Gizmo Cards - Financial Statement Analysis PDF

How does the statement of cash flow differ from the statement of income Cash flow: - Reflects cash basis rather than accrual basis of accounting - Focuses on more than just operating activities (it includes investing and financing activities) Example of statement of cash flows vs statement of inco...

How does the statement of cash flow differ from the statement of income Cash flow: - Reflects cash basis rather than accrual basis of accounting - Focuses on more than just operating activities (it includes investing and financing activities) Example of statement of cash flows vs statement of income Revenues are recognized on the statement of income when it has been earned, rather than when the cash is received from customers Easy way to remember statement of cash flows vs statement of income statement of cash flows- OIF Statement of income- revenues and expenses, focuses only on operating activities What are some typical transactions for each category of cash flows Why are cash flows from operating activities so important - they result from what the company is in the business of doing - are the source for future debt repayments - are the source for future dividends payments The categories of the direct method include: - receipts from customers - payments to suppliers - payments to employees - payments of interest - payments of income taxes Why is cash-to-cash cycle a cash flow challenge The payment received by a customer (inflow) may be used by the company to pay towards inventory (outflow) Cash also includes cash equivalents, which are.... amounts that can be easily converted into known amounts of cash What is the purpose of an internal control system To safeguard the company's assets What risks are included when customers pay on account - Customers not paying after the 30 days or whatever the time is Carrying amount =.... Full value of company's accounts receivable less the allowance for doubtful accounts What are the 2 methods to determine the bad debts amount 1. Percentage of credit sales method 2. Aging of accounts receivable method What is the most common starting point for the operating activities section in the Statement of Income Net earnings (or Net Income or Profit) Aging of Accounts Receivable method- explain - uses an aging of the various receivables as the basis for the estimate - Known as statement of financial position method Two main types of corporations: 1. Public Companies (also known as publicly Held Companies) 2. Private Companies (also known as Privately Held Companies) Difference between public and private companies Shares of public companies trade on public stock exchanges. Shares of private companies trade privately, and are not avaiable through public exchanges Financial statements are normally prepared for shareholders _______ Quarterly (every 3 months) What are the 3 categories of Business Activities 1. Financing activities 2. Investing activities 3. Operating activities A company's financing comes from 2 sources 1. Investors- through issuance of shares 2. Creditors- throuhg taking out loans or making purchases on credit A company's operating activities are related to the company's ________ Revenues and expenses 2 Basic categories of operating activities: 1. Inflows from sales to and collections from customers 2. Outflows related to payment of the expenses of the business Statement of Income Measure of a company's performance by the results of its operating activities for a month, a quarter, or a year Profit =... Income - Expenses Earnings per Share Compnay's net income divided by average number of common shares that are outstanding (owned by shareholders of company) Why is the Earnings per Share useful to shareholders It puts their investment in perspective; shows them how much money they would receive at the end of the fiscal year Statement of Changes in Equity details on how each component of shareholders' equity changed during the period; differentiating between changes that result from transactions with shareholders and those resulting from the company's operations Most common measures of liquidity is... Working Capital Working Capital =.... Current Assets - Current Liabilities Current Liabilities Liabilities that must be settled within the next 12 months Accounting Equation Assets = Liabilities + Shareholders' Equity Which Common Assets are Current and which are Non-Current Current: Cash, Short term investments, Accounts receivable, Inventory, Prepaid expenses and deposits Non-current: Property, plant, and equipment (PPE), Intangible assets, goodwill Goodwill A premium that has been paid on the acquisition of another company 3 Characteristics of a liability 1. It is a present obligation of the entity 2. Company expects to settle it thorugh an outflow of resources that represent future economic benefits 3. Obligation results from an event that has already happened Accrued Liabilities Amounts owed related to expenses that are not yet due, such as interest and warranty expense Public reporting standards vs private Public: International Financial Reporting Standards (IFRS) Private: Accounting Standards for Private Enterprises (ASPE) Focus of IFRS and ASPE (Think: needs) Focus on the needs of shareholders (current and potential) and creditors EX Confirmatory value The actual revenues compared to the projected revenue Receiving Payments from Customers as credit is accounted for in... Assets (specifically Cash and Accounts Receivable A/R) *Increased in Cash, Decreased in A/R Making payments to suppliers (at a later date) is ccounted for in... Assets (specifically Cash) and Liabilities (specifically Accounts Payable) *Both are decreased Who sets the accounting standards used in canada The Canadian Accounting Standards Board (AcSB) Cost Constraint When preparing financial statements, the benefits of reporting financial into must exceed the costs of doing so Which is more useful to users, cash basis of accounting or accrual basis of accounting? and why? Accrual basis of accounting Transactions recorded in the period in which they occur. For cash, they are only recorded when cash is actually received or paid by the company Under cash basis of accounting, revenues and expenses rae recorded.... Revenues are recorded when cash is received Expenses are recorded when the cash is paid Why is interest not accounted for at the time a loan is taken out Interest expense on a loan is incurred with the passage of time Representationally Faithful financial information must be... Complete, neutral, and free from error Enhancing Qualitative Characteristics can increase the.... Usefulness of financial info Shares issued by a company in exchange for cash is represented by... Assets (specifically cash) and Shareholders' Equity Interest costs are normally recorded at the... End of each month Since it is a contra-asset account, Allowance for Doubtful Accounts woulkd normally have a ______ balance Credit Under the accrual basis of accounting: Revenue and expenses are recorded... Revenues are recorded when they are earned Expenses are recorded when they are incurred Accounting Equation Assets = Liabilities + Shareholders' Equity Where are transactions involving assets, liabilities, and shareholders' equity recorded Various accounts At the time a loan is taken out, we account only for the _____ and not the _______ Principal, Interest In the case of a company prepaying their rent or putting down a deposit for monthly rent, are these advance payments an expense? No Expenses reduce _____ earnings Retained Earnings Purchase of Inventory is accounted for in... And why accounts payable? Assets (specifically Inventory) and Liabilities (Specifically Accounts Payable) Accounts payable because in this scenario, the comapny pays at a later date (Known as Credit Purchase) What does average collection period tell users It tells users how long it takes for a compnay to collect receivables Can private companies use IFRS Yes On the Accounting Equation, how are the numbers represented (which are in paranthesis) Decreased amounts (Like paying rent) are in parenthesis, meaning they are negative (like they subtract) Increased amounts (Like cash from shares) are just numbers by themselves Purchasing Insurance Coverage is accounted for in... Assets (specifically cash and Prepaid Insurance) *Decreased in Cash, Increased in Prepaid Insurance Shares represent the investor's ______ interest in the company Ownership Purchasing Land is accounted for in... Assets (specifically Cash and Land) *Decreased in Cash, Increased in Land What are the 2 parts of a transaction when a company sells products to a customer Part 1- accounts for sales revenue and cash/accounts receivable Part 2- accounts for inventory