Accounting Cost Concepts Quiz
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Questions and Answers

What happens to total variable costs when activity levels change?

  • They become fixed after reaching a certain activity level.
  • They decrease with an increase in activity levels.
  • They increase or decrease based on changes in activity levels. (correct)
  • They remain constant regardless of activity levels.

    • In the context of fixed costs, what is the significance of a zero slope?

  • It means fixed costs do not change with activity levels. (correct)
  • It shows that fixed costs become variable after a certain level.
  • It indicates that total fixed costs vary with activity levels.
  • It suggests that fixed costs are eliminated at high activity levels.

    • How can one determine if a cost is purely variable using the equation y=mx+b?

  • By ensuring that 'm' is greater than zero.
  • By solving for 'b' and confirming it equals zero. (correct)
  • By analyzing the y-intercept value only.
  • By ensuring that both y and m are zero.

    • Why might fixed costs not remain fixed across all ranges of activity?

    <p>They might need to be adjusted to accommodate increased capacity.</p> Signup and view all the answers

    What occurs to the fixed cost per unit as activity levels increase?

    <p>It decreases since total fixed costs are split among more units.</p> Signup and view all the answers

    What must be confirmed during the analyzing transactions step of the accounting cycle?

    <p>The accounts affected need to be identified and classified.</p> Signup and view all the answers

    Which statement about journal entries is accurate?

    <p>Each journal entry must include at least one credit and one debit.</p> Signup and view all the answers

    What is the primary purpose of preparing a trial balance?

    <p>To ensure total debits equal total credits and confirm account balances.</p> Signup and view all the answers

    What represents the left side of a T-account?

    <p>Debit</p> Signup and view all the answers

    Why are accounting adjustments necessary in the cycle?

    <p>To make sure all revenue and expenses are accurately represented.</p> Signup and view all the answers

    What is the primary purpose of variance analysis?

    <p>To compare actual performance with budgeted estimates</p> Signup and view all the answers

    Which of the following best defines a favorable variance?

    <p>Earnings exceeded expectations</p> Signup and view all the answers

    How do you calculate Total Profit Variance?

    <p>Actual Profit - Budgeted Profit</p> Signup and view all the answers

    What does sales volume variance primarily result from?

    <p>An incorrect estimation of demand</p> Signup and view all the answers

    What is the impact of volume variances on variable costs?

    <p>They increase proportionally with sales volume</p> Signup and view all the answers

    What can be inferred from a negative profit variance?

    <p>Lower sales volume resulted in less revenue</p> Signup and view all the answers

    When analyzing variances, which factor is crucial for understanding the reason behind performance discrepancies?

    <p>Root cause of the variance</p> Signup and view all the answers

    Which of the following variances is impacted by incorrect estimates of sales price?

    <p>Sales Price Variance</p> Signup and view all the answers

    What is a Flexible Budget primarily used for?

    <p>Estimating budgetary impact given actual sales volume</p> Signup and view all the answers

    What could be a consequence of focusing solely on performance discrepancies?

    <p>Ignoring smaller variances that may have no significance</p> Signup and view all the answers

    What happens when cash is paid after an expense is incurred?

    <p>Expense is recorded, a liability is created, and cash decreases.</p> Signup and view all the answers

    What does the Matching Principle emphasize regarding expenses?

    <p>Costs to generate revenues must be recognized as expenses in the same time period as the revenues.</p> Signup and view all the answers

    Which of the following best describes a prepaid expense?

    <p>An asset that increases when cash is paid before the expense is incurred.</p> Signup and view all the answers

    In double-entry accounting, what must remain balanced?

    <p>The basic accounting equation: Assets = Liabilities + Owners’ Equity.</p> Signup and view all the answers

    What is a liability recorded when cash is paid after an expense is incurred called?

    <p>Payable.</p> Signup and view all the answers

    What occurs during the accounting cycle at the end of the period?

    <p>A trial balance is prepared to check that debits equal credits.</p> Signup and view all the answers

    Which statement is true when cash is paid on the date the expense is incurred?

    <p>Expense increases and cash decreases.</p> Signup and view all the answers

    During an event that has financial impact, what needs to happen for it to be classified as a transaction?

    <p>It must be reliably recorded.</p> Signup and view all the answers

    What is the main purpose of cost allocation?

    <p>To distribute common costs to benefit activities or objects</p> Signup and view all the answers

    How is depreciation on non-manufacturing equipment recorded?

    <p>Directly as an expense on the income statement</p> Signup and view all the answers

    What does negative working capital typically indicate?

    <p>The company has more liabilities than assets</p> Signup and view all the answers

    What is a cost driver in cost allocation?

    <p>An attribute that determines how costs are allocated</p> Signup and view all the answers

    What does Inventory Turnover measure?

    <p>How often inventory is sold and replaced over a period</p> Signup and view all the answers

    Which of the following correctly defines the Cash Conversion Cycle (CCC)?

    <p>The period from incurring costs to receiving cash back</p> Signup and view all the answers

    What does the Accounts Receivable Turnover ratio indicate?

    <p>The speed at which a company collects cash from sales</p> Signup and view all the answers

    What principle should be followed regarding average collection period?

    <p>It should not exceed the credit period given</p> Signup and view all the answers

    Which action best optimizes inventory investment?

    <p>Balancing inventory levels to avoid excess costs and stock-outs</p> Signup and view all the answers

    What does ROA measure?

