Financial Accounting Chapter 1-3 Notes PDF

**[Chapter 1 ]** **[Financial Accounting]** - Users External - Investors - Creditors - IRS, SEC, etc - Goal- To provide information for making investments or credit investments - Focus - Relevance- makes a difference - Faithful representation...

**[Chapter 1 ]** **[Financial Accounting]** - Users External - Investors - Creditors - IRS, SEC, etc - Goal- To provide information for making investments or credit investments - Focus - Relevance- makes a difference - Faithful representation - All information that it should have - No information that it shouldn\'t have - Timeframe- Past - Rules - GAAP (or IFRS) and SOX - Role of auditor - Scope - Firm-wide summary - Quarterly or annual - Behavioral Concerns - Adequacy of disclosures - Agency issue between managers and investors or creditors **[Managerial Accounting]** - Users- Internal - Managers - Employees - Goals - **Planning**- choosing goals and strategies - **Control**- Evaluating the results of operations - Focus - Relevance- makes a difference - Timeliness- getting information in time makes a difference - Timeframe- Present and Future - Rules - Non GAAP - Decision usefulness - Scope - Components of firm - Daily or weekly - Behavioral Concerns - Effect on managers' actions - Agency issues between managers and their bosses - Obligations to stakeholders **[Dr. Debit's Rules for Managerial Accounting]** - All costs have to go somewhere - You can't control costs that you can't see - Costs advise us, but they don't rule us - Decisions are only as good as the information and skills used to make them - We are what we are rewarded to be - Don't make your problems into the boss's problems - No one ever left a job because they couldn't stand being so happy - School is the only business where customers want less for their money **[Business Trends]** - Service Economy - Global Economy - Time Based Competition - Enterprise resource planning (ERP) -- Integrates all functions and data into one system - E-Commerce - Just-in-time (JIT) management - Total quality management (TQM) - Today's business environment is characterized by global competition, time based competition, and a shift toward a service economy **[Ethics for Managerial Accountants]** - **[Institute for Management Accountants (IMA)]** - Competence- Ability to do the job - Confidentiality- Keeping firm's secret - Integrity- Being honest and fair - Credibility- Giving reliable information - **[Ethical Dilemma]** People that would be affected by this are: - Stakeholders - Firm policy - Consult a supervisor Advisor Lawyer - **[Types of Costs]** - Cost- Sacrifice of resource - Expenditure- Outlay of cash - Expense- Accounting Concept - Matching Principle - Period Cost- Expensed in period - E.g.: Selling & Administrative - Product Cost- Attached to units produced - "Capitalized" on B/S until units are sold - Recognized on I/S when units are sold - Theory of contract- Everything in business is an exchange - **[Types of Firms]** - Service Firms - Merchandising Firms - Manufacturing Firms - **[Service Firms]** - All costs are period costs - Expense as incurred - Matching principle - **[On the I/S]** - Revenue -- Expenses = Income Service Revenue \$20450 Selling & Administrative Expenses [(16950)] Operating Income \$3500 XYZ provided 1,000 Units of service January \$16950 / 1,000 units = \$16.95/units - Merchandising Firms - Resell goods purchased from supplier - Period Costs- Expenses as incurred - Product Costs - "Inventoriable" - Matching Principle - **[Basic