that has become cost of goods sold Paying Utility Costs is accounted for in... Assets (Specifically Cash) and Shareholders' Equity (Specifically Retained Earnings) *Both Decreased Paying Advertising Costs is accounted for in... Assets (specifically Cash) and Shareholders' Equity (specifically Retained Earnings) *Both are decreased Why does declaration of dividends reduce retained earnings Because dividends are actually a distribution of retained earnings Declaring and Paying Dividends is accounted for in... Assets (specifically Cash) and Shareholders' Equity (specifically Retained Earnings) *Both are decreased (think why?) 4 things you need to know to depreciate property, plant, and equipment (PPE) 1. Pattern in which the asset's economic benefits will be consumed 2. asset's cost 3. asset's estimated redicual value 4. asset's estimated useful life Process of cost allocation is known as... Depreciation Straight-Line Depreciation Assuming the asset will generate consistent revenue, the amount of depreciation expense is constant each year and would form a straight line on a graph Revenues ultimately ______ retained earnings. Why? Increase. Because they increase net income, whihc increases retained earnings _______ ultimately decrease retained earnings because they decrease net income, and a lower net income means lower retained earnings Expenses Expenses ultimately ______ retained earnings. Why? Decrease. Because they decrease net income, and a lower net income means lower retained earnings Retained earnings equation = Openingretained earnings + Net income - Dividends Declared Net Income equation = Revenues - expenses Permanent Accounts Accounts with balances that carry over from one period to the next Which accounts are permanent accounts? Asset, Liabilities, and shareholders' equity Which accounts are temporary accounts Revenue, expense, and dividends declared Accruals are required when... a company needs to recognize a revenue or expense before the receipt or payment of cash Example of accrued expenses employees that hace worked but have not yet been paid Deferrals are required when.... a company needs to recognize a revenue or expense in an accounting period after the cash has been received or paid Ending Retained earnings = ___ Beginning Retained earnings + Net income (or net loss) - Dividends Declared What are the 4 closing entries (Hint: what is the acronym) REID Revenues closed to the income summary account Expenses closed to the income summary account Income summary closed into Retained Earnings Dividends Declared closed into Retained Earnings When closing revenues, it gets closed as a _____ (debit or credit). Why? Debit. We know from CLRR that revenues are normally credit when increasing, but since we are closing to 0, it decreased. Decreased for revenues = debit. When closing expenses, it gets closed to ________ (debit or credit). Why? credit. We know from AED that expenses normally have a debit balance, but when we close it to 0, it decreases. Increase = debit. Decrease = credit Net income ______ Retained earnings (Increases or decreases) Increases Users asses a company's cash flows from investing activities to examine a company's decisions regarding.... PPE (property, plant, and equipment) When retained earnings are increased (by net income) they have a _____ balance (debit or credit) Credit When retained earnings are decreased (by net loss or dividends declared) they have a ______ balance Debit Revenues are defined as.... Increases in economic benefits from a company's ordinary operating activities Comprehensive income = Net income + other comprehensive income Gains result in.... Increases in economic benefits from activities that are outside the course of ordinary operating activities What do users consider when assessing revenues Quantity by measuring growth Quality by assessing the source of growth, and how closely revenue growth corresponds with cash flow from operating activities """Cash"" includes:" Cash on hand Bank deposits Cash equivalents Users examine a company's financing activities to asses... Decisions made by management and/or the board of directors in relation to the company's debt and equity What is the percentage of credit sales method, and what does it estimate - Estimating bad debts based on assumption that the amount of bad debts expense is a function of total sales made on credit Bad debts expense = Sales on Account * Historical % the older the receivable... the higher the likelihood the company will be unable to collect it Current ratio greater than 1 means... Company has more than $1 in current assets for every $1 of current liabilities A company is owned by its ______ Shareholders Why was there the development of financial reporting standards to minimize the differences in financial reporting across countries and to reduce the need for different sets of financial info in each country WHat does it mean that corporations are separate legal entities They can enter contracts and be sued What do public and private shares mean for the company Public shares are often widely held, meaning they are owned by a number of individuals. Some portion of their ownership will usually change hands every day Private shares are narrowly held, only a small number of people. Not easy to transfer ownership in a private company Current Assets Assets that are cahs or will become cash within the next 12 months Liabilities Amounts that the company owes to others Which Common Liabilities are Current and which are Non-Current Current: Band indebtness, Accounts payable (trade payables), Deferred revenue (unearned revenue), Dividends payable, Accrued liabilities, Income taxes payable Non-Current: Notes payable, Long-term debt, Deferred income taxes Deferred Revenue (Unearned Revenue) Amounts owed to customers for advance payments until related goods or services have been provided Statement of Cash Flows (Cash Flow Statement) Presents the flows of cash related to the three categories of business activities (remember OIF) over a period of time Operating Activities include... All inflows and outflows of cash related to the sale of goods and services Internal Users: Management Where there are numerous shareholders, they elect a _____ Board of directors Financing transactions are... Transactions that either resulted from new funds being received from investors or creditors or from the return of funds to these 2 groups Do users inside the organisation also use financial accountint information Yes, but at a different level of detail International Financial Reporting Standards (IFRS) Accounting standards that must be followed by Canadian public companies Notes Payable Amounts owed to a creditor Public companies are companies whose.... Shares trade on a Canadian public stock exchange Objective to both IFRS and ASPE Produce financial reporting that is useful to the users 4 qualitative characteristics that increase the usefulness of financial information: 1. Comparability 2. Verifiability 3. Timeliness 4. Understandability Material or materiality Critical info to user decision-making A company's investing activities are related to two things: 1. Buying and selling property, plant, and equipment 2. Buying and selling the shares of other companies Income also includes... Include EX Gains. EX, a companuy is done using a piece of equipment and decides to sell it. Consolidated Financial Statement Consolidates financial info for the main, or parent company, including financial info of all other companies that it controls (Called Subsidiary Companies) Net Earnings (Net income or Profit) Amount of company's revenue that remains after paying all its expenses, such as rent, employee cost, etc. Common Shareholders' Equity Components (2) Share capital Retained Earnings Classified Statement of Financial Position Present information in order of Liquidity Liquidity How soon something will be received, realized, or consumed, or else settled or paid What do closing entries do for a business (hint: what do they do to balances "They 0 out the temporary accounts; ""fresh start""" What is usually a contra-asset account Accumulated Depreciation Which accounts on a company's statement of financial position are permanent accounts? Assets = Liabilities + Shareholders' Equity All factors in this equation are permanent the 2 methods to determine cash flows from opertaing activities Direct and indirect method Indirect method (reconciliation method) has a starting point of... Net income Common cash flow challenges include: - Significant increases in sales volumes - Lengthy cash-to-cash cycles - Undercapitalization (or inadequate financing) Why are significant increases in sales volumes a cash flow challenge "More sales = more inventory needed. The