    <p>The profit earned for each dollar invested in the company's assets</p> Signup and view all the answers

    Which of the following formulas correctly represents Profit Margin?

    <p>$ rac{Net,Income}{Revenue}$</p> Signup and view all the answers

    What can increase the Return on Assets (ROA)?

    <p>Reducing unproductive assets</p> Signup and view all the answers

    How is Return on Equity (ROE) calculated?

    <p>$ rac{Net,Income}{Average,Stockholders',Equity}$</p> Signup and view all the answers

    What does Financial Leverage indicate?

    <p>How much of the assets are financed by debt versus equity</p> Signup and view all the answers

    What does a high operating leverage imply?

    <p>A small change in revenue can significantly affect net income</p> Signup and view all the answers

    What can be done to increase asset turnover?

    <p>Identify and eliminate unproductive assets</p> Signup and view all the answers

    What is the primary relationship between Revenue and Asset Turnover?

    <p>Asset Turnover measures sales against total assets</p> Signup and view all the answers

    Which metric evaluates how efficiently a company earns money?

    <p>Profit Margin</p> Signup and view all the answers

    How does cutting costs impact a company's net income?

    <p>It can increase net income without changing revenue</p> Signup and view all the answers

    Study Notes

    Costs

    • Cost is a resource consumed to operate a business.
    • Resources have associated costs.
    • Cost is a component of profit.
    • Costs are classified according to their "cost behavior."

    Fixed Costs vs. Variable Costs

    • Fixed Costs: Do not change with the volume or level of activity.
    • Variable Costs: Change proportionally to the volume or level of activity.
    • Costs do not always change linearly with activity levels.
    • Rent is a fixed cost.
    • The cost of producing an additional burger is a variable cost.

    Variable Costs

    • Variable costs change proportionally to a cost driver.
    • Cost driver = the activity causing a cost to change
    • VC(q) = cost per unit (c) * quantity (q)

    Total Cost

    • Total cost (TC) = Fixed costs + Variable costs

    Mixed Costs

    • Mixed costs have both fixed and variable components.
    • Example: salesperson salary plus commission.

    Relevant Range

    • Relevant range of a fixed cost is related to the capacity of the resource.
    • Capacity is the amount of work that a resource can handle before needing replenishment. (e.g., room size in a classroom limiting the number that can be taught at a time)

    Variable Costs

    • Variable costs do not always vary linearly.
    • Some variable costs decrease or increase as quantity increases (imperfect variable costs).
    • Diminishing or increasing costs may arise due to increased efficiency or inefficiencies such as higher shipping/storage costs.

    Cost Structure Estimation

    • Most organizations use historical data to estimate the proportion of fixed and variable costs.
    • High-low method is a quick and dirty method used as a first pass.

    Regression Method

    • Uses all data points.
    • Simple or multiple regressions. (Simple is used in this class)

    Figuring Out Total Costs

    • Average costs are calculated by dividing total costs by the quantity/activity level.

    Marginal of Safety

    • The percentage difference between your current revenue and break-even revenue.
    • A higher margin of safety indicates lower fixed costs.

    The Balance Sheet

    • Assets = Liabilities + Owner's Equity
    • Assets = Current assets + Non-current assets
    • Liabilities = Current liabilities + Non-current liabilities

    Current Assets

    • Cash
    • Short-term investments
    • Readily marketable securities
    • Accounts Receivable
    • Inventory
    • Prepaid expenses

    Non-current Assets

    • Long-term investments
    • Long-term notes receivable
    • Property, Plant, and Equipment
    • Intangible assets

    Liabilities

    • Accounts payable
    • Wages payable
    • Interest payable
    • Current maturities of long-term debt
    • Deferred revenue
    • Notes payable

    Stockholders' Equity

    • Contributed capital
    • Common stock
    • Retained earnings
    • Net income
    • Dividends
    • Beginning retained earnings

    Operating Activities

    • Focus on selling goods or rendering services.
    • Includes any cash receipts or payments that are not classified as investing or financing activities.

    Cash Inflows in Operating Activities

    • Receipts from sales or services.
    • Receipts of interest or dividends.
    • Lawsuit settlements and refunds from suppliers.

    Cash Outflows in Operating Activities

    • Payments to employees and suppliers.
    • Payments to purchase inventory.
    • Interest payments to creditors.

    Profitability

    • Increase gross profit margin by charging higher prices and reducing production costs while keeping customers.
    • Decrease operating expense margin by getting rid of unnecessary levels of management.

    Valuing a Company

    • Intrinsic value is the price a rational investor is willing to pay.
    • Discounted cash flow models use discounted dividends or free cash flows to estimate intrinsic value.
    • Market-based models use multiples (e.g., P/E, P/B) of comparable companies.

    Variance Analysis

    • Comparing actual performance with budgeted/standard performance.
    • Explanations of differences (variances) are important.

    Decentralization

    • Managers may prioritize their own goals over the company's, in which case, performance pay/monitoring can be vital.

    Cost Centers

    • Minimize costs and maximize efficiency

    Profit Centers

    • Maximize revenues and minimize costs

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    Description

    Test your understanding of essential accounting cost concepts, including variable and fixed costs, journal entries, and trial balances. This quiz will help you explore how costs behave with changes in activity levels and the significance of the accounting cycle.

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