Balance sheet * Statement of financial position * Income statement * None of these None of these The statement of cash flows * Provides a connecting link between two consecutive income statements * Is intended primarily to provide necessary information for assessing the profitability of an entity * Summarizes all cash inflows and outflows of an entity for a given period of time * Is a required statement only for those companies using cash-basis accounting Summarizes all cash inflows and outflows of an entity for a given period of time Which of the following is NOT a purpose of the statement of cash flows? * It measures the profitability of an entity. * It provides investors with information about the investing and financing activities of an entity. * It provides information about an entity's cash receipts and payments over a period of time. * It highlights changes in managerial strategy regarding investments and finances. It measures the profitability of an entity. Which of the following statements is NOT true? * The statement of cash flows includes transactions that are not already reflected in the balance sheet and income statement. * The statement of cash flows does not replace the income statement. * The statement of cash flows provides details as to how the cash account changed during a period. * The statement of cash flows sheds some light on a company's ability to generate income in the future. The statement of cash flows includes transactions that are not already reflected in the balance sheet and income statement. cash equivalents Short-term, highly liquid investments that can be readily converted to a specific amount of cash and which are relatively insensitive to interest rate changes. Cash equivalents include coins and currency, checking and savings accounts, CD's and other short term interest bearing securities (maturity in 3 months or less) Reasons for cash decreases? paying off loans, debts common cash inflow (receipts) receive investments from owners receive money from borrowing collect from customers collect from sale of old machines and buildings, etc. common cash outflow (payments) pay to buy new machines and buildings, etc. pay wages pay suppliers pay interest on loans pay principal on loans pay dividends to owners Three Categories of Cash Flows In the statement of cash flows, cash receipts and payments are classified according to 3 main categories: 1. Operating activities 2. Investing activities 3. Financing activities Operating activities include Cash receipts from: sale of goods or services, sale of trading securities, interest revenue, dividend Cash payments for: inventory purchases wages and salaries, taxes, interest expenses, other expenses (e.g. utilities, rent) purchase of trading securities, Investing activities include Cash receipts from: sale of plant assets, sale of a business segment, sale of nontrading securities, collection of principal on loans Cash payments for: purchase of plant assets, purchase of nontrading securities, making loans to other entities Financing activities include Cash receipts from: issuance of stock, borrowing (e.g., bonds, notes, mortgages) Cash payments for: cash dividends, repayment of loans, repurchase of stock (treasury stock) The normal pattern of positive inflows or negative outflows of cash reported in the cash flow statement is as follows: Cash from operating activities + Cash from investing activities − Cash from financing activities + or − Non-cash Investing and Financing Activities Some investing and financing activities affect a company's financial position but not the company's cash flows during the period. Which of the following would NOT be considered cash or cash equivalents for purposes of preparing a statement of cash flows? Notes receivable Those transactions and events that enter into the determination of net income are reported under which section of the statement of cash flows? Operating activities Which of the following would be reported as a cash flow from financing activities? Cash receipts from the issuance of long-term debt Which of the following is the typical sequencing of activities on the statement of cash flows? Operating, investing, and financing Which of the following would be classified as an operating activity on a statement of cash flows? Cash received as dividends on investments When preparing a Statement of Cash Flows, do the following: 1. Identify all the cash inflows and outflows 2. Separate them into the Operating Investing and Financing activities categories 3. Prepare the formal statement Why learn to prepare a Statement of Cash Flows using summary data? 1. To understand the very important Indirect Method 2. To see the connections among all 3 financial statements 3. Many companies, especially small ones, provide only a balance sheet and an income statement. The following financial information is available for the year 2012: Operating activities $ 309,800 Investing activities ($118,000) Financing activities ($190,000) Ending cash balance $ 5,600 Given this information, what is the beginning cash balance? Beginning cash balance: x + $309,800 - $118,000 - $190,000 = $5,600 x = $3,800 Avondale Inc. had the following cash transactions during 2012: Sales receipts $2,000,000 Inventory payments 1,500,000 Interest payments 20,000 Wage payments 120,000 Dividend receipts 10,000 Interest receipts 6,000 Equipment purchased 150,000 Stock of Canton Company purchased 50,000 Stock issued 300,000 Repaid a note (nonoperating) 100,000 What was Avondale's net cash provided by (used in) operating activities? Cash provided by operating activities: $2,000,000 - $1,500,000 - $20,000 - $120,000 + $10,000 + $6,000 = $376,000 Avondale Inc. had the following cash transactions during 2012: Sales receipts $2,000,000 Inventory payments 1,500,000 Interest payments 20,000 Wage payments 120,000 Dividend receipts 10,000 Interest receipts 6,000 Equipment purchased 150,000 Stock of Canton Company purchased 50,000 Stock issued 300,000 Repaid a note (nonoperating) 100,000 What was Avondale's total net increase in cash for the year provided by (used in) financing activities? Cash provided by financing activities: $300,000 - $100,000 = $200,000 [Show Less]
Understanding of a business increases as one associates the individual asset, liability, and equity accounts with the underlying business activities that g... [Show More] ive rise to them. T/F True Assets and liabilities are generally classified as _______________ or _________ __________. current or long term. Current Asset one that is expected to be used within one year of the balance sheet date. Long term assets include property, plant and equipment, investments in other companies, and bonds or notes receivable Current Liabilities liabilities due within a short time, usually within a year long-term debt a liability that falls due beyond one year from the date of the financial statements Companies can issue what two kinds of stock? common and preferred Common stockholders are the true owners of a business. T/F True Preferred stockholders give up some of the rights of ownership enjoyed by common stockholders in exchange for some of the safety promised to creditors. T/F True Companies usually provide balance sheets for at least __________ years, with the statements shown in comparative, side-by-side format. Two The first item in a U.S. balance sheet is usually __________. Cash The first item in a NON-U.S. countries balance sheet is usually ________________________. Long term assets The order of presentation in a standard balance sheet