purchase of more inventory requires cash, which can cause a company to ""grow"" themselves out of business" Who is responsible for an organizaiton's internal controls the Board of Directors What are some things that are included in an internal control system Physical controls Assignment of responsibilities Separation of duties Independent Verification Documentation Where possible, which duties should be separated Transaction authorization Recording of transactions Asset custody What are the limitations of internal control Cost/benefit considerations Human error Collusion Management override Changing circumstances Why is bank reconciliation important Business owners and managers are assured that: 1. Every transaction recorded by the bank has also been recorded by the company, or the reason why not has been explained 2. Every transaction recorded by the company in its cash account(s) has also been recorded by the bank, or the reason why not has been explained What is an example of why some records may not be recorded by the bank but is recorded by you, or vice versa EX. a cheque has been written and mailed out by the company, but has yet to be deposited by the recipient. Therefore, the bank is not aware of it until it is deposited. What should the format of a bank reconciliation include (answer will be a picture) Do notes payable have interest yes Example for bank reconciliation: The bank statement showed $500 was deducted from the company's account by the bank as a payment of loan principal. the payment was not recorded in the compnay's ledger at the time of payment. What adjustments need to be made Since the bank knows this happened, but the company does not, we need to adjust the company side. Deferred Income Taxes Amounts representing probably future taxes the company will have to pay Do the reconciled balances on the bank and company side need to equal to each other Yes Why would companies sell on account - Increase total sales - Remain competitive - Generate additional forms of revenue (EX interest income) Costs companies may incur when selling on account - Bad debts expense - Wages for creditgranting function - Wages for collections function What are the steps for the allowance method of accounting for bad debts "1. Establish the allowance and recording the bad debts expense - Debit Bad debts expense, since the money owed by the customers is increasing. remember AED - Credit Allowance for Doubtful Accounts, since this is where the money will come from to pay for the expense 2. Writing off a specific receivable (Writeoff Entry) - This happens if the amount is deemed uncollectible; that the customer will not be paying this - Debit allowance, since the customer is giving money - Credit Accounts Receivable, since their debt is be... Equation to find bad debts expense Bad debts expense = sales on account * Historical % What is the direct writeoff method companies recognize that a customer is not going to pay, so a company writes it off Current Ratio = Current assets/Current liabilities What are the three different inventory classifications 1. Raw Materials 2. work-in-process 3. finished goods Can company's reflect both predictive and confirmatory value Yes If our revenues exceeded our expenses, we have a ________. If our expenses exceeded our revenues, we have a ___________. Net income. Net loss. Conceptual Framework An underlying set of objectives and concepts that guide accounting standards; justifying new standards an drevising old ones International Accounting Standards Board (IASB) Responisble for ongoing development of IFRS EX of predictive value Seeing this years sales, what will next years be? The concept of materiality is _______ Company-specific Materiality is assessed from a ______ and _______ perspective Qualitative (measured in dollars) and Quantitative (measured in context) Who do Financial statement Users include The owners (referred to as investors) Those who have lent money to the organization (Referred to as creditors) What are owners referred to Investors Who are Creditors Those who have lent money to the organization Corporations are owned by _____ Shareholders "What does ""Limited"" or ""Ltd."" mean" The company has limited legal liability How are employees creditors They work and then receive payment Financial Accounting is sometimes referred to as.... Why? External Financial Reporting. it focuses on providing accounting information to external decision makers What is the primary purpose of financial accounting information To aid the Financial Statement Users in their economic decision making relative to the organization Business Stakeholders = ________ Financial Statement Users Examples of Business Stakeholders Creditors, Stock Exchange Regulators, Management, Employees, etc. External Users: Shareholders, board of directors, Potential investors, Creditors, Regulators, Taxing authorities, Other corps including competitors, Securities (stock) analysts, Credit-rating agencies, labor unions, journalists A private company has ______ shareholders and a public company has ________ shareholders 1, Many thousands Financial Accounting Process by which information on the transactions of an organization is captured, analyzed, and used to report to decision makers outside of the organization's management team What are External decision makers referred to Financial Statement Users Who are users inside the organization Management Managerial Accounting all the organization's financial information \, including indormation that is never shared with those outside of the organization Financial Statements Management's reports to the company's owners that are produced at the end of each accounting period What does a board of directors do Represent the interests of the shareholders What is the responsibility of board of directors Overseeing the management team hired to operate the company Two major groups of creditors 1. Financial institutions and other lenders 2. Suppliers, employees, and the various levels of government Dividends Payments made by a company that distribute a portion of the company's profits to shareholders Gain or increase in value of selling shares to other investors is known as _______ Capital Appreciation Shareholders' Equity Funds that flow into the company from issuing shares to its shareholders When can a compnay seek funding from a second primary financing source (creditors) Once a company has some shareholders equity Retained Earnings Any profits that are kept or retained by the company Gross Profit (Gross Margin) Difference between revenue received vs amount the goods cost to the seller Share Capital Shares issued by company Current vs Non-Current Current- Within 12 months Non-current - Past 12 months Common Shares Share certificates that shareholders receive in exchange for cash or other assets Corporations vs other forms of business "Corporations are legally distinct from their owners (this is where ""Limited"" or ""Ltd."" comes from)" In the even the company fails, the liability of shareholders is limited to... Their investment in the corporation Shareholders are not typically involved in day to day operations, except in _____ Small private corporations Communication between shareholders, board of directors, and management Shareholders -> board -> management 2 ways shares generate a return 1. Dividends 2. Selling their shares to other investors Typical Financing Activities Inflows: Borrowing money, Issuing shares Outflows: Repaying loan principal, Paying dividends Typical Investing Activities: Inflows: Proceeds from the sale of property, plant, and equipment. Proceeds from the sale of shares of other companies Outflows: Purchase of property, plant, and equipment. Purchase of shares of other companies Profit is also known as Net income, net earnings, or earnings Net loss Expenses for the period exceed the income earned Do all canadian companies use the same accounting standards No Statement of Income is also known as the... Statement of operations Statement of net earnings Statement of earnings Statement of profit or loss Income Increases in economic benefits; money or other resourcse that flow into the company due to activities such as sales or sale of goods Expenses Decreases in economic benefits; Money or other resources that flow out of the company Expenses also include.... Include EX Losses. EX Company sells used equipment but the gain is less than what it cost to buy the machinary Subsidiary Company A company that is controlled by a main, or parent, company Comparative Information Results of both the current and preceding period Statement of Changes in Equity is also known as Statement of Shareholders' Equity Statement of Changes in Shareholders' Equity Statement of Equity Accounting