Inventory Formula]** - **Beginning Merchandise Inventory + Purchases (+ Freight In)** - **Cost of Goods Available for Sale -- Ending Merchandise Inventory = Cost of Goods Sold (COGS)** - **Merchandise ~BB~ + Purchases = Cost of Goods Available (COGAS)** - **COGAS -- Merchandise ~EB~ = COGS** - **\*\*Freight In, may or may not be included\*\*** - On the Income Statement - Sales -- COGS = Gross Profit (GP) - Gross Profit -- Operating Expenses = Operating Income 12/31/2018 - \$420 1/1/2019 - \$420 Sales in January - \$13620 \$930 Merch BB 420 Purchases [+ 13620] COGAS 14040 Merch EB [- 930] Income 13100 Sales Revenue \$20450 COGS Beginning Merch Inv \$420 Purchases 13610 Ending Merch Inv [(930)] COGS \$13100 Gross Profit 7350 Selling & Administrative Expenses - Income 3500 \$13100 / 1000 units = \$13.10 / unit - **[Manufacturing Firms]** - Transform raw materials into finished goods - **Product costs = DM + DL + MOH** - DM = Direct Materials - DL = Direct Labor - MOH = Manufacturing Overhead - Period Costs- Expense as incurred - Direct Costs = DM + DL Traceable - DM = Direct Materials - DL = Direct Labor - Indirect Costs = IDM + IDL + Other MOH - IDM = Indirect Materials - IDL = Indirect Labor - Other MOH items - Factory rent, Insurance, Utilities - Machine depreciation, repairs, etc. - Raw Materials (RM) Direct Materials (DM), Indirect Materials (IDM) - Factory Labor Direct Labor (DL), Indirect Labor (IDL) - **[Basic Inventory Formulas:]** - **DM~BB~ + (DM) Purchases = DM Available** - **DM available - DM~EB~ = DM Used** - **WIP ~BB~ + DM (Used) + DL + MOH = Total Mfg. Costs** - **Total Mfg. Costs -- WIP~EB~ = COGM** - **FG~BB~ + COGM = COGAS** - **COGAS -- FG~EB~ = COGS** DM~BB~ \$95 DM Purchases [+5627] DM Available 5722 DM~EB~ [-72] WIP 5650 WIP~BB~ \$270 New Mfg. Costs [+13650] Total Mfg. Costs \$13920 Beginning WIP \$ 270 Direct Materials Used: Beginning DM \$ 95 Purchases of DM DM available for use 5722 Ending DM (72) DM Used 5650 DL 1220 Manufacturing Overhead 6780 Total Manufacturing Costs Incurred 13650 Total Mfg. Costs to Account for [-19320] Ending WIP (310) COGS Manufactured \$13,610 FG~BB~ \$ 420 COGM [+13610] COGAS \$14030 B/S FG~EB~ I/S COGS \$13020 Sales Revenue \$20,450 COGS Beginning FG Inventory \$ 420 COGS Manufactured COGS Available for sale 14030 Ending FG Inventory (930) COGS Gross Profit 7350 Selling and Administrative Expenses Operating Income 3500 \$13100 / 1000 Units = \$13.10 / Unit - Prime Costs = DM + DL - Total Mfg. Cost = Prime Costs + MOH - Conversion Costs = DL + MOH - Total Mfg. Cost = DM + Conversion Costs - **Can't add Prime costs and Conversion costs together** **[Finding COGS]** 8k + 95k = 103k 103k -7k = 96k DM Used 4k + 96k + 30k + 21k = 151k 151k -- 3k =148k COGS Manufactured 3k + 148k = 151k 151k -- 5k = 146k COGS **[Chapter 2]** **[Job Order v. Process Costing]** - Job Costing - Traces costs to individual units or specific jobs - An advertising agency would use job order costing - Process Costing - Traces costs to the processes used to make continuous series of similar units - A cell phone manufacturer would use Process Costing - Both systems use 4 steps to track production costs: - Accumulate- Acquire DM, DL, and MOH - Assign- Trace DM and DL to WIP - Allocate- Use a formula to assign MOH to WIP (Estimating) - Adjust- Fix any over or under allocated MOH **Job Order Costing** - Raw Materials- An asset which increases as a debit and decreases as a credit - Labor- An asset which increases as a debit and decreases as a credit - MOH- An asset which increases