is? current assets, long-term assets, current liabilities, long-term liabilities, and stockholders' equity What is the difference between current assets and liabilities called? Working capital Recognition the process of condensing all estimates and judgments into one number and reporting that one number in the formal financial statements. Disclosure describing details in a narrative note. ____________________ is the preferred method of reporting financial information. Recognition Individual transactions impacting balance sheets can be analyzed by remembering that the accounting equation (_________=__________ + ___________) is always maintained. Assets = Liabilities + Owners' Equity Transaction analysis the process of determining how an economic event impacts financial statements. The discipline imposed by the mathematical necessity of maintaining the accounting equation helps to ensure that all dimensions of the impact of an event on financial statements have been considered. T/F True Transaction analysis is NOT a useful exercise in critically and systematically analyzing the impact of business events on a company's reported financial performance and position. T/F False. Transaction is very useful Asset Mix The proportion of total assets in each asset category, is determined to a large degree by the industry in which the company operates. Net Income The amount by which revenues exceed expenses. The primary categories of income statement items are revenues, expenses, gains, and losses. Income statement items that do not relate to a company's continuing operations are income from discontinued operations and extraordinary items. Individual transactions impacting income can be analyzed using the expanded accounting equation, which is: Assets = Liabilities + Paid-in Capital + (Revenues - Expenses - Dividends) An important use of an income statement is to forecast income in future periods. Good forecasting requires an understanding of what underlying factors determine the level of a revenue or an expense. Accrual accounting the process that accountants use in adjusting raw transaction data into refined measures of a firm's economic performance. One of the important economic contributions made by accountants is the collection of accrual accounting rules which, when applied to a company's raw cash flow data, _________________________________________________________. result in a superior measure of that company's economic performance What is income? the increase in an individual's or a company's wealth during a period, or simply money earned Gross Profit Equation Net Sales - COGS = Gross Profit Net Profit Equation Gross Profit - Expenses = Net Profit Gross Profit Margin Gross profit/sales revenue x 100 Net income the difference between the selling price of the product and the cost of the product. Operating Income measures the performance of the fundamental business operations conducted by a company and is computed as gross profit minus operating expenses. A general rule of thumb is that all expenses are operating expenses except __________ ___________ and __________ _______ _____________. interest expense and income tax expense. Another name for operating income is? EBIT (earnings before interest and taxes) Operating Income Equation Operating Income = Gross Profit - Operating Expenses Profit generated by fundamental business operations is eaten up by? (also known as the "pie" available to be split among) Lenders (interest) Government (income taxes) Owners (net income) Income from continuing operations Equation Income from Continuing Operations = Operating Income (EBIT) - Interest Expense +/- miscellaneous revenues, expenses, gains, and losses - Income Tax Expense Income from continuing operations is The economic profit generated by the part of the business that will continue in operation NEXT YEAR. income from discontinued operations a company elects to dispose of a major business segment, the results of the discontinued segment are reported separately, along with any gain or loss associated with the disposing of the segment. extraordinary gains and losses Also called extraordinary items, these gains and losses are both unusual for the company and infrequent. Extraordinary Items extraordinary items are defined as events or transactions that are unusual in nature and infrequent in occurrence Income from continuing operations Equation Net Income = =/- Income (loss) from Discontinued Operations + / - Extraordinary Gains (Losses) What is the "bottom line"? The economic profit generated by business operations this year. Net Income the accountant's attempt to summarize in one number the overall economic performance of a company for a given period. Which of the following would be classified as a current asset? Capital stock Accounts receivable Accounts payable Land Accounts receivable Comprehensive Income the number used to reflect an overall measure of the change in a company's wealth during the period. Comprehensive income includes items that, in general, arise from changes in market conditions unrelated to the business operations of a company. The most common of these items are: * Changes from translating financial statements of non-U.S. subsidiaries into U.S. dollars, caused by changes in foreign currency exchange rates * Changes in the value of investment securities that are not held for active trading purposes * Changes in the value of certain derivative instruments The requirement to report comprehensive income was issued by the FASB in _______________________. June 1997 Distributions by a corporation to its stockholders are called Dividends Which of the following types of accounts show evidence of acquired resources? Owners' equity Liabilities Assets Both liabilities and owners' equity Both liabilities and owners' equity [Show Less]
Accounting the recording of the day-to-day financial activities of a company and the organization of that information into summary reports used to evaluat... [Show More] e the company's financial status Bookkeeping the preservation of a systematic, quantitative record of an activity accounting system used by a business to handle routine bookkeeping tasks and to structure the information so it can be used to evaluate the performance and financial status of the business Accounting information Info that is intended to be useful in making decisions about the future. The balance sheet, the income statement, and the statement of cashflows What are the three primary financial statements? External Users Who is financial accounting information primarily prepared for and used by? Managerial Accounting the name given to accounting systems designed for internal users Balance Sheet Reports a company's assets, liabilities, and owners' equity Income Statement reports the amount of net income earned by a company during a period Net income the excess of a company's revenues over its expenses statement of cash flows reports the amount of cash collected and paid out by a company in the following three types of activities: operating, investing, and financing FASB Which private body establishes accounting rules in the U.S.? Financial Accounting Standards Board (FASB) a private body established and supported by the joint efforts of the U.S. business community, financial analysts, and practicing accountants The Securities and Exchange Commission (SEC) the organization that regulates U.S. stock exchanges and seeks to create a fair information environment in which investors can buy and sell stocks without fear that companies are hiding or manipulating financial data American Institute of Certified Public Accountants (AICPA) the professional organization of certified public accountants (CPAs) in the United States Public Company Accounting Oversight Board (PCAOB) the organization that inspects the audit practices of registered audit firms and has statutory authority to investigate questionable audit practices and to impose sanctions such as barring an audit firm from auditing SEC-registered companies Internal Revenue Service (IRS) Gov't agency that establishes rules to define exactly when income should be taxed. It has no role in setting financial accounting rules; and a company's financial statements are not used in determining how much tax the company must pay The International Accounting Standards Board (IASB) Organization that was formed to develop a common set of worldwide accounting standards. Its standards are increasingly accepted worldwide, but FASB rules are still the standard in the United States. 