Equation Definition Equation that provides structure to the statement of financial position 3 Characteristics of an Asset 1. Resource controlled by an entity 2. Company expects future economic benefits from the use or sale of the resource 3. Event gave company control of the resource has already happened Accounts Receivable Amounts owed to company by its customers as a result of credit sales What are the 4 financial statements Statement of income Statement of changes in equity Statement of financial position Statement of cash flows Typical activities in Financing activities: Issuance of shares, proceeds of new borrowings, repayment of debt, or payment of dividends Investing Activities generally include: Purchase and sale of long-term assets such as property, plant, and equipment (PPE) Immaterial Info that would not affect the user's decisions Objectives for the frameworks of IASB and AcSB To assist the organizaitons as they develop new financial reporting standards To assist accountants in determining how to account fo ritems for which no specific accounting standards have been developed To assist users in their interpretation of the info contained in financial statements Fundamental Qualitative Characteristics They are essential if financial information is to be considered useful and, without them, the info is useless Predictive Value Info that users can use as basis fo rdeveloping expectations about the company's future Confirmatory Value Provides feedback to users on their previous assessments of the company ________ ultimately increase retainted earnings because they increase net income, which increases retained earnings Revenues Lower net income = _____ Lower retianed earnings The two broad types of accounting reports that management prepares: 1: Reports for internal use only (used by management): known as Managerial Accounting. Purpose: inform decision-making 2. Reports for external use (used by others outside the organization): known as Financial Accounting. Purpose: help external users make decisions EX for cash vs accrual basis of accounting EX tuition payment for the fall. Cash: the payment would only account for September, but not for the other months Accrual: the payment would span through all months of the fall semester. So say you pay tuition for 15 weeks, September would be 4/15, October 4/15, etc. In various accounts, we can find transactions such as.... Assets, liabilities, and shareholders' equity Is issuance of shares considered revenue to a company. why? No. It is not related to the sale of goods or services to customers Purchasing equipment is accounted for in... Asets (specifically cash and equipment) * Decreases for Cash, Increases for Equipment Recording Insurance Expense is accounted for in... Assets (specifically Prepaid Insurance) and Shareholders' Equity (specifically Retained Earnings) *Both are decreased Profit margin = _____ Net income / sales revenue Net book value (Carrying amount) the portion of equipment's cost that has yet to be expensed How do we use ratios (what do we compare) We compare different years _______ and ______ ______ accounts normally have a credit balance Liabilities and shareholders' equity what are the 3 things to look out for when using the accounting equation to analyze and record transactions 1. Every transaction must affect at least 2 accounts 2. Each line must balance (the effects to the asset side must be EQUAL to the effects on the liabilities an dshareholders' equity side) 3. Each entry in teh retained earnings column must be accompanies with an entry in the final column indicating whether it reults from a revenue, an expense, or the declaration of a dividend Taking out a bank loan is accounted for in.... Assets (specifically cash) and Liabilities (specifically bank loan payable) Maying rent for the month is accounted for in.... Assets (specifically cash) and Shareholders' Equity (Specifically Retained Earnings) Cash normally has a _____ balance Debit To record a decrease in the cash account, we would _________ it Credit Dividends declared will normally have a _____ balance. Why? Debit. Dividends declared decreases retained earnings. Paying Wages is accounted for in... Assets (Specifically Cash) and Shareholders' Equity (Specifically Retained Earnings) * Both are decreased Straight-Line Depreciation Expense equation (Original Cost - Estimated Residual Value) / Estimated Useful Life Components that make up the straight-line depreciation expense Original cost Estimated residual value Estimated useful life Recording depreciation expense on equipment is accounted for in... Assets (Specifically Equipment) and Shareholders' Equity (Specifically Retained Earnings) *Both are decreased (think why?) Ending Retained Earnings = ____ Beginning retained earings + net income - dividends declared Beginning retained earnings + net income - dividends declared = ______ Ending retained earnings Investing activities are normally expected to result in a net _____ of cast (therefore have a ____ effect on cash) outflow, negative Financing activities are normally expected to result in a net ____ of cash (therefore have a ____ effect on cash) Inflow, Positive Liabilities and shareholders' equity accounts normally have a ______ balance Credit Estimated Residual Value The amount the company estimates it may be able to recover from the disposal of the asset when the company is finished using it Recording Interest Expense is accounted for in.... Liabilities (Specifically Interest Payable) and Shareholders' Equity (Specifically Retained Earnings) *Interest payable increased, Retained earnings decreased Calculation to find monthly interest payment on a loan Loan Principle Outstanding (How much you loaned from the bank) * Interest Rate * 1/12 Return on assets = _____ net income / average total assets Return on equity = _____ Net income / average total shareholders' equity Operating Activities are normally expected to result in a net ____ of cast (therefore have a _____ effect on cash) Inflow, Positive Limitation to the template method (NOT the double entry method) Limits the information management can capture and analyze in managing the business How does double-entry accounting system overcome the limitation of limiting information It enables business to capture transaction details while making it easy to summarize information by account Asset account's normally have a _____ balance Debit _______ account's normaly have a debit balance Asset To record an increase in the Accounts Payable account, we would _______ it Credit Dividends declared ________ retained earnings. Why? Decrease. Because they are a distribution of retained earnings To record a decrease in Accounts Payable, we would ________ it Debit Accounts Payable- When we add up all the debits and credits, why would we expect to more credits than debits? Because this account normally has a credit balance Cash- when tallying up debits and credits, why would we expect more debits than credits? Because this account normally has a debit balance Increases in accounts are recorded in... EX The same way as teh account's normal balances. EX revenue accounts normally have credit balances, so increases will be recorded as credit Temporary Accounts Acounts with balances that are clsoed at the end of each accounting cycle or period Example of defferals Prepaid rent Key points for adjusting journal entries They never involve cash They are made at the end of each accounting period Does a contra-asset account normally have a credit balance or debit balance credit balance Revenue accounts weill normally have a ________ balance. why? Credit. Because they increase retained earnings Quick Ratio = (Current assets - Inventory - Prepaid expenses) / Current liabilities What does quick ratio find basically same as current ratio, but only uses assets that are liquid at the moment (so quick ration excludes inventory and prepaid expenses, which can not be quickly converted into cash) Is the AcSB responsible for the standards of both private and public companies Yes Retained Earnings represent... Company's profits (revenues - Expenses) that have been reinvested in the business, rather than being distributed ot the shareholders as dividends The total dollar value of _______ must be equal to the total dollar value of ________ Debits, Credits All credit entries must be _______ (what format) Indented General journal vs general ledger General journal- Contains detailed info on each transaction General ledger- Contains summary information for each account Adjusting Entries- what are the 2 broad categories Accruals and Deferrals What is carrying amount of PPE its cost - accumulated depreciation Why are closing entries necessary They are required to transfer the balances in the temporary accounts (Remember REID) to retained earnings When dividends declared are closed, they have a ______ balance? Why? What affect does it have on retained earnings? Credit. From AED, we know dividends declared normally have a debit balance (increase). Since we are closing them (decreasing) we credit them. Therefore, retained earnings are debited Statement of Financial position (Balance Sheet) Resources controlled by a company (assets) and the claims on those resources (by creditors and investors) at a given point in time Why are retained earnings debited when we close dividends declared? Dividends declared are a distribution of earnings. So, since we are distributing earnings, this means retained earnings are decreased, meaning debit balance. What is the primary focus of most financial statement users (Hint: what activity) Operating activities Accounts receivable are amounts due typically within... 