as a debit and decreases as a credit Raw Materials 135k Work In Process 129k Accounts Payable 135k Raw Materials 129k **[Subsidiary Ledger Accounts]**- Detailed ledgers that show what each job ledger contributes to the total cost of an item - When a manufacturing firm buys [direct materials], it debits: **Raw Materials** - When a manufacturing firm uses [direct materials], it debits: **Work in Process** - When a manufacturing firm uses [direct labor], it debits: **Work in Process** Work in Process 98k MOH (IDM) 12k Wages Payable 98k Raw Materials 12k MOH (IDL) 9500 MOH (Utilities) 13750 Wages Payable 9500 Utilities Payable 13750 MOH (Insurance) 5k MOH (Depreciation) 11200 Prepaid Insurance 5k Accumulated Depreciation 11200 - Predetermined Overhead Rate - Reasons for using POHR - **Formula**: **POHR = Estimate MOH for the Period / Estimated Allocation Base** - **Characteristics** - Determined before the period starts - Used to assign MOH to WIP sensibly - **Common Allocation Bases**: - DHL (Direct Labor Hours) - DL\$ (Direct Labor Dollars) Nature of the Firm - MH (Machine Hours) - POHR = Est. MOH / Est. DL\$ = \$600k / \$1.2M = \$0.50 / DL\$ or 50% of DL costs Job 123 DL = 16k \*.50 = 8k Job 124 DL = 71k \*.50 = 35.5k Job 125 DL = 11k \*.50 = 5.5k Total = 98k = 49k WIP 49k MOH 49k FG 285.5k WIP 285.5k (77k + 208,500 = 285.5K) September Accounts Receivables 130k Sales 130k (35k + 95k = 130k) COGS 104k Finished Goods 104k MOH is Under-allocated - At EOP: - All costs have to go somewhere - If MOH Acquired \> MOH Applied **Under-applied** - If MOH Acquired \< MOH Applied **Over-applied** COGS 2450 MOH 2450 POHR = 93k MOH / 12,000 MH = 7.75 /MH Actual MH = 16k MH Allocation Rate = \$7.75 / MH 16k \* 7.75 = 124k **[Job Costs Sheets]** - Uses: - Controlling Costs - Evaluating Performance - Pricing Products - Allocating Scarce Resources - At EOP: - All costs have to go somewhere! - If MOH Acquired \> MOH Applied Under-Applied - If MOH Acquired \< MOH Applied Over-Applied - To get rid of MOH, Debit COGS and credit MOH **Actual MOH Cost = IDL + Depreciation on Plant + Machinery Repair + Plant Supplies + Plant Utilities** Actual MOH Cost = 11k + 48k + 11k + 6k + 7k = **83k** **MOH Acme Allocated = Actual MH \* Allocation Rate** MOH Acme Allocated = 16k MH \* \$7.75 /MH = \$**124k** **MOH is Over-Allocated \$83k (Actual) \< \$124k (Allocated)** [Debit] **MOH** 41k [Credit] **COGS** 41k **[Chapter 3 Process Costing]** - **[Job Order Costing]** - Firm Type Unique Batches - Cost Accumulation By the Job - WIP Inventory 1 General ledger Acct. + Subsidiary Accts. - Recordkeeping Job Cost Sheet - Cost Transfer As job is completed Firm type = (unique products/batches/services) Cost accumulation = by job WIP inventory = 1 general ledger account. + subsidiary accts. Record keeping = Job costing sheet is used. Cost transfer = as a job is completed - **[Process Costing]** \[ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_Work in Proces\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\] - Firm Type Similar Products in Uniform Processes - Cost Accumulation By the Process - WIP Inventory Separate WIP for each Process or Department - Recordkeeping Production cost report by department - Cost Transfer At end of the accounting period Practice Questions Which is least likely to use processing cost? \*Accounting Firms are least likely to use the processing cost system\* \*Categories of Product Costs are the same in Job Order and Process Costs\* Firm type = similar products in a uniform process Cost accumulation = by