1. Rapid Advancements in the IT field 2. the international integration of worldwide business 3. Increased scrutiny associated with large corporate accounting scandals Which 3 factors have combined to make right now a time of significant change in accounting? Sarbanes-Oxley Act A wave of accounting scandals starting in 2001 resulted in this act, which increases U.S. federal government scrutiny of the production of financial statements. Balance Sheet reports a company's financial position at a specified point in time and lists the company's resources (assets), obligations (liabilities), and net ownership interest (owners' equity). Assets probable future economic benefits obtained or controlled by a company as a result of past transactions or events Liabilities probable future sacrifices of economic benefits arising from present obligations of a company to transfer assets or provide services in the future as a result of past transactions or events Owners' equity the residual interest in the assets of a c [Show Less]
Accounting A system of providing "quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making... [Show More] economic decisions." Accounting Equation Assets = Liabilities + Owners' Equity Accounts Payable The flip side of accounts receivable—when one company sells on credit, creating for itself an account receivable, the company on the other side of the transaction is buying on credit, creating an account payable. Accounts Receivable Amounts owed to a business by its credit customers and are usually collected in cash within 10 to 60 days. Accrual Accounting The process that accountants use in adjusting raw transaction data into refined measures of a firm's economic performance. Accumulated Depreciation Reflects the wear and tear, or depreciation, of these items since they were originally purchased. Accumulated Other Comprehensive Income The grouped together and reported changes which companies experience increases and decreases in equity each year because of the movement of market prices or exchange rates Activity-based Costing (ABC) A method of attributing overhead costs to products based on measurable factors that relate to activities that create overhead costs. Additional Paid-in Capital Invested by stockholders that exceeds the par value of the issued shares. American Institute of Certified Public Accountants (AICPA) The professional organization of certified public accountants in the United States. Asset Probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events. Asset Mix The proportion of total assets in each asset category, is determined to a large degree by the industry in which the company operates. Asset Turnover Sales divided by assets and is interpreted as the number of dollars in sales generated by each dollar of assets. Assets The firm's economic resources, formally defined as "probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events Assets-to-equity Ratio Assets divided by equity and is interpreted as the number of dollars of assets acquired for each dollar invested by stockholders. Audit Committee Members of a company's board of directors who are responsible for dealing with the external and internal auditors. Average Collection Period Shows the average number of days that elapse between sale and cash collection. Balance Sheet A listing of an organization's assets and of its liabilities at a certain time. Batch-level Activities Activities that take place in order to support a batch or production run, regardless of the size of the batch. Book Value The book value of an asset is the asset's cost minus the asset's accumulated depreciation. Bookkeeping The preservation of a systematic, quantitative record of an activity. Breakeven 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. Capital Budgeting Systematic planning for long-term investments in operating assets. Capital Lease Obligations A long-term liability in the balance sheet. Cash Coins and currency as well as the balances in company checking and savings accounts. Cash Budget An important tool in helping management plan its cash needs. This discussion briefly introduces you to budgeting cash receipts. Cash Equivalents Short-term, highly liquid investments such as Treasury bills, commercial paper, and money market funds. Cash Flow Adequacy Ratio Cash from operations divided by expenditures for fixed asset additions and acquisitions of new businesses Cash Times Interest Earned Ratio A financial analysis tool that indicates the interest payment ability of an entity Certified Public Accountant A person who has taken a minimum number of college-level accounting classes, has passed the dreaded CPA exam, and has met other requirements set by his or her state. Common Stock Stockholders' equity investment Common-size Financial Statements All amounts for a given year being shown as a percentage of that denominator for the year. Comparability Tnformation that becomes much more useful when it can be related to a benchmark or standard Comprehensive Income The number used to reflect an overall measure of the change in a company's wealth during the period Conservatism a pervasive factor in accounting, can be summarized as follows: When in doubt, recognize all losses but don't recognize any gains. Consistency Principle What principle states that once you adopt an accounting principle or method, continue to follow it consistently in future accounting periods? Contribution Margin The difference between total sales and variable costs; the portion of sales revenue available to cover fixed costs and provide a profit. Contribution Margin Ratio The percentage of net sales revenue left after variable costs are deducted; the contribution margin divided by net sales revenue. Control Activities Policies and procedures used by management to meet their objectives. Control Environment The actions, policies, and procedures that reflect the overall attitudes of top management about control and its importance to the entity. Control Procedures Policies and procedures used by management to meet their objectives. Controlling Implementing management plans and identifying how plans compare with actual performance. Cost Behavior The way a cost is affected by changes in activity levels. Cost Drivers Numerical measure used to reflect the amount of a specific cost that is associated with a particular activity. Cost of Goods Sold When a business sells goods to customers, the cost of the goods sold is recorded as an expense Cost Pool Total cost being generated by a specific overhead cost activity. Cost-volume-profit (C-V-P) Analysis Techniques for