Accounting for Decision Makers – C213 Refresher PDF

lOMoARcPSD|44945521 Accounting for Decision Makers – C213 Refresher Accounting for Decision Makers (Western Governors University) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded...

lOMoARcPSD|44945521 Accounting for Decision Makers – C213 Refresher Accounting for Decision Makers (Western Governors University) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 Accounting for Decision Makers – C213 Managerial Accounting - inside company for internal users Accounting System: system of providing quantitative information, about economic entities  Bookkeeping - preservation of a systematic, quantitative record of an activity  Analysis – Organize and evaluate accounting information Financial Accounting - provide an objective, reliable means through which management can communicate the results of operations to the owners—the shareholders  Balance Sheet – Assets = Liability + Equity, reveals what a company owns and what it owes  Income Statement = Revenue – Expenses, measuring the economic performance of a company  Statement of cash flow = Amount of cash collected – Cash paid out by company in Operating, Investing and Financing area, outlines where a company gets its cash and how it spends that cash Securities and Exchange Commission (SEC) monitors the financial accounting disclosures of companies (both U.S. and foreign) whose stocks trade on U.S. stock exchanges International Trade Commission uses financial accounting information to unfair trade practices. Justice Department uses financial statement data to evaluate whether companies are earning excess monopolistic profits. State agencies, such as public utility commissions and insurance commissions, use financial statements and other accounting information in setting and/or approving utility and insurance rates. Sarbanes-Oxley Act of 2002- increases the government oversight/scrutiny of the accounting and auditing financial statements. Securities and Exchange Commission (SEC) to regulate U.S. stock exchanges and make sure that investors are provided with full and fair information about publicly traded companies. Legal authority to establish accounting standards for companies soliciting investment funds from the American public. Financial Accounting Standards Board (FASB) – estd. 1973. 7 full time members, private body setup only (no enforce authority) to accounting standards leading to creation of generally accepted accounting principles" (GAAP). International Accounting Standards Board (IASB) formerly International Accounting Standards Committee (IASC) estd 1973, London, develop a common set of worldwide accounting standards and produce standard as International Financial Reporting Standards (IFRS). American Institute of Certified Public Accountants (AICPA) - The professional organization of Certified Public Accountants (CPA) in the United States Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 Public Company Accounting Oversight Board (PCAOB), private, non-profit, arm of SEC, created by Section 101 of the Sarbanes-Oxley Act inspects the audit practices of registered audit firms under AICPA and has statutory authority to investigate questionable audit practices and to impose sanctions such as barring an audit firm from auditing SEC-registered companies. Balance Sheet- Assets = Liability + Equity The financial statement that reports resources owned, the obligations to transfer resources to other organizations, and the claims by the entity's owners is known as the Reported in order of Asset, Liability and Equability and within that shown as current (short) and long- term (Classified) assets and liability Assets are grouped on balance sheet based on Liquidity, which is the ease with which the item can be turned into cash. Liabilities generally are grouped on the balance sheet according to their due dates, with short-term liabilities listed first Owners' (Stockholders) equity represents the owners' residual interest in the assets that remains after deducting its liabilities. Net assets = assets - liabilities [A] Paid-in capital - value of the assets given in exchange for these shares [B] Retained (Reinvested) earnings represent the portion of stockholders' equity (resulting from cumulative profitable operations) that has not been paid to the owners as dividends. Net Income - Dividend [C] Treasury stock when a company buys back its own shares (profitability company), accountants call the repurchased shares [D] Accumulated other comprehensive income – Increases and decreases in equity as a result of market events/conditions Classified balance sheet - balance sheet that distinguishes between current and long-term assets Entity concept is the idea that personal financial activity is kept separate from business financial activity. Similarly, the accounting