30 days What are the 5 steps of the multi-step statement of income 1. Sales revenue (or revenue) 2. Gross profit (or gross margin)- difference between sales revenue and cost of goods sold 3. Profit from operations- difference between gross profit and company's operating expenses (such as advertising, rent, ect.) 4. Profit before income tax expense (or income before income taxes)- factors in all company's non-operating activities 5. Net income (loss or profit)- Income tax expense is subtracted from profit before income tax to arrive at net income/loss Comprehensive income The total change in the shareholders' equity (or net assets) of the enterprise from non-owner sources How does understanding the cash flow in and out of a company help users? helps them: - Assess the company's ability to generate cash flows from its core operations - Evaluate the cash flows the company has been able to obtain from investors (through the issuance of new shares) and creditors (through new borrowings) - Assess the extent to which the company has invested cash to replace or add revenue-generating assets such as property, plant, and equipment - Determine the amount of cash that the company has used to repay debt - Evaluate the amount of cash dividends distributed to shareholders,... What is allowance for doubtful accounts, and what is a key thing about it and what does that account mean (Hint: what account) Represents management's best estimate of the total accounts receivable that it does not expect to be able to collect (the amount that customers don't pay after paying on credit) It is a contra-asset account, meaning it is associated with another asset account What are quick assets "Assets that are liquid once received (EX inventory is NOT a quick asset because it takes time for it to be sold and become ""Cash"")" Accounts receivable turnover ratio = Credit sales / Average accounts receivable Calculating this ratio from financial statement data usually requires you to assume all sales are ______ sales Credit What does the Accounts Receivable Turnover Ratio tell users It tells users how often a company collects its receivables Average Collection Period = 365 days / Accounts receivable turnover Expenses reduce _____ Retained Earnings Receiving payments from customers- when customers pay by credit, how does it look on the accounting equation Decreased in A/R and increased in Cash (Think: It moves from A/R to Cash) _________ ________ decrease retained earnings because they are a distribution of retained earnings Dividends declared Expense accounts will normally have a _______ balance. Why? debit. Because expense accounts decrease retained earnings To increase in the Cash account, we would ____ it Debit Net loss ________ Retained earnings (increases or decreases) Decreases Percentage of credit sales method- explain - uses sales on account as basis for estimate - known as Statement of Income Method because it is based on info from the statement of income Single-step statement of income vs multi-step statement of income? Single-step: - all items of revenues are presented first, followed by expenses - the revenues - expenses is used in the last step to calculate net income/loss Multi-Step: - requires several steps to reach net income/loss - includes 5 steps - makes analysis easier for users since it shows gross profit and profit from operating activities What type of account is allowance for doubtful accounts Contra-asset Statement of income- what is the main equation that helps us?
 Net income = Revenues - expenses Statement of changes in equity- what are the main equations that help us? Common shares (end) = Common shares (beginning) + Common Shares issued (sold) - Common shares Repurchased Retained Earnings (end) = Retained Earnings (beginning) + Net income - Dividends Declared Statement of Financial Position- What is the main equation that helps us?
 Assets = Liabilities + Shareholders Equity (Shareholders Equity = Share capital + Retained Earnings) Statement of Cash Flows- what is a key thing that helps us remember this statement?
 OIF, shows cash for all activities (Operating, Investing, Financing) Public corporations use what type of accounting standards?
 IFRS- International Financial Reporting Standards What are the users of accounting?
 Internal and External Users Example of internal users: employees, company officers, managers and directors in finance, human resources, marketing Examples of external users: Potential investors, lenders, stock analyst, customers, suppliers, government agencies Prescriptive Analytics - suggests how to make decisions that lead to desired outcomes. Four most common types of data analytics Descriptive Diagnostic Predictive Prescriptive Descriptive Analytics - describes what happened in the past. Diagnostic Analytics - explains why something happened in the past. Predictive Analytics - predicts what will happen in the future based on historical information. Forms of Business Organizations: Proprietorship Partnership Corporation Explain Proprietorship: Owned by one person Simple Unlimited Liability Limited life (owner dies = business dies Income tax paid by owner Explain Partnership: Owned by more than 1 person (must sign partnership agreement) Limited life (Owners die = business dies) Each partner has unlimited liability Moderate Income tax paid by individual partners IFRS stands for: International Financial Reporting Standards ASPE stands for: Accounting Standards for Private Enterprises Private corporations use what type of accounting standards?
 ASPE- Accounting Standards for Private Enterprises Can Private corporations use IFRS?
 They can but once they use it, it has to be used every time after that Proprietorships and partnerships generally follow ASPE for external reporting. What standards do proprietorships and partnerships follow for internal use?
 not required to follow any particular standards for internal use ASPE is used by Canada only, while IFRS is used by basically the whole world (what countries) three types of business activities? Operations 2. Investing 3. Financing Financing activities (think debt): Cash flows from debt or equity financing Issuing or repurchasing shares Paying dividends Borrowing or repaying debt Investing Activities (Think Immortal): Related to purchase or sale of long-lived assets Land, building, equipment PPE (property, plant, equipment) Operating activities (think day to day): Cash flows related to its revenues and expenses Intangible Assets- assets with no physical substance, but are a privilege or a right granted to/held by a company Examples of Intangible Assets: Goodwill, Brand Name, Patents, Copyrights, and Trade Secrets Accounts Receivable- Amounts owed to a company for goods and services delivered but not yet paid for by customers What are the 4 financial statements? Statement of income Statement of changes in equity Statement of financial position Statement of cash flows Order of preparation of statements: Statement of income Statement of changes in equity Statement of financial position Statement of cash flows Net Income = Revenues - Expenses This is a statement of income Statement of Changes in Equity: shows the changes in Share capital Retained earnings/deficit Other shareholders' accounts Share capital- amounts contributed by shareholders Retained earnings- net income retained LESS any dividends paid to shareholders (this amount is put back into the company) Common shares end of period = common shares beginning of period + common shares issued (sold) - common shares repurchased Retained earnings end of period = retained earnings beginning of period + net income - dividends declared This is a statement of Changes in Equity Shareholders Equity = share capital + Retained Earnings Assets = Liabilities + Shareholders Equity What is the Accounting Equation?