determining how changes in revenues, costs, and level of activity affect the profitability of an organization. Current Assets Cash, accounts receivable, and inventory. Current Liabilities Those obligations expected to be paid within one year, the most common being accounts payable. Current Portion of Long-term Debt Some liabilities, such as mortgages, are payable in equal monthly installments over a specified number of years. The portion of these liabilities that is payable within 12 months from the balance sheet date. Current Ratio A comparison of current assets (cash, receivables, and inventory) with current liabilities. It is computed by dividing total current assets by total current liabilities. Debt Ratio A frequently used measure of leverage, computed as total liabilities divided by total assets. Debt-to-equity Ratio Total liabilities divided by total equity and is interpreted as the number of dollars of borrowing for each dollar of equity investment Deferred Income Tax Liability The income tax expected to be paid in future years on income that has already been reported in the income statement but which, because of the tax law, has not yet been taxed. Derivative A financial instrument, such as an option or a future, that derives its value from the movement of a price, an exchange rate, or an interest rate associated with some other item. Detective Controls Internal control activities that are designed to detect the occurrence of errors and fraud. Differential Costs Future costs that change as a result of a decision; also called incremental or relevant costs. Direct Costs Costs that are specifically traceable to a unit of business or segment being analyzed. Direct Labor Wages paid to those who physically work on direct materials to transform them into a finished product and are traceable to specific products. Direct Materials Materials that become part of the product and are traceable to it. Direct Method reporting the information contained in the last column of the adjustment worksheet Disclosure Convey the details in a narrative note without ever including anything in the financial statements themselves. Discontinued Operations A separate income category for operations [Show Less]
Order of assets listed on the balance sheet Assets are listed in the order of liquidity. Liquidity is the amount of time it would usually take to covert... [Show More] an asset into cash. Obviously, cash would be listed first, followed by marketable investments (a company can quickly convert a short-term investment into cash). Accounts receivable would be listed next followed by inventory, and long-term investments, fixed assets, and intangibles. Current assets are listed before long-term assets. Current liabilities are listed before long-term liabilities, but there is no specific order they are listed in outside of current and long-term. There is also no specific order equity accounts are listed on the balance sheet; although, typically you will see paid-in-capital followed by retained earnings followed by accumulated other comprehensive income, and lastly, treasury stock. Difference between a manufacturing company and a service company. Period Costs Product Costs Service Co. Selling Costs Direct Labor Administrative Costs Service Overhead Manufacturing Co Selling Costs Direct Labor Administrative Costs Manufacturing Overhead Direct Materials (inventory The only difference is - a manufacturing company has direct materials (inventory). 00:34 01:30 Evaluating a historical income statement to project a future income statement. Projected growth for 2017 = 10% increase over 2016 sales. Step 1: Convert the income statement into a common-sized income statement. Step 2: Multiply 2016 sales by 1.10 (10% growth) to get the forecasted 2017 sales. Then multiply the projected 2017 sales by the percentages from step 1. Now, what would you do if you were given the 2017 sales figure and you need to calculate the 2016 sales figure based off the 10% growth for 2017? Calculation for 2016: 110,000 / 1.10 = 100,000 Role of the U. S. Securities and Exchange Commission (SEC) in financial reporting. Regulates the U.S. Stock exchanges. Seeks to create a fair information environment in which investors can buy and sell stocks. Congress created the first securities act in 1933 and the second securities act in 1934 in response to the stock market crash of 1929. The Securities Act of 1933 requires most companies planning to issue new debt or stock securities to the public to submit a registration statement to the public for approval. The Securities Act of 1934 requires a public company to file detailed periodic reports including audited financial statements (form 10-K is the annual report; Form 10-Q is the quarterly report). Granted the legal authority to establish accounting standards. Currently the SEC accepts the pronouncements set by FASB. The SEC can suspend trading of a company's stock, and if hearings show that the issue failed to comply with the securities laws, the SEC can de-list the security. Congress strengthened the SEC through the enactment of Sarbanes-Oxley (SOX), which was enacted after the massive frauds that occurred in the late 1990s and the early 2000s. Compare and Contrast Traditional Costing to Activity-Based Costing (ABC). ABC is a more accurate product costing system than traditional product costing systems. ABC requires more time and expense to administer than do traditional costing systems. Companies with diverse products involving substantially different production processes, an ABC system yields better cost data and better management decisions. Describe how basic cost behavior patterns change as sales volumes change. Fixed costs (FC) are fixed in total, but as sales volume increases, the per unit FC decreases. Variable costs (VC) are fixed per unit, but as sales volume increases, total VC increases. Stewart Manufacturing produces and sells die cast race cars. VC for each die cast car is $3 and total FC are $300,000 Per Unit Variable costs remains the same Total Fixed Costs remains the same Per Unit Fixed Costs decrease Analyze a statement of cash flows to identify operating, investing, and financing activities. Operating Activities: All categories that are on the income statement, and all current assets and liabilities. i.e. sales (cash received from customers); cost of goods sold (cash paid for inventory); operating expenses (cash paid for rent); Analyze a statement of cash flows to identify operating, investing, and financing activities. Investing Activities: Balance sheet accounts: Long-term assets. i.e. property, plant, and equipment; investments i.e. cash paid for equipment, cash paid for investments (stock, loans) Analyze a statement of cash flows to identify operating, investing, and financing activities. Financing Activities: Balance sheet accounts i.e. Long-term liabilities and equity accounts i.e. mortgage payable; common stock and additional-paid-in capital (cash received from stockholders); retained earnings (cash paid for dividends) Explain Accrual Accounting Revenue recognition: In order for revenue to be recognized in an accrual system, two criterial must be met: The promised work must be done before the revenue is recognized. Cash collection must be reasonable assured before revenue is recognized. Explain Accrual Accounting Expense recognition: Expenses are matched to the revenue that is generated from the expense. Direct matching, as with cost of goods sold (COGS) However, some expenses are extremely difficult to match with specific revenue, and are more aligned to a specific time period. Systematic allocation, as with deprecation Moreover, some expenses are difficult to match with specific revenue or specific time periods. Immediate recognition, as with advertising Variable Costs: A cost that changes directly with changes in the level of sales or production. Examples are direct materials costs and sales commission. 