records of a small business must be kept separate from the personal finances of the owner. Book-to-market ratio = owners' equity / total market value of a company's shares is a measure of how much difference there is between accounting book value and market value; a book-to-market ratio of exactly 1 would indicate that the recorded value of the company is equal to its market value. Most companies in the United States have book-to-market ratios of less than 1. Going concern assumption - continue in business for the foreseeable future Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 Income Statement (statement of earnings) = Revenue (assets created ~ net asset= asset-liability) – Expenses Incur - refers to the time the firm receives the service or other benefit. Gains and losses- refer to money made or lost on activities outside the normal business of a company. Net income - If revenues exceed expense (revenue – expense) Net loss - if expenses exceed revenues Basic Earnings per share (EPS) – Net income / No of outstanding shares Diluted Earnings per Share - Net income / No of outstanding shares + Potential shares Diluted earnings per share reflects the existence of stock options or other rights that can be converted into shares in the future. Time Period – frequency of reporting the earnings- monthly, quarterly, yearly Revenue Recognition – based on the value it provides rather than cash it provides Statement of cash flow = Operating – Inflow – selling good, providing services, outflow – wages, utilities bill, taxes Investing - Inflow – selling building/land, outgoing – purchasing land/building Financing – Inflow – borrow money, receiving investment, outgoing- repaying loan, distribution to owners Notes to financial statements:  Summary of significant accounting policies – assumptions, estimates and judgement along with method used Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521  Additional information about the summary totals found in the statements - description of all the individual items that comprise notes payable  Disclosure of important information not recognized in the statements – status of legal proceeding, subsequent events which is uncertain  Supplementary information required by the Financial Accounting Standards Board (FASB) or the Securities and Exchange Commission (SEC) – business segment information, domestic/international market breakdown External Auditor – certify the financial statements are presented in accordance with Generally Accepted Accounting Principles (GAAP) using Generally Accepted Auditing Standard (GAAS) Generally Accepted Auditing Standard (GAAS) - requires CPAs to provide reasonable assurance that significant fraud or misstatement is NOT present in financial statements Why to trust External Auditor – Trust Factor and Lawsuits Relevant – fast, uncertain, estimates, forecast, current day accounting focus. Capable of impacting a decision, must be provided on a timely basis, be useful in evaluating past decisions, and provide some basis for forecasting future financial performance. Reliable – slow, carefully verified, precise (few estimated or forecast), historically accounting focus. represent the economic conditions or events that it purports to represent. Comparability - data for other firms or it may be with similar information for the same firm but for other periods of time. More useful when it can be related to a benchmark or standard. Consistency - Comparability of accounting data for the same company over time. Conservativism – when in bad, tell bad news and hold good news until positive. When in doubt, recognize all losses but don't recognize any gains. counterbalance to the natural tendency of managers to be overly optimistic in their financial estimates. Tool for lenders to assess the company health. Materiality - question of whether an item is large enough to make any difference to anyone. Depend on size of the company and use of the information. Articulation – Connection between Balance sheet, statement of income and Statement of cash flow. The idea that certain figures on an operating statement help to explain changes in figures on comparative balance sheets Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 Balance Sheet – A=L+E o Asset (A)- cash, land, inventory, building etc.  Current Asset based on operating cycle – decreasing order of liquidity  Cash – coin, currency, checking/saving account, cash equivalent interest- bearing security (3 months)  Inventory  Account Receivable – business credit 10-60 days  Long term asset – expected to be here for year  Tangible - Property, Plant, Equipment (PP&E), stock, bond o Accumulated depreciation - wear and tear, or depreciation of items since they were originally purchased.  