 Assets = Liabilities + Shareholders Equity This is a Statement of Financial Position Statement of Cash Flows shows net increase or decrease in cash for the period Statement of Cash Flows report the effect on cash related to the company's Operating, Investing, and Financing Activities This is a statement of Cash Flows What is the relationship between the statements? Net income from Statement of Income -> Statement of Changes in Equity Shareholders equity from Statement of changes in Equity -> Statement of Financial Position Cash from Statement of Financial Position -> Statement of Cash Flows Operating Activities: Inflows: Sales to customers Collections of amounts owed by customers Outflows: Purchases of inventory Payments of amounts owed to suppliers Payments of expenses (Rent, Wages, etc) Payments of taxes owed to the government Investing Activities: Inflows: Proceeds from sale of PPE Proceeds from the sale of shares of other companies Outflows: Purchase of PPE Purchase of shares of other companies Financing Activities: Inflows: Borrowing Money Issuing Shares Outflows: Repaying Loan Principal Paying Dividends Explain Corporation: Separate legal entity owned by shareholders (owners of shares) Indefinite life Shareholders enjoy limited liability (restricted by the number of shares the shareholder holds) May be public or private Corporation pays income tax Intellectual Capital is the foundation of organization performance What are developments in information tech reshaping?
 Organizations, Changing the nature of work, increasing value of knowledge workers Intellectual Capital Equation: Capital = Competency x Commitment Knowledge Workers are important because their minds are filled with creativity and insight, making them critical assets Intellectual Capital- the combined brainpower and knowledge of an organization's employees Who dominates workplaces in today's age with all the new changes to information and tech?
 Knowledge Workers Key points about the Fourth Industrial Age we are currently in: Many changes driven by cloud, internet, automation, robotics, and AI High Tech IQ must be maintained due to these changes Globalization- worldwide interdependence of resource flows, product markets, and business competition What is one controversial consequence of globalization?
 Job Migration- the shifting of jobs from one country to another What is a Key Component in a Free-Agent Economy?
 Self Management Organizations must value the talents of a workforce whose members are diverse with respect to gender, race, ethnicity, age, and other characteristics. All organizations are open systems Why would a company be Reshoring?
 The increase in cost (Think: rise in transportation cost, increased labor cost, etc) What is the opposite of Job Migration?
 Reshoring- shifting jobs from overseas to back home Glass Ceiling Effect- an invisible barrier/ceiling that prevents women and visible minorities from rising to top jobs What is an indicator of Ethics? (Ethics Indicator)
 Corporate Governance Corporate Governance- active oversight of top management decisions, strategy, and financial reporting by company's board of directors Skills that must be had and maintained in a Free-Agent Economy: Mastery Networking Entrepreneurship Technology Marketing Renewal Free-Agent Economy- economy where people change jobs more often and work on flexible contracts with shifting mix of employers over time How do open systems benefit organizations? They show how well an organization is doing Helps gather customer feedback Explain the Shamrock analogy (Think: Leaves) First Leaf- Core group of permanent full-time employees Second Leaf- "Freelancers" and "Independent contractors" Third Leaf- Temporary part-timers How do organizations create value?
 By providing products or services that meet the needs and desires of customers. Open Systems Flow (Think inputs, outputs, process): Resource inputs -> Transformation process -> Product outputs -> Consumer Feedback -> the beginning Performance Effectiveness- output measure of task orr goal accomplishment Performance Efficiency- input measure of resource costs associated with goal accomplishment How does one measure performance by and/or within organizations?
 Productivity How are you going to remember Top Managers?
 C-Suite Performance Effectiveness = Goal Accomplishment Some Organizational trends and transitions relevant to management: Focus on Valuing Human Capital Demise of "Command-and-Control" Emphasis on Teamwork Pre-Eminence of Tech Importance of Networking New Workforce Expectations Concern for Sustainability Performance Efficiency = resource utilization Levels of Managers (in order top to bottom): Board of Directors (non-profit = Board of Trustees) Top Managers Middle Managers First Line Managers Examples of Top Managers: Chief Executive Officer (CEO) Chief Operating Officer (COO) Chief Information Officer (CIO) Responsibilities of Top Managers: Performance of organization as a whole or one of its larger parts Set strategy and lead organization to follow its purpose and mission Pay attention to external environment Be alert to potential long-run problems and opportunities Basic Responsibilities of Board of Directors/Board of Trustees: make sure everything is run smoothly and managed in a lawful and ethical manner Responsibilities of Middle Managers: In charge of relatively large departments or divisions consisting of smaller work units Examples of Middle Managers: Clinic Directors at Hospitals Division Managers Regional Sales Managers Job Description you would see for Middle Managers: Working with Top Managers Coordinating with peers Supporting lower level team members First-Line Managers- in charge of non-managerial workers Examples of First-Line Managers: Team Lead Supervisor Department Head Types of Managers: Line Managers Staff Managers Functional Managers General Managers Line Managers- oversee work that directly contributes to organization's outputs Staff Managers- use knowledge to advise and support efforts of Line Workers Functional Managers- responsible for single area of activity, such as production, finance, marketing, and human resources Examples of Staff Managers: Corporate director of HR CFO Examples of Line Managers: President Retail Manager Department Supervisors General Managers- responsible for activities over various areas Accountability flows upwards in organizational structure QWL- Quality of Work LIfe What does High-QWL entail?