00:26 01:30 Fixed Costs: A cost that doesn't change based on changes in the level of sales or production. Examples are building rent and executive salaries. Product Costs: A cost incurred as part of the production process. These costs are first reported as an asset (inventory) and then as an expense (cost of goods sold) when the product is sold. Period Costs: A cost incurred outside the factory or production facility. These costs are reported as an expense in the period in which they are incurred. Direct Materials: The cost of the primary raw materials used in production. In producing French fries, the direct materials cost is the cost of the potatoes. 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. Direct Labor: The cost of the wages of the workers who are assembling the direct materials into the finished product. In producing an automobile, the direct labor cost is the compensation cost of the auto workers on the assembly line. Indirect Labor: Labor that is necessary to a manufacturing or service business but is not directly related to the actual production of the product. Manufacturing Overhead: All factory costs that are not direct materials or direct labor. Examples are factory supervisor salaries, factory building depreciation, and miscellaneous indirect materials such as glue or screws. Direct Costs: The costs that are created by a particular product or segment that is being analyzed. If a product or segment is dropped, the direct costs created by that product or segment will disappear. Indirect Costs: The costs that are assigned to a particular product or segment but that are not actually caused by that product or segment. If a product or segment is dropped, the indirect costs assigned to that product or segment will remain. Differential Costs: A future cost that can be changed by a decision made now. An example is monthly rent for an apartment. Sunk Costs: A past cost that cannot be changed by any decision made now. An example would be last month's paid rent. Out-of-Pocket Costs: Costs that involve the outlay of cash or the use of some other asset (like equipment). Opportunity Costs: The benefits not received because of actions NOT taken. For example, the opportunity cost of going to a basketball game is the increased points that you could have received on the next day's accounting exam if you had spent that time studying. Calculate the cost of a product Product costs = Direct labor + Direct Materials + Factory Overhead Factory overhead = Indirect labor + Indirect materials + “Factory expenses” Can you calculate the product costs for September? Factory overhead = 5,000 + 3,000 + 7,000 + 8,000 = 23,000 Total product costs = 20,000 + 25,000 + 23,000 = 68,000 Total non-product costs = 2,000 + 5,000 = 7,000 Identify overhead cost activities Describe the purpose of accounting. Accounting is the recording of the day-to-day financial activities of a company and the organization of that information into summary reports used to evaluate the company's financial status. Bookkeeping is a part of accounting. Bookkeeping refers to the process of recording transactions into various accounts, which is the first step in accounting. The next step is to analyze the accounts and organize them into financial statements and other useful reports. Describe the three financial statements. The balance sheet reports a company's assets, liabilities, and owners' equity. It reports the financial position of a firm at a point in time. The income statement reports the amount of net income earned by a company during a period. Net income is the excess of a company's revenues over its expenses. It reports the financial performance of a firm over a period of time. The statement of cash flows reports the amount of cash collected and paid out by a company in the following three types of activities: operating, investing, and financing over a period of time. Lenders Banks use companies' financial statements in making decisions about commercial loans. The financial statements are useful because they help the lender predict the future ability of the borrower to repay the loan. Investors Investors want information to help them estimate how much cash they can expect to directly receive from the business in the future if they invest in it now. Company Management Managers use financial accounting data to formulate company goals, to compute bonuses for employees, and to illuminate company weaknesses. Suppliers and Customers Suppliers, customers, and employees use financial statements to tell them about the long-run prospects of a company. Employees Financial statement data, as mentioned earlier, are used in determining employee bonuses. In addition, financial accounting information can help an employee evaluate the employer's ability to fulfill its long-run promises, such as for pensions and retiree health care benefits. Financial statements are also important in contract negotiations between labor and management. Competitors Competitors use financial accounting information to reveal strategic opportunities within their industry. Government Agencies Government agencies use financial statement data to bolster political and regulatory positions for and against companies. Politicians Politicians use financial statement data to bolster political and regulatory positions for and against companies. The Press Reporters use financial accounting data as background information and to indicate which companies are undergoing significant changes in financial status. CPA Accreditation The American Institute of Certified Public Accountants (AICPA) is the professional organization of certified public accountants (CPAs) in the United States. A CPA is someone who has taken a minimum number of college-level accounting classes, has passed the CPA exam, and has met other requirements set by his or her state. A CPA firm is a company that provides freelance business advice, particularly in connection with accounting issues and executes the vast majority of external audits in the US. The AICPA sets ethical standards for CPAs, provides continuing education for them, writes and grades the CPA exam, lobbies for legislation favored by CPAs, and provides other support to CPAs. Its oversight of the CPA exam is its main role in accreditation. However, to be accredited as a CPA you must meet the requirements of the state in which you plan to practice. The requirements for each state are set by that state's legislature and overseen by that state's Board of Accountancy, which is a state agency. [Show Less]