Intangible – no physical, trademarks, good will (economic values of relationship), contracts purchased from other company (no home grown)  Other Long Term o Deferred Income Tax – future income tax benefits/credit o Net pension asset o Liability (L) - enterprise's obligations to pay cash or other economic resources to others  Current Liability – expected to be paid within a year  Account Payable – buying in credit  Accrued Liability – build up gradually over the time, wages, taxes, utility, interest  Short term loan payable – burrowing, loans, notes, line of credit (preapproved loan)  Current Portion of long-term debt – long term loan payout in monthly (principal payment)  Unearned Revenue – advance/Future payment owing service, airline ticket  Long term Liability Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521  Long term Debt – loans/notes/bond/mortgages more than 1 year payback  Capital lease obligations – pay equivalent of owing the asset  Deferred Income tax liability – income tax to be paid in future year  Other Long-term liability o Pension obligation o Environmental cleanup obligation o Warranty obligation o Stakeholder equity (E) - Residual interest in the assets of an entity that remains after deducting its liabilities  Common Stock – owners of company, voting right, dividend  Par value was equal to the market value of the shares at issuance  Preferred Stock – no voting right, limited dividends, pay first in case of bankruptcy or poor performance  Retained Earnings- cumulative amount of a corporation's profits that have been reinvested on behalf of the stockholders, not distributed to stakeholders  Treasury Stock - buyback own shares, profit sharing, stock option, prevent takeover, increase EPS, boost the stock sale price  Accumulated other compressive income AOCI – market related gain/loss due to fluctuations of USD value in non-US subsidiaries  Derivative is 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. 3 set of books US corporation keep  Financial Reporting – Balance Sheet, Income statement, cash flow statement  Income Tax reporting  Internal Managerial Accounting Balance Sheet outside US – Fixed Asset -> Working Capital (Current Asset – Current Liability) Property, plant, and equipment will be listed first Current assets and current liabilities will be netted together Recognition – summarize the complexity of an event in one single number. Ex brand value of coca cola Disclosure – Non quantifiable and non-measurable transactions narrative added in notes Valuation – How much value post recognition. It should be based on Historical (Reliable) and User significance (Relevance) value NOT market value (fair value) Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 Transaction analysis - process of determining how an economic event impacts the financial statements based on accounting equation – A=L+E Executory Contract- In future contracted work. Ex- employee will work or leasing Asset mix - proportion of total assets in each asset category. Strongly influenced by a company's industry Asset mix percentages - computed by dividing the amount of the individual asset item by the amount of that company's total assets. Financing mix - percentage of total financing (liabilities plus equity) in each individual category. It is a measure of degree to which a company finances assets using liabilities or owners’ equity. Influenced by individual managements' financing decisions. Product Mission: To make, distribute & sell the finest quality and promoting business practices that respect the Earth and the Environment. Economic Mission: To operate the Company on a sustainable financial basis of profitable growth, increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. Social Mission: To operate the company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally, nationally & internationally. Net Income is typically viewed as the fundamental measure of a company's profitability, Measure of sustainable profitability is income from continuing operations. Income Statement (statement of earnings) Accrual accounting is the process that accountants use in adjusting raw transaction data into refined measures of a firm’s economic performance. An important function of accrual accounting is making sure that revenues and expenses are reported during the correct time period. Financial capital maintenance - increase in dollar amount of a company’s net assets (assets – liabilities, or owners’ equity) excluding inflation. The concept that income is defined as the excess of net assets at the end of an accounting period over the net assets at the beginning of the accounting period, excluding effect of transactions with owners. Physical Capital maintenance - increase in actual physical resources, productive capacity Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 Gross Profit = Sales Prices- Cost price Operating Income or EBIT Earnings Before Interest