 Respect, fair pay, safe conditions room to grow and progress in a career, protection of individual rights and wellness Explain the main idea behind the Upside-Down Pyramid: Members like C-Suites executives and top managers are at the bottom, to support their operating and front-line workers, who are at the top Good at coaching and supporting others, rather than directing and giving orders Administrators are managers in public or non-profit organizations 4 Management Process Functions: Planning- setting objectives Organizing- assigning tasks Leading- inspiring people Controlling- measuring performance Managerial success also requires ability to build interpersonal networks and use them to accomplish well-selected task agendas 3 roles commonly filled by managers: Interpersonal Roles- interaction with other people Informational Roles- Exchanging + Processing of info Decisional Roles- using info to make decisions What are the essential skills of managers? Technical Skills Human Skills Conceptual Skills Conceptual Skills gain importance at higher levels Human skills are equally important for all management levels Technical skills gain importance at lower levels Current Assets: Cash Trading Investments Accounts Receivable Notes Receivable Inventory Supplies Prepaid Expenses Non-Current Assets: Long Term Investments Property, plant, and equipment (PPE) Intangible Assets Goodwill Current Liabilities: Bank Indebtedness Accounts Payable Deferred Revenue Notes Payable Current portion of long term debt Non Current Liabilities: Notes Payable Bank Loan Payable Shareholders Equity: Share Capital Retained Earnings Current vs Non Current: Current are those that are expected to be used up within a year. Non Current are those that are expected to be used up beyond a year. Land has an indefinite life, therefore it does not depreciate Operating Cycle- average time between when business pays cash to obtain products or services, and when it receives cash from customers for these products or services Deferred Revenue- cash has been received, but goods and services have not been provided yet Equity Securities- shares of other companies Assets are usually listed in order of liquidity on statements PPE is usually listed in order of permanency IFRS uses the term depreciation for depreciable tangible assets, and the term amortization for intangible assets with definite lives ASPE uses the term amortization for both tangible and intangible assets with definite lives Example of notes for Non Current Liabilities (EX Mortgage): Maturity Date Interest Rate Carrying Amount = Cost of Asset - Accumulated Depreciation Goodwill has indefinite life, therefore is not amortized Goodwill is reported separately from other intangibles Bank Indebtedness- Short term loan from bank Accounts Payable- amounts owed to suppliers Non Current Liabilities usually have extensive notes to financial statements What are the 3 different types of comparisons that help aid in analyses? Intracompany Comparisons Intercompany Comparisons Industry Average Comparison Intracompany Comparisons- comparing two or more periods within the same company Intercompany comparisons- comparing company vs competitors Industry Average Comparison- based on averages for particular industries The higher the Current Ratio, the better. Why?
 Lenders will look at the ratios to see if the company can pay off its debts Liquidity Ratios shows the ability of a business to pay its short-term debts. Current Ratio= Current Assets / Current Liabilities Working Capital= Current Assets - Current Liabilities (+) Working Capital = greater likelihood company will be able to pay its current liabilities (-) Working Capital = Company may have to borrow money Where would users pull numbers for liquidity ratios?
 Statement of Financial Position What are the equations for liquidity ratios?
 Working Capital = Current Assets - Current Liabilities Current Ratio = Current Assets / Current Liabilities Solvency Ratio shows company's survival rate over a long period of time Debt to Total Assets = Total Liabilities (due to lenders) / Total Assets The Lower the debt to total assets, the better. Why?
 Shows debts can be repaid when they are due Where would users pull numbers for solvency ratios?
 Statement of Financial Position What is the equation for solvency ratios?
 Debt to Total Assets = Total Liabilities/Total Assets Profitability ratios show the income or operating success of a company for a period of time (usually a year) Profitability ratio essentially shows what is available to shareholders Basic Earnings(Loss) Per Share = Income available to common shareholders / weighted average number of common shares Price Earnings Ratio = Market price per share / basic earnings per share The higher price earnings ratio the better. Why?
 Shows investors are expecting higher earnings growth What are the equations for profitability ratios?
 Basic earnings (loss) per share = income available to common shareholders / weighted average number of common shares Price earnings ratio = market price per share / basic earnings per share What is the objective of financial reporting?
 To provide useful financial information that is useful for users Qualitative Characteristics of Useful Financial Information: Relevance Faithful Representation Key points of Relevance as a Qualitative Characteristic: May have Predictive and/or Confirmatory Value Materiality is important Usefulness; makes a difference in users decisions 4 things that enhance qualitative characteristics: Comparability Verifiability Timeliness Understandability Comparability- different companies use the same accounting policies and methods to prepare their financial statements. Verifiability- independent consensus that information is faithfully represented Timeliness- available before it loses its usefulness in decision making Understandability- classified, characterized, and presented clearly and concisely Cost constraint- the benefit of financial reporting must outweigh the cost of preparing financial statements Going Concern- The assumption that a business will continue to operate for the foreseeable future. Historical Cost- the cost of assets/liabilities when they were acquired Fair Value- the cost of assets/liabilities if they were to be acquired today Historical Cost vs Fair Value example (house in 2010) Historical Cost- what the house was bought for in 2010 Fair Value- what the house is worth in 2024 Amortization- depreciation for intangible assets Accounts Receivable/Payable vs Notes Receivable/Payable: Accounts Receivable/Payable do not bear any interest Notes Receivable/Payable bear interest Accumulated Depreciation is a contra asset account Key points of Faithful Representation as a Qualitative Characteristic: Must be complete, neutral, and free from error Should reflect economic reality What are some disadvantages to Bureaucratic Organizations? Excessive paperwork Slow in handling problems Rigidity in face of shifting customer needs High resistance to change Employee apathy Frederick Taylor- 4 guiding principles of Scientific Management: Develop a "science", including rules of motion, standardized work implements, and proper working conditions for every job Select workers with the right abilities for the job Train workers to do the job, and give incentives Support workers, and help plan their tasks Henri Fayol- Rules/duties of management: Foresight Organization Command Coordination Control Henri Fayol- Think: POLC Planning Organizing Leading Controlling Max Weber- Characteristics of Bureaucratic Organizations: Clear division of labor Clear hierarchy of authority Formal rules and procedures Impersonality (no bias/favoritism) Careers based on merit McGregor- Theory X vs Theory Y, describe the workers in each theory Theory X- workers are assumed to be lazy and resist change Theory Y- workers are assumed to be hard workers, and are imaginative and creative TQM stands for Total Quality Management In Theory X, how will managers act?
 Command and control, top down In Theory Y, how will managers act?
 Give freedom, and give responsibilities to workers Quality- Continuous improvement is important for entire organization What is the focus of TQ (Total Quality Management)?
 Meeting customer needs by doing things right the first time ISO Certification- what is it?
 Global quality management standards Evidence Based Management- what are some key points? "hard facts" Managers are well-informed and knowledgeable when making decisions Contingency Thinking- what is it?
 The appropriate way to solve problems depends on the situation Chris Argyris- adults may react negatively when restricted by strict management practices and rigid organizational structures Managers should shift from Theory X thinking to Theory Y thinking. Why?
 Viewpoint will shift to see people as independent, responsible, and capable of self-direction Maslow- what is the focus?
 Managers who understand and help workers satisfy their needs at work get more productivity out of employees Maslow- what are the order of needs from highest to lowest?
 Self-actualization, esteem, social, safety, physiological T Account- Debits are on the left side, Credits are on the right side An account has a credit balance when Credit amounts > Debit amounts An account has a debit balance when Debits amounts > Credits amounts Liabilities are normally a credit account. What does this mean?
 Credit for increase, debit for decrease What accounts are found in Shareholders' Equity? (For T Accounts)
 Common Shares, Retained Earnings, Revenues, Expenses, Dividends Declared Common Shares is normally a credit account. What does this mean?
 Credit for increase, debit for decrease Assets are normally a debit account. What does this mean?
 Debit for increase, credit for decrease Retained Earnings is normally a credit account. What does this mean?