1. What does accounting focus on? O The impact a business's activities have on its public image O The impact a business's activities have on its relati... [Show More] onship with customers O The impact a business's activities have on the environment O The impact a business's activities have on its overall financial performance O The impact a business's activities have on its overall financial performance 2. Which report summarizes cash collections and cash expenditures from operating, investing, and financing activities over a period of time? O Statement of Cash Flows O Cash flow schedule O Summary of cash receipts O Cash receipts and disbursements O Statement of Cash Flows 00:05 01:30 3. Which users would have a primary concern with an organization's ability to provide healthcare benefits? O Suppliers O Employees O Vendors O Competitors O Employees 4. Which benefit does a corporation gain by following Generally Accepted Accounting Principals (GAAP)? O An increase in the amount of assets it reports O A decrease in its income tax obligations O A decrease in the amount of net income it reports O An increase in its comparability to other companies O An increase in its comparability to other companies 5. Which body regulates a certified public accounting firm's audit practices when the firm is auditing a large publicly traded company? O Another certified accounting firm (CPA) O The Public Company Accounting Oversight Board (PCAOB) O The internal revenue service (IRS) O The financial accounting standards board (FASB) O The Public Company Accounting Oversight Board (PCAOB) 6. What has had the most significant impact on accounting practices? O New product innovations O Mobile computing O Certification requirements O Information Technology O Information Technology 7. What two items of information are revealed on the balance sheet? Choose 2 answers O Costs O Revenues O Debt O Expenses O Ownership O Debt O Ownership 8. Which term is defined as the residual interest in the net assets of a company? O Owner's Equity O Revenues O Operating Income O Liabilities O Owner's Equity 9. A corporation has total liabilities of $300 million, total owners' equity of $100 million, and current assets of $50 million. What is the value of the firm's long-term assets? O $250 million O $350 million O $400 million O $450 million Assets = Liabilities + Equity x + 50m = 300m + 100m Solving for x = 350m O $350 million 10. Which situation should result in revenue recognition on the income statement for the year ending 12/31/14 if the firm is using accrual-basis accounting? O In 2014, a company collects cash from a customer for services it will provide next year (2015) O In 2014, a company collects cash from a customer for services it provided in the previous year (2013) O In 2014, a company enters into a contract whereby it agrees to provide services to a customer next year in (2015) O In 2014, a company provide services to a customer for cash will be collected the next year (2015) O In 2014, a company provide services to a customer for cash will be collected the next year (2015) 11. Which category on the statement of cash flows summarizes cash receipts and payments to owners and creditors of the company? O Cash flows from business activities O Cash flows from financing activities O Cash flows from investing activities O Cash flows from operating activities O Cash flows from financing activities 12. Where would an investor find a summary of a company's significant accounting policies? O In the income statement O In the balance sheet O In the statement of cash flows O In the notes to financial statement O In the notes to financial statement 00:02 01:30 13. Which assurance does an external audit report provide for its readers? O The company will be a good credit risk O The company's financial statement fairly reflecst it financial position O The company will generate positive cash flows O The company will generate net income O The company's financial statement fairly reflects it financial position 14. Match each accounting term with its definition. Answer options may be used more than once or not at all. Conservatism Material Reliable Relevant Information having to do with the matter at hand Information related to recognizing losses as they occur Information that can be verified Information that is important enough to make a difference Conservatism: Information related to recognizing losses as they occur Material: Information that is important enough to make a difference Reliable: Information that can be verified Relevant: Information having to do with the matter at hand 15. Order the steps in the decision cycle from first (1) to last (5). -Analyze financial statements -Gather information -Implement decision -Make decision -Prepare financial statements 1. Prepare financial statements 2. Analyze financial statements 3. Gather information 4. Make decision 5. Implement decision 16. Partial financial information for a company is as follows: Current assets $36,543 Total assets $58,719 Current liabilities $24,824 Total liabilities $48,561 Stockholders' equity $10,158 Sales $46,997 Net Income $ 3,761 Market value of shares $41,316 What is the price-earnings (PE) ratio for this company? O 11.0 O 12.5 O 12.9 O 15.6 O 11.0 17. What does it mean if a company has a debt ratio of 101.5% O The company has 1.5% more current liabilities than current assets O The company has 1.5% more total liabilities than total assets O The company has 1.5% more total liabilities than net income O The company has 1.5% more total liabilities than gross sales O The company has 1.5% more total liabilities than total assets 18. What is consistent with a continual decline in gross profit if the firm's cost of goods sold remains the same? O Continual increase in taxes O Continual increase in interest O Continual decrease in salaries O Continual decrease in sales O Continual decrease in sales 19. Which two cash flow adequacy ratios represent a cash cow? Choose 2 O $6,991/$5,486 O $4,510/$4,932 O $7,589/$9,210 O $5,220/$1,875 O $8,091/$9,374 $6,991/$5,486. $5,220/$1,875. Which formula yields a cash times interest earned ratio of 11? O Cash before interest and taxes of $11,000 / cash paid for acquisitions of $1,000. O Cash before interest and taxes of $11,000 / cash paid for income taxes of $1,000. O Cash before interest and taxes of $11,000 / cash from operations of $1,000. O Cash before interest and taxes of $11,000 / cash paid for interest of $1,000. O Cash before interest and taxes of $11,000 / cash paid for interest of $1,000. Which form of debt should be reported in the long-term liability category? O Accounts payable due in 30 days O Salaries payable due in 2 weeks O Unearned revenue that will be earned in 9 months O Notes payable expected to be paid in 18 months O Notes payable expected to be paid in 18 months 22. In January of year 1, a company began doing business as a corporation in order to sell technology-related accessories and services. During its first month of operations, the following events occurred: January 1 The corporation received $1,000,000 in cash in exchange for stock issued to stockholders. January 3 The corporation borrowed $250,000 from bank. The loan is a four-year loan with an interest rate of 12 percent, payable each year on January 1 beginning in year 2. January 5 The corporation purchased equipment to be used in the business for $200,000 cash. January 8 The corporation purchased inventory costing $200,000 by paying $120,000 in cash. The remainder was put on credit accounts with suppliers. January 15 The corporation hired five employees. Each employee will be paid $1,000 at the end of each month. January 30 The corporation paid $6,000 cash for a one-year insurance policy. The policy period will begin on February 1, year 1. What will be the impact of the January 5 event on the company's balance sheet on that date? O Cash will decrease $200,000, and loan payable will decrease $200,00 O Equipment will increase $200,000, and cash will decrease $200,000. O Cash will decrease $200,000, and paid-in-capital will decrease $200,000. O Equipment will increase $200,000, and retained earnings will decrease $200,000. O Equipment will increase $200,000, and cash will decrease $200,000. 