and Taxes = Gross Profit – Operating expenses Income from continuing operations= operating income- subtracting interest expense, income tax expense, and other miscellaneous items. A measure of a company's performance that includes all items that are expected to continue into the future. Net Income = Income from continuing operations – below-the-line categories (Income from Discontinued Operations and Extraordinary Gains and Losses (earthquake loss etc)). Represent overall economic performance of a company for a given period. Bottom line. Comprehensive Income = Net Income –/+ OCI (other comprehensive Income arise from arise from changes in market conditions unrelated to the business operations of a company such as exchange rate difference). Exclusions are - Unrealized Gain/loss, foreign currency translation adjustment and deferred gain/losses on derivatives instrument. It reflects an overall measure of the change in a company’s wealth during the period (delta wealth) Revenue - value of the goods and services provided by a company in its business operations. Ex – Sales Revenue, Service revenue, Interest revenue etc., Expenses - value of resources used in generating the reported revenue. Depreciation – wear and tear cost estimates Gain and Losses – money made or lose outside of the normal operations. Ex. Restructuring charges Derivative instruments - to hedge exposure to risk stemming from changes in prices and rates of underlying instrument EVA - Economic Value Added - earnings-based compensation is measurement of earnings Single step Income Statement = Revenue- Expense =Net Income Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 Multiple step Income Statement – highlight the relationship, presentation of gross profit and operating income Revenue Recognition – contract with customer creates performance obligation. Point of Sale. An exchange transaction involving goods and services has occurred and the earnings process is essentially complete. The earnings process is complete, and a valid promise of payment has been received Expense Recognition – based on Matching principle of all cost and expenses incurred to generate revenue must be recognized in the same accounting period as the related revenue. 1. Direct matching, as with cost of goods sold – Walmart selling 2. Systematic allocation, as with depreciation – rent, insurance 3. Immediate recognition, as with advertising, research & development- current period, salary of company president Retained Earnings (Equity Account) = Net Income (=Revenue-Expense) – Dividends  More revenue, more Retained earnings  More Expense, less Retained earnings  More Dividends, less Retained Earning Expanded accounting equation - Analysis of revenue and expense transactions requires the use of the Assets = Liabilities + Paid-in Capital + (Revenues - Expenses - Dividends) New Zealand - only national government to adopt the accrual basis for its official accounting Proforma Financial Statement – Budgeted/Forecasted/Projected Forecasting exercises begin with a forecast of Cash If a company anticipates a 40% increase in sales volume, then it is most likely that the company will need about a 40% increase in account payable/cash Cash Flow It highlights changes in managerial strategy regarding investments and finances. Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 It provides information about an entity's cash receipts and payments over a period of time. It provides investors with information about the investing and financing activities of an entity. NOT measures the profitability of an entity. Cash equivalents are short-term, highly liquid investments such as Treasury bills, commercial paper, and money market funds. Decided by Management. Investing - in Productive capacity Operation - transactions and events that enter into the determination of net income Cash from operating activities + Cash from investing activities − Cash from financing activities + or – Start up, High Growth Company- Cash Burn rate – feeding cash from Finance to meeting operating expense and investing Steady State Company – Operating creates cash for Investing and some for Finances (Dividends) Cash Cow – Operating creating enough cash for all investing and financial liabilities – loan repayment, share repurchase, dividends. Indirect Income – start with Net Income and then details the adjustment to arrive operating cash flow. Highlight the impact of accrual assumptions, operating cash flow management, every company use. A decrease in accounts receivable. Easy to make. Direct Income – easy to understand, reporting the information in the last col of the adjustment, allow line-item analysis. The method by which cash flows are presented on a statement of cash flows as operating cash receipts and payments. Shows the major classes of operating cash receipts and