Financial Accounting: Key Concepts

• Financial accounting focuses on providing information to external users, such as investors and creditors.
• Management accounting provides information to internal users, such as managers, for decision-making.

Key Concepts in Financial Accounting

• Generally Accepted Accounting Principles (GAAP) are the common set of accounting rules, standards, and procedures.
• GAAP aims to ensure financial statements are understandable, relevant, reliable, and comparable.
• The Financial Accounting Standards Board (FASB) is the primary accounting standard setter in the United States.
• The International Accounting Standards Board (IASB) develops International Financial Reporting Standards (IFRS).
• The basic accounting equation is Assets = Liabilities + Equity.
• Assets are a company's resources, such as cash, accounts receivable, and equipment.
• Liabilities are obligations to others, such as accounts payable and loans.
• Equity represents the owners' stake in the company.

Financial Statements

• The income statement reports a company's financial performance over a period of time.
• The income statement follows the format Revenues - Expenses = Net Income.
• The statement of retained earnings shows the changes in retained earnings during a period.
• The balance sheet presents a company's assets, liabilities, and equity at a specific point in time.
• The balance sheet follows the basic accounting equation: Assets = Liabilities + Equity.
• The statement of cash flows reports the movement of cash both into and out of the company during a period.
• The statement of cash flows classifies cash flows into operating, investing, and financing activities.

Key Concepts in Management Accounting

• Cost accounting involves the measuring, recording, and reporting of product costs with a total-cost perspective.
• Cost-volume-profit (CVP) analysis examines the relationship between costs, volume, and profit.
• Budgeting is the process of creating a financial plan for the future.
• Variance analysis involves comparing actual results to budgeted results and investigating any differences.
• Performance evaluation involves assessing the performance of managers and business units.

Cost Accounting

• Direct costs can be easily traced to a specific product or service.
• Indirect costs cannot be easily traced to a specific product or service.
• Manufacturing overhead includes costs that are incurred in the manufacturing process but are not direct materials or direct labor.
• Product costs include all costs involved in the manufacturing of a product.
• Period costs are not directly tied to a product, and are expensed in the period in which they are incurred.
• Job order costing is used when products are custom-made or produced in small batches.
• Process costing is used when products are mass-produced.

Cost-Volume-Profit (CVP) Analysis

• The break-even point is the level of sales at which total revenues equal total costs.
• Contribution margin is the amount of revenue remaining after deducting variable costs.
• Contribution margin ratio is the percentage of revenue available to cover fixed costs and generate a profit.
• Margin of safety is the difference between actual sales and break-even sales.
• Operating leverage is the extent to which a company's profits are sensitive to changes in sales volume.
• Sales mix is the relative proportion of each product or service that a company sells.

Budgeting

• A master budget is a comprehensive financial plan for the entire organization.
• An operating budget focuses on the day-to-day operations of the company.
• A financial budget focuses on the company's financial position.
• A sales budget is the starting point for the master budget.
• Production budget determines the number of units that must be produced to meet sales demand and inventory needs.
• A cash budget forecasts the company's cash inflows and outflows.
• A capital expenditures budget outlines the company's plans for investing in long-term assets.

Variance Analysis

• A variance is the difference between actual results and budgeted results.
• A favorable variance occurs when actual results are better than budgeted results.
• An unfavorable variance occurs when actual results are worse than budgeted results.
• A materials variance measures the difference between the actual cost of materials and the standard cost of materials.
• A labor variance measures the difference between the actual cost of labor and the standard cost of labor.
• A overhead variance measures the difference between the actual cost of overhead and the standard cost of overhead.

Performance Evaluation

• Return on Investment (ROI) measures the profitability of an investment relative to its cost.
• Residual Income (RI) measures the amount of profit that a business unit earns above a minimum rate of return.
• Economic Value Added (EVA) measures the economic profit created by a business unit.
• Balanced Scorecard is a performance measurement system that considers financial and non-financial measures.
• Transfer pricing is the price at which one part of a company sells goods or services to another part of the same company.

Financial Statement Analysis

• Ratio analysis involves calculating and interpreting financial ratios to assess a company's performance.
• Liquidity ratios measure a company's ability to meet its short-term obligations.
• Solvency ratios measure a company's ability to meet its long-term obligations.
• Profitability ratios measure a company's ability to generate profits.
• Market value ratios measure a company's stock performance.

Time Value of Money

• Present value is the current value of a future sum of money or stream of cash flows, given a specified rate of return.
• Future value is the value of an asset or investment at a specified date in the future, based on an assumed rate of growth.
• Discounting is the process of finding the present value of a future cash flow.
• Compounding is the process of finding the future value of a present sum of money.
• Annuity is a series of equal payments made at regular intervals.
• Perpetuity is an annuity that continues forever.

Capital Budgeting

• Capital budgeting is the process of planning and managing a company's long-term investments.
• Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows.
• Internal Rate of Return (IRR) is the discount rate that makes the NPV of a project equal to zero.
• Payback Period is the amount of time it takes for a project to generate enough cash to recover its initial investment.
• Accounting Rate of Return (ARR) is the average annual profit from a project divided by the initial investment.

Inventory Management

• Inventory management involves planning, coordinating, and controlling the acquisition, storage, handling, movement, distribution, and possible sale of inventory.
• First-In, First-Out (FIFO) assumes that the first units purchased are the first units sold.
• Last-In, First-Out (LIFO) assumes that the last units purchased are the first units sold.
• Weighted-Average Cost calculates the cost of goods sold and ending inventory based on a weighted-average cost.
• Economic Order Quantity (EOQ) is the optimal order size that minimizes total inventory costs.
• Just-in-Time (JIT) inventory management aims to minimize inventory levels by receiving goods only when they are needed in the production process.