23. In January of year 1, a company began doing business as a corporation in order to sell technology-related accessories and services. During its first month of operations, the following events occurred: January 1 The corporation received $1,000,000 in cash in exchange for stock issued to stockholders. January 3 The corporation borrowed $250,000 from a bank. The loan is a four-year loan with an interest rate of 12 percent, payable each year on January 1 beginning in year 2. January 5 The corporation purchased equipment to be used in the business for $200,000 cash. January 8 The corporation purchased inventory costing $200,000 by paying $120,000 in cash. The remainder was put on credit accounts with suppliers. January 15 The corporation hired five employees. Each employee will be paid $1,000 at the end of each month. January 31 The corporation paid $6,000 cash for a one-year insurance policy. The policy period will begin on February 1, year 1. What will be the impact of the January 31 event on the company's balance sheet on that date? O Cash will decrease $6,000, and accounts receivable will increase $6,000. O Prepaid insurance will decrease $6,000, and accounts payable will decrease $6,000. O Cash will decrease $6,000, and paid-in capital will decrease $6,000. O Prepaid insurance will increase $6,000, and cash will decrease $6,000. O Prepaid insurance will increase $6,000, and cash will decrease $6,000. [Show Less]
Debt Ratio Total Liabilities/Total Assets Current Ratio Current Assets/Current Liabilities. Only need a balance sheet. 00:42 01:30 Retu... [Show More] rn on Sales Net Income/Sales. Only need income statement Asset Turnover Sales/Total Assets Return on Equity Net Income/Stockholder's equity. Balance and Income Statements used. Price-Earnings Ratio (PE) Market Value fo Shares/Net Income Accounting is the recording of the day-to-day financial activities of a company and the organization of that information into summary reports used to evaluate the company's financial status. Bookeeping is the preservation of a systematic, quantitative record of an activity. Without bookkeeping, good business is impossible. An accounting system is used by a business to handle routine bookkeeping tasks and to structure the information so it can be used to evaluate the performance and financial status of the business. Accounting information is intended to be useful in making decisions about the future. The focus of financial accounting is the three primary financial statements: the balance sheet, the income statement, and the statement of cash flows. Financial accounting information is provided for, and used by, external users. Managerial accounting is the name given to accounting systems designed for internal users. The information provided by financial accounting is summarized in the financial statements: The balance sheet reports a company's assets, liabilities, and owners' equity. The income statement reports the amount of net income earned by a company during a period. Net income is the excess of a company's revenues over its expenses. The statement of cash flows reports the amount of cash collected and paid out by a company in the following three types of activities: operating, investing, and financing. Among the users of financial accounting information are lenders, investors, company management, suppliers, customers, employees, competitors, government agencies, politicians, and the press. Financial accounting information helps lenders evaluate the cash flows a business can be expected to generate in the future in order to repay loans. Investors use the same type of information to assess the attractiveness of companies as investments. Managers use financial accounting data to formulate company goals, to compute bonuses for employees, and to illuminate company weaknesses. Suppliers, customers, and employees use financial statements to tell them about the long-run prospects of a company. Competitors use financial accounting information to reveal strategic opportunities within their industry. Government agencies and politicians use financial statement data to bolster political and regulatory positions for and against companies. Reporters use financial accounting data as background information and to indicate which companies are undergoing significant changes in financial status. 00:02 01:30 The practice of accounting involves adherence to he established accounting rules as well as the use of judgment. U.S. accounting rules are established by the FASB. FASB is a group that sets accounting standards. The XXXX is not a government agency; it is a private body established and supported by the joint efforts of the U.S. business community, financial analysts, and practicing accountants. The FASB has no legal power to enforce the accounting standards it sets but maintains its influence by carefully protecting its prestige and reputation. SEC regulates U.S. stock exchanges and seeks to create [Show Less]
Accounting A system of providing "quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making... [Show More] economic decisions." Balance Sheet Document which reports the resources of a company (the assets), the company's obligations (the liabilities), and the owners' equity, which represents how much money has been invested in the company by its owners. 00:50 01:30 American Institute of Certified Public Accountants (AICPA) The professional organization of certified public accountants in the United States. Bookkeeping The preservation of a systematic, quantitative record of an activity. Certified Public Accountant A person who has taken a minimum number of college-level accounting classes, has passed the dreaded CPA exam, and has met other requirements set by his or her state. Financial Accounting The name given to accounting information provided for and used by external users. Financial Accounting Standards Board (FASB) Private, non-profit body that sets accounting standards in the United States. Financial Statements The three primary financial information documents: the balance sheet, income statement, and statement of cash flows. Income Statement This document reports the amount of net income earned by a company during a period, with annual and quarterly income statements being the most common. Internal Revenue Service (IRS) The government agency responsible for tax collection and tax law enforcement. International Accounting Standards Board (IASB) An independent, international body formed to develop worldwide accounting standards. International Financial Reporting Standards (IFRS) The accounting standards produced by the IASB. 00:03 01:30 Managerial Accounting The name given to accounting systems designed for internal users. Public Company Accounting Oversight Board (PCAOB) A private, non-profit organization that effectively serves as an arm of the SEC in registering, inspecting, and disciplining the auditors of all publicly traded companies. Statement of Cash Flows This document reports the amount of cash collected and paid out by a company in the following three types of activities: operating, investing, and financing. Accounting Equation Assets = Liabilities + Owners' Equity Accumulated Other Comprehensive Income The source of these increased assets Assets Assets are the firm's economic resources, formally defined as "probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events What does accounting focus on? The impact a business's activities have on its overall financial performance Which report summarizes cash collections