payments Current asset increases - = mean cash decrease – Current liability increases + = mean cash increase + Increase account payable + = retained cash Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 Increase account receivable - = cash disbursed Decrease in account receivable + = cash hold Decrease in account payable - = cash hold Decrease in inventory + = cash hold to buy newer inventory Depreciation + = increase cash Increase in interest/income tax payable + = Cash hold Gain on Sales of PP&E - = Free Cash Flow = Net Cash Flow from Operations - Capital Expenditures Non-cash investing and financing activities should be disclosed separately, either in the notes to the financial statements or in an accompanying schedule but not in the cash flow statement itself. Financial statement analysis Leveraged buyout – buying company in exchange for bonds and stock in a transaction that would, in today's terminology. The DuPont framework decomposes return on equity into its profitability, efficiency, and leverage components. Financial ratios - Relationships between financial statement amounts. Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 Management using Financial Analysis for decision making in Operating, Investing and Financing External user such as investor, creditors using Financial Analysis for decision making in Investing. Financial Ratio Debt Ratio - represents the proportion of borrowed funds used to acquire the company's assets = Total Liability/Total Assets. The general rule of thumb is that debt ratios should be around 50 percent. Current Ratio – measure of liquidity = current assets/current liability. Historically, the rule of thumb has been that a current ratio below 2 suggests the possibility of liquidity problems. Return on Sales - Net income / sales, is a financial ratio called return on sales which tells how many pennies of profit a company makes on each dollar of sales. With 8%, DuPont makes 8.0¢ of profit on each dollar of sales. Asset Turnover- measure company efficiency = Sales/Total Assets Return on Equity (RoE) – measure amount of profit earned per dollar of investment = Net Income/Stockholder equity. Good companies typically have return on equity values between 10 and 20 percent. Price Earning Ratio (P/E) - The relationship between the market value of company and that company’s current earnings = Market Value of Shares/Net Income. PE ratios typically range between 10 and 30  Debt ratio: percentage of company funding that is borrowed  Current ratio: indication of a company's ability to pay its short-term debts  Return on sales: pennies in profit on each dollar of sales Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521  Asset turnover: measure of efficiency; number of sales dollars generated by each dollar of assets  Return on equity: pennies in profit for each dollar invested by stockholders  Price-earnings ratio: number of dollars an investor must pay to "buy" the future rights to each dollar of current earnings Common-size financial statement for company having profitability problem - divide all financial statement numbers for a given year by a common denominator for the year (ex sales number give efficiency and by Asset (revenue), gives asset mix).  When using common-size statements- Data may be selected for the same business as of different dates, or for two or more businesses as of the same date  Compare the mix of revenue, and expenses, and determine efficient use of resources within a company over time or between companies within a given industry without respect to relative size. DUPOT Framework  Return on Sales – Net Income/Sales – Profitability  Asset Turnover – Sales/Asset – Efficiency  Asset to equity – Asset/Equity – Leverage Usefulness of Cash Flow Ratios  Large Non-cash Expenses Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521  Rapid Growth  Window Dressing Time Cash Flow to Net Income – Cash flow from Ops/Net Income. Reflects the extent to which accrual accounting assumptions and adjustments have been included in computing net income Cash Flow Adequacy ratio - cash from operations / cash paid for acquisition+ cash paid for capital expenditures. Fixed asset additions and acquisitions of new businesses, indicates whether a business is a cash cow. Reflects a company's ability to finance its capital expansion through cash from operation Cash Times Interest Earned - cash flow from ops+ cash paid for int and taxes/cash paid for interest. Indicator of company ability to mee its interest payment with it cash flow from Operations. Cash Budgeting Cost of selling on credit  Bad debt  Book keeping  Carrying cost - cash tied up in receivables Sales Discount- reduction in price and credit policy is for attracting more customers 2/10, n/30 – 2 percent discount when pays in 10 days otherwise pay entire amount in 30 days 2/10, n/EOM - 2 percent discount when pays in 10 days otherwise pay entire amount by end of month These are recorded on Contra account – Subtraction from sales Sales are generally reported NET (sales) of any discount taken Winthrop Merchandising is preparing its budget for 2011 (its first year of operation). Sales for the year are budgeted at $1,500,000; 20% are cash sales and 80% are credit sales. The company expects to collect 60% of all credit sales in 2011. Budgeted expenses are $1,200,000. These expenditures include $37,500 for depreciation and $745,500 for variable manufacturing overhead. If the desired ending cash balance is $45,000, how much must Winthrop borrow during the year?  $180,000  $187,500  $142,500  $225,000 FEEDBACK 0 / 1 (0.0%) Correct Answer: $187,500 Cash available: (1,500,000 x 20%) + (1,500,000 x 80% x 60%) = $1,020,000 Total cash needed: $1,200,000 - $37,500 + $45,000 = $1,207,500 Total cash borrowed: $1,020,000 - $1,207,500 = ($187,500) Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 Internal Controls Type of Financial statement problem –  Errors- Unintentional o Error in transactional and journal entries o Error in accounts and ledger o How to minimize- well designed information system and careful human procedures  Disagreement – differing judgements and estimates o How to minimize- Auditor, self-regulation  Fraud – Intentional o Misappropriation of asset – stealing o Fraudulent financial reporting – lying o How to minimize- Auditor, market punishment, legal enforcement Sarbanes Oxley Act (SOX)- o Created Public Company Accounting Oversight Board (PCAOB) o Supervised by SEC, appoints members ad approves actions o Governmental standards for audits o Inspections o Investigations o Constraints on Auditor o Auditors are prohibited from providing non audit services such as actuaries o Auditor rotation every 5 years o Auditor must report on Internal control adequacy o Auditor reports to audit committee external outside directors o Constraints on Management o Personal Certification by CEO/CFO of financial statements and disclosure o Must have code of ethics o No Loans o Management must report about the adequacy of company internal controls o Supporting Audit committee According to Sarbanes-Oxley, Opinions about the reliability of internal controls is the services an accounting firm permitted to provide to its audit client Internal control structure can be divided into five basic categories: 1. The control environment - actions, policies, and procedures that reflect the overall attitudes of top management, the directors, and the owners about control and its importance to the company o Management philosophy and operating style o Organizational structure o Audit committee – outside directors Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 2. Control activities (procedures)  Segregation of duties (preventative control) o Authorization o Record Keeping o Custody of assets  Proper procedures for authorization (preventative control)  Physical control over assets and records (preventative control)  Adequate documents and records (detective control)  Independent checks on performance (detective control) o External auditors o Internal auditors o Rotation of duties 3. Risk assessment 4. Information and communication 5. Monitoring The reasons that management might manage earnings include:  Pressure to meet internal earnings targets  Pressure to meet external expectations  Smoothing income  Preparing to apply for a loan or to offer stock to the public Earning Management Continuum GAAP Oval - represents the flexibility a manager has, within GAAP, to report one earnings number from among many possibilities based on different methods and assumptions. Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 Security and Exchange Commission (SEC) is a governmental agency that regulates stock exchanges and publicly-traded companies. Financial Accounting Standards Board (FASB) is a private, non-government, rule-making agency that promulgates and interprets Generally Accepted Accounting Principles (GAAP). The SEC has the legal authority to establish GAAP and has delegated that responsibility to the FASB. Management accounting Management Accounting –gathering & analysis for internal users. Detailed data, daily decisions - Product Cost, Breakeven analysis, Budgeting, Performance evaluation, Outsource production Good management accounting is a competitive tool. Motivated by Management’s desire to improve.  