the process WIP inventory = Separate WIP for each process or department Record keeping = production cost report by department Cost transfer = at the end of an accounting period **[4 Step Procedure]** 1. Summarize the Physical flow of units 2. Compute output in terms of EU 3. Compute the cost per EU 4. Assign costs to units completed and the units in process - Combines past and current costs 1. WIP~BB~ 3) Transferred Out (TO) 2. New Costs 5) WIP~EB~ **\*\*NOT AN ACCURATE DEPICTION** Will NOT be on Exam **[FIFO Method]** - Separates past and current costs - Traces each to its respective units 1. WIP~BB~ Old Costs 4) Transferred Out (TO) 2. New Costs 5) WIP~EB~ XYZ Paint Co. Weighted Average Method DM - XYZ makes paint in two processes - Mixing Dept Start\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\> Finish (conversion DL+MOH) - Canning Dept - In the Mixing Department - DM are added at the beginning of the process - CC are added evenly throughout the process - WIP Sept 1= Beginning balance - 20,000 Gallons - 25% Complete for CC - Gallons of Paint Started = Total amount of New units needed to produce in sept - 92,000 Gallons - WIP Sept 30= Ending Balance - 16,000 Gallons - 30% Complete for CC **Transferred Out = Total Units - WIP~EB~** **WIP~BB~ + New Units = Total Units = WIP~EB~ + Transferred Out** - Weighted-Average Method - Combines old and new production costs - Focuses on output side - 96,000 Gallons **Completed and TO** - 100% of DM 96k EU for DM - 100% of CC 96k EU for CC - 16k Gallons in **WIP~EB\ (not\ yet\ finished)\ (consider~** two types of cost DM,CC) - 100% of DM 16k EU for DM - 30% of CC 16k \* 30% = 4,800 EU for CC **Step 2: compute output in terms of EU** Transferred Out - WIP~BB~ = **DM + CC** - DM = 16,160 - CC = 8,126 - Costs added in September - DM = 84,640 - CC = 213,634 - **WIP~BB~** = 16,160 + 8,126 = 24,286 **Compute the cost per EU** Weighted-Average Cost/EU = [(WIP Costs + Current Period Costs)] WIP BB \$16,160 \$ 8,126 \$24,286 Cost added 84,640 213,634 298,274 Total Costs From step 2 Cost/EU DM EU = 100,800 / 112,000 = \$0.90/ EU for DM CC EU = 221,760 / 100,800 = \$2.20/ EU for CC Total EU = \$3.10 / EU **Step 4 Assign cost to units completed and units in process** **DM CC Total** **[Transferred Out]** EU 96k 96k Cost Per EU [x \$0.90] [x \$ 2.20] Costs Assigned 86,400 211,200 \$297,600 **[WIP EB]** EU 16k 4,800 Cost per EU [x \$0.90] [x \$2.20] Costs Assigned 14,400 10,560 \$29,960 **Total Costs A 100,800 221,760 \$322,560** **A=Assigned\^** **\^TOTAL CC** WIP BB 24,286 **[Cont,\^]** **[Uses for Production Cost Reports]** - Controlling Costs - Evaluating Performance - Pricing Products **Practice Problem** **September** 0 Units WIP~BB~ Started 20k new units Had 4k Units in WIP~EB~ on Sep. 30 that were 25% Complete for CC 1. 0 Units (WIP~BB)~ 3) 16k (Transferred Out (TO)) 2. 20k Units (New Units) 5) 4k (WIP~EB)~ Weighted-Average Cost/EU = [(WIP Costs + Current Period Costs)] Uniformly means equally DM EU = 20k CC EU = 17k Transferred Out 16k \* 100% = 16k Transferred Out 16k \* 100% = 16k Total units 20k- Wip eb 4k = 16,000 \* 100%= 16k WIP~EB~ 4k \* 100% = 4k WIP~EB~ 4k \* 25% = 1k DM=TO 16k + WIP EB 4k = 20 EU CC=TO 16k+ WIP E Incurred Costs \$35,200 for DM \$37,400 for CC Cost/EU for DM = 35200 / 20k = \$1.76 Cost/EU for CC = 37,400 / 17k = \$2.20 DM = 16k EU \* 1.76 = 28,160 CC = 16k EU \* 2.20 = 35,200 Total Cost of Units = \$63,360 35,200 + 37,400 = 72,600 72,600 -- 63,360 = 9240 Or DM 4k EU \* 1.76 = 7020 CC 1k EU \* 2.20 = 2,220 7020 + 2,220 = 9240