and cash expenditures from operating, investing, and financing activities over a period of time? Statement of cash flows Which users would have a primary concern with an organization's ability to provide healthcare benefits? Employees Which benefit does a corporation gain by following Generally Accepted Accounting Principles (GAAP)? An increase in its comparability to other companies Which body regulates a certified public accounting firm's audit practices when the firm is auditing a large publicly traded company? The Public Company Accounting Oversight Board (PCAOB) What has had the most significant impact on accounting practices? Information technology What two items of information are revealed on the balance sheet? Ownership, Debt Which term is defined as the residual interest in the net assets of a company? Owners' equity A corporation has total liabilities of $300 million, total owners' equity of $100 million, and current assets of $50 million. What is the value of the firm's long-term assets? $350 million Which situation should result in revenue recognition on the income statement for the year ending 12/31/14 if the firm is using accrual-basis accounting? In 2014, a company provides services to a customer for which cash will be collected the next year (2015). Which category on the statement of cash flows summarizes cash receipts and payments to owners and creditors of the company? Cash flows from financing activities Where would an investor find a summary of a company's significant accounting policies? In the notes to financial statements Which assurance does an external audit report provide for its readers? The company's financial statements fairly reflect its financial position Match each accounting term with its definition. Reliable = Information that can be verified Relevant = Information having to do with the matter at hand Material = Information that is important enough to make a difference Conservatism = Information related to recognizing losses as they occur Order the steps in the decision cycle from first (1) to last (5). 1. Prepare financial statements 2.Analyze financial statements 3.Gather information 4. Make decision 5. Implement decision Partial financial information for a company is as follows: Current assets $36,543 Total assets $58,719 Current liabilities $24,824 Total liabilities $48,561 Stockholders' equity $10,158 Sales $46,997 Net Income $ 3,761 Market value of shares$41,316 What is the price-earnings (PE) ratio for this company? 11.0 What does it mean if a company has a debt ratio of 101.5%? The company has 1.5% more total liabilities than total assets. What is consistent with a continual decline in gross profit if the firm's cost of goods sold remains the same? Continual decrease in sales Which two cash flow adequacy ratios represent a cash cow? $6,991/$5,486 $5,220/$1,875 Which formula yields a cash times interest earned ratio of 11? Cash before interest and taxes of $11,000 / cash paid for interest of $1,000 Which form of debt should be reported in the long-term liability category? Notes payable expected to be paid in 18 months Which two values affect the measurement of net income? Ordinary gains and losses Operating expenses Which two items' subtotals are included in a multi-step income statement? Gross profit Income from operations What was the 2012 net profit amount if the 2013 pro-forma net profit of $187,000 was based on a 22% increase? $153,279 [Show Less]
What does accounting focus on? The impact a business's activities have on its overall financial performance Which report summarizes cash collection... [Show More] s and cash expenditures from operating, investing, and financing activities over a period of time? Statement of cash flows 01:12 01:30 Which users would have a primary concern with an organization's ability to provide healthcare benefits? Employees Which body regulates a certified public accounting firm's audit practices when the firm is auditing a large publicly traded company? The Public Company Accounting Oversight Board (PCAOB) What has had the most significant impact on accounting practices? Information technology What two items of information are revealed on the balance sheet? Choose 2 answers Ownership. Debt Which term is defined as the residual interest in the net assets of a company? Owners' equity A corporation has total liabilities of $300 million, total owners' equity of $100 million, and current assets of $50 million. What is the value of the firm's long-term assets? $350 million Which situation should result in revenue recognition on the income statement for the year ending 12/31/14 if the firm is using accrual-basis accounting? In 2014, a company provides services to a customer for which cash will be collected the next year (2015). Which category on the statement of cash flows summarizes cash receipts and payments to owners and creditors of the company? Cash flows from financing activities Where would an investor find a summary of a company's significant accounting policies? In the notes to financial statements Which assurance does an external audit report provide for its readers? The company's financial statements fairly reflect its financial position 00:02 01:30 Reliable Information that can be verified Relevant Information having to do with the matter at hand Material Information that is important enough to make a difference Conservatism Information related to recognizing losses as they occur steps in the decision cycle 1 Prepare financial statements. 2 Analyze financial statements. 3 Gather information. 4 Make decision. 5 Implement decision Partial financial information for a company is as follows: Current assets $36,543 Total assets $58,719 Current liabilities $24,824 Total liabilities $48,561 Stockholders' equity $10,158 Sales $46,997 Net Income $ 3,761 Market value of shares $41,316 What is the price-earnings (PE) ratio for this company? 11.0 What is consistent with a continual decline in gross profit if the firm's cost of goods sold remains the same? Continual decrease in sales Which two cash flow adequacy ratios represent a cash cow? $6,991/$5,486. $5,220/$1,875. Which formula yields a cash times interest earned ratio of 11? Cash before interest and taxes of $11,000 / cash paid for interest of $1,000 Which form of debt should be reported in the long-term liability category? Notes payable expected to be paid in 18 months In January of year 1, a company began doing business as a corporation in order to sell technology-related accessories and services. During its first month of operations, the following events occurred: January 1 The corporation received $1,000,000 in cash in exchange for stock issued to stockholders. January 3 The corporation borrowed $250,000 from bank. The loan is a four-year loan with an interest rate of 12 percent, payable each year on January 1 beginning in year 2. January 5 The corporation purchased equipment to be used in the business for $200,000 cash. January 8 The corporation purchased inventory costing $200,000 by paying $120,000 in cash. The remainder was put on credit accounts with suppliers. January 15 The corporation hired five employees. Each employee will be paid $1,000 at the end of each month. January 30 The corporation paid $6,000 cash for a one-year insurance policy. The policy period will begin on February 1, year 1. What will be the impact of the January 5 event on the company's balance sheet on that date? Equipment will increase $200,000, and cash will decrease $200,000. [Show Less]
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