Both financial and nonfinancial data  Usually kept secret within the company  Decision Making – o Planning  Long run Planning -3-5 years, strategic (direction), capital budgeting (resources)  Short run planning – Months, Prod and process prioritization, ops budgeting (profit plan)  Production prioritizing - continual evaluation of the profitability of the various product lines and divisions  Operational budgeting - Planning decisions regarding current operations and those of the immediate future o Controlling – measuring actual performance  Budget vs Actual Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521  Assessing the importance of variances o Evaluating  Analyze result - variances which result from a comparison of actual performance against expected results  Provide feedback  Reward performance  Identify problems Financial Accounting - gathering and analysis for External users (creditor/investors), Summary Data, occasional decision -Credit analysis, regulatory uses (financial health and insurance company), estimate value of company,  Uniform across companies (generally accepted accounting principles)  Restricted to financial data  Data often made public Cost volume Profit Analysis – (CVP) Breakeven analysis – Variable (increase proportional to sales) – raw material, packaging labor, patient care. Fixed - building, rent, executive salaries, capital expenditure, maintenance Product Cost Flow:  Product Cost – Manufacturing Cost incurred inside the production facility – inventory. Direct/indirect wages of worker, material cost, rent, depreciation, insurance  Period Cost – Non-Manufacturing Cost incurred outside the production facility – Selling and Administration expenses - supporting staff salary, advertising head quarter rent, interest etc. Decision Making  Direct (traceable to product/business unit) and indirect cost  Differential (change cost with my decision) and Sunk Cost (cost be the same no matter what I do)  Out of Pocket (actual spending of resource, past cost- buying ticket for skiing) and Opportunity cost (no outlay of cash, loosing what you are getting) Common cost - Costs incurred for the benefit of more than one segment of the business Manufacturing Overhead cost: other than direct materials or direct labor such as Indirect + Insurance, utilities Controller - Head of accountant Institute of Management Accountants (IMA) provides guidance on ethical professional practice to help professionals involved in management accounting processes provide Certified Management Accountant (CMA) Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 Activity-based costing (ABC) - A method of attributing overhead costs to products based on measurable factors that relate to activities that create overhead costs. Five steps in implementing and using an ABC system, which are:  Identify overhead cost activities.  Analyze individual overhead costs in terms of those cost activities – cost pool  Identify measurable cost drivers - numerical measure used to reflect the amount of a specific overhead cost that is associated with a particular activity  Assign overhead.  Use the ABC data to make decisions. Activity-based costing differs from traditional product costing in the allocation of Manufacturing overhead costs Traditional product costing systems (e.g. job order costing and process costing) usually assume that Products consume overhead costs The four general categories of ABC activities are:  Unit – traditional – more you do, more it cost- assemble activity. Ex-Machine maintenance Machine depreciation Electricity and other energy costs  Batch – small batches, increase overhead cost. Ex- Inspections Machine setups Movement of and accounting for materials  Product line - engineering changes made in the assembly line, product design changes, and warehousing and storage costs for each product line  Facility support - building depreciation, property taxes, plant security, insurance, accounting, outside landscape and maintenance, and plant management's and support staff's salaries. Cost Pool – Cost associated with producing each batch. Tracing overhead costs to activities involves dividing overhead costs into cost pool. Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 CVP Cost-Volume-Profit (C-V-P) analysis – techniques for determining how changes in revenue, cost and level of activity impact profitability. It is based on fixed cost (rent, insurance), variable cost (direct material and labor). Counteract the natural over-optimism of entrepreneurs. Key factors involved in C-V-P analysis are:  Revenues from the sales prices charged for goods and services  Fixed and variable costs  Sales volume  Mix of products  Resulting profits CVP is useful to Managers in Planning (Primary), Evaluating and Controlling decisions. Behavior with respect to changes in the volume of activity. Variable cost per unit is constant Total Variable cost increases proportionally as the number of units increases. Variable Cost Relevant range - variable costs are approximately linear within a certain range of production. Relevant Range - Fixed and variable cost relationships remain the same  Fixed Cost remains same such as rent, insurance  Fixed Cost per unit decrease as the number of unit increases Fixed Cost Relevant Range Fixed Cost Stepped Fixed Cost Regression Line – straight line that best fits among all of the data points Variable cost per hour - slope of the total cost line Rise (increase in cost $)/Run (increase in level of activity) Fixed cost – Y-intercept of total cost Slope of Cost = variable cost per unit Slope of Revenue = Sales Price Per Unit = Revenue Rise – Revenue Run Scatter graph Method- for decision making Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 Scattergraph method to analyze mixed costs, the regression line should be visually fit to Minimize the average distance between all the data points and the regression line Contribution Margin = Sales- Variable cost Profit = Sales Revenue - Variable Costs - Fixed Costs Profit = (Sales Price × Units) - (Variable Cost × Units) - Fixed Costs Profit = Sales Revenue - (Variable Cost Ratio × Sales Revenue) - Fixed Costs Break-even-point - volume of activity at which total revenues = total costs, or where profit is zero. Also, when contribution margin equals the fixed costs. Cost-Volume-Profit Analysis (cliffsnotes.com) Break even $ value = Fixed cost/CM Ratio Break even $ CM Ratio = CM/Total sales CM = 250000-85000 =165000 CM = Sales - Variable CM Ratio = 165000/250000 =.66 Break even $ = 100000/.66 = 151515 Break even Target $ value = Fixed Cost+ Target 100000+30000/.66= 196969 $/CM Ratio Break even Sales Unit = 3.00X = 1.80X + 300000 (Sales Price × Units) = (Variable Cost × Units) + (3-1.8)=300000 Fixed Costs 1.2x=300000 X= 250000 Break even Sales Unit = 10x=6x+300000+120000 (Sales Price × Units) = (Variable Cost × Units) + 10-6x=4200000 Fixed Costs+ additional profit X=4200000/4=105000 Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 Profit graph- plots only profits and losses and omits costs and revenues Cost that are graphed as a straight line are variable, total and fixed cost Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 Johnston Co. sells three products with the following sales and variable cost rates: Variable Variable Contribution Margin Sales cost % Cost (Sales- Variable cost) Product 7320 4680 $12,000 61% 1 Product 8550 10450 $19,000 45% 2 Product 5600 2400 $ 8,000 70% 3 39000 21470 17530 Assume that Johnston's total fixed costs are $9,000. Using the current sales mix, what is Johnston's break-even point?  $20,000  $30,000  $16,364  $15,000 Correct Answer: $20,000 CM Ratio – CM/Total Sales = 17530/39000=45% Break even = Fixed / CM Ratio = 9000/.45=20000 Operating leverage (measure of risk) of a company increases as management chooses to emphasize fixed cost, rather than variable cost, to create or obtain the product for sale to the marketplace. Higher fixed cost, more fluctuation in case of sales increase or decrease. Maintaining low fixed costs and high variable costs rather than high fixed costs and low variable costs is a more conservative cost structure Company with a high operating leverage will have larger losses below the break-even point PRO FORMA What was the 2012 net profit amount if the 2013 pro-forma net profit of $187,000 was based on a 22% increase? Less YOUR CORRECT ANSWER ANSWER $228,140 Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 YOUR CORRECT ANSWER ANSWER $182,975 $153,279 $145,860 Divide 187,000 by 1.22 = 153279 company has projected the following sales for the spring quarter of 2014: $200,0 April 00 $250,0 May 00 $275,0 June 00 65% of all sales are paid for with cash. The remainder is on credit. The pattern for credit receivables collections are: Month of Sale 60% Month After Sale 30% Second Month After Sale 10% What are the forecasted cash collections for the month of June? - $269,750 June Cash = 65% of 275000 = 178750 June Credit = 35% credit 275000 x 60% = 57750 May – Cash = 35% credit of 250000 x 30% = 26250 April – Cash = 35% credit of 200000 10% = 7000 Question A company plans to purchase inventory for the second half of 2014 as follows: July $100,000 August $75,000 September $225,000 October $125,000 November $250,000 December $30,000 They usually pay 50% of inventory purchases in the month of purchase, 35% in the following month, and 15% in the second month. Based on this information, what are the forecasted total 2014 cash payments for inventory purchased in the second half of 2014? Downloaded by Brianna Threatt ([email protected])  lOMoARcPSD|44945521 Less YOUR CORRECT ANSWER ANSWER $705,000 $752,500 $790,000 Jul Aug Sep Oct Nov Dec Total Purchase Required 100000 75000 225000 125000 250000 30000 CP @ 50% of inventory purchase 50000 37500 112500 62500 125000 15000 402500 CP @35% on purchase of previous month 35000 26250 78750 43750 87500 271250 CP @15% on purchase of 2nd previous month 15000 11250 33750 18750 78750 Total payment 752500 Downloaded by Brianna Threatt ([email protected])