 Credit for increase, debit for decrease Expenses is normally a debit account. What does this mean?
 Debit for increase, credit for decrease Dividends Declared is normally a debit account. What does this mean?
 Debit for increase, credit for decrease Revenue is normally a credit account. What does this mean?
 Credit for increase, debit for decrease We know Shareholders Equity = Common Shares + Retained Earnings, and Retained earnings = Net income - Dividends Declared. So, to expand this equation, Shareholders Equity = ?
 Common shares + Retained Earnings + Revenues - Expenses - Dividends Declared Limitations to Trial Balance: Does not prove the general ledger is correct EX Missing transactions, incorrect account(s), duplicate postings Journal Entry Formatting- Credits are indented Since revenues and expenses are temporary accounts, they get closed to Income Summary Closing process- after closing revenues and expenses, if expenses > revenues, the Income Summary account will have a debit balance Types of Prepayments: Prepaid expenses Deferred revenues Types of Accruals: Accrued expenses Accrued revenues Temporary vs Permanent Accounts: Temporary accounts are reset (closed) Permanent accounts carry into the future Which accounts are temporary accounts?
 Revenues, expenses, dividends declared (They are all components of retained earnings) Which accounts are permanent accounts?
 Assets, Liabilities, shareholders' equity Closing process- Revenue accounts: Debit revenue accounts Credit income summary Closing process-Expense accounts: Debit income summary for total expense amount Credit each expense account for its balance Closing process- Dividends Declared account: Debit retained earnings Credit dividends declared Statement of financial position accounts carry into the future. This means assets, liabilities, and shareholders' equity are permanent accounts Cash Basis of accounting: Revenue recorded only when cash is received Expenses recorded only when cash is paid Accrual Basis of accounting: Revenues recorded when earned, even if cash has not been received (EX sales on account) Expenses recorded when goods or services are consumed or used, rather than when cash is paid (EX Supplies) Expense accounts normally have a debit balance. So we need to credit expenses to close it. Then the accounts will have 0 balances and the accounts will be transferred to the Income Summary account Revenue accounts normally have a credit balance. So we need to debit revenues to close it. Then the accounts will have 0 balances and the accounts will be transferred to the Income Summary account Closing process- after closing revenues and expenses, if revenues > expenses, the Income Summary account will have a credit balance The Income Summary account balance is equal to net income Closing Income Summary- if income summary account has a credit balance, we would debit income summary account and credit retained earnings Closing Income Summary- if income summary account has a debit balance, we would credit income summary account and debit retained earnings Revenue and Expense accounts get closed to Income Summary Income Summary gets closed to Retained Earnings Dividends Declared gets closed to Retained Earnings Dividends declared normally have a debit balance, so we need to credit it to closed it. This also means Retained earnings needs to be debited to bring the balance to 0 External Environment of Organizations: Economic Legal-political Socio-cultural Technological Natural Environment Environmental Uncertainty- lack of complete information regarding what exists and what developments may occur in the environment What are the 2 dimensions of environmental uncertainty? Degree of Complexity Rate of change Social Business Innovations- find ways to use business models to address important social problems; focus on critical social issues Disruptive Innovation- products/services that were created that became so widely used that they largely replaced prior practices and competitors (EX MP3 players disrupted CDs and cassettes) Triple Bottom Line: what are the 3 P's of organizational performance? Profit People Planet What are the competencies managers must have? Technological Competency Information Competency Analytical Competency Characteristics of useful information: Timely High quality Complete Relevant Understandable Data Mining- process of analyzing data to produce useful information for decision-makers Big Data- exists in huge quantities; difficult to process without mathematical and analytical techniques Management Analytics (Business Analytics)- systematic evaluation and analysis of data to make informed decisions The 5 V's of Big Data- what do they explain?
 They explain how to get to most out of data in solving critical problems and pursuing attractive opportunities The 5 V's of Big Data- what are they?
 Volume Variety Veracity Velocity Value Multi-dimensional thinking applies both intuitive and systematic thinking Systematic thinking- rational, analytical, step-by-step Intuitive Thinking- flexible and spontaneous What type of decisions help solve structured problems?
 Programmed Decisions Structured Problems- ones that are familiar, straightforward, and clear with respect to information needs Programmed Decisions- apply solutions that are readily available from past experiences to solve structured problems Unstructured problems- ones that are full of ambiguities and information deficiencies Non-programmed decisions- apply a specific solution to meet the demands of a unique problem What type of decisions help solve unstructured problems?
 Non-programmed decisions Risk Environment- lacks complete information but offers probabilities of the likely outcomes for possible action alternatives Certain Environment- offers complete factual info on possible action alternatives and their consequences Uncertain Environment- lacks so much information that it is difficult to assign probabilities to the likely outcomes of alternatives Certain Environment- risk of failure and type of decision Low risk Programmed decision Uncertain Environment- risk of failure and type of decision High risk Nonprogrammed decision Steps in decision-making process: Step 1- find and define the problem Step 2- Generate and evaluate alternative solutions Step 3- Choose preferred course of action Step 4- Implement decision Step 5- Evaluate results Classic Model vs Behavioral Model in decision making Classic Model- optimizing decisions Behavioral Model- satisficing decisions Spotlight questions- ethical reasoning: Utility Rights Justice Caring Bias in decision-making: Availability Bias Representativeness Bias Anchoring and adjustment Bias Availability Bias- bases decision on recent information or events Representativeness Bias- bases decision on similarity to other situations Anchoring and Adjustment Bias- Bases decision on incremental adjustment from prior decision point Framing Error- trying to solve problem in context perceived, positive or negative Confirmation Error- Focusing on information that confirms a decision already made Escalating Commitment- continuing course of action even though it is not working Big-C Creativity- when extraordinary things are done by exceptional people Little-C Creativity- when average people come up with unique ways to deal with daily events and situations 3 types of Personal Creativity Drivers: Task Expertise Task motivation Creativity Skills 3 types of Situational Creativity Drivers: Team Creativity Skills Management Support Organizational Culture Service Companies- perform services as primary source of revenue Merchandising companies- buy and sell inventory When does an operating cycle begin and end?
 Begin- cash is spent to purchase inventory or provide service End- cash is collected Which company (merchandising or service) have longer operating cycles?
 Merchandising Why do merchandising companies have longer operating cycles?
 Merchandise needs to be purchased, held in stores or warehouses, and then sold to customers 2 categories of expenses: Cost of Goods sold Operating expenses Categories of expenses- define cost of goods sold total cost of merchandise sold in a period Categories of expenses- define operating expenses incur in process of earning sales Merchandising Company-> Cost of Goods available for sale = beginning inventory + Cost of goods purchased during period What are the systems used to account for inventory and cost of goods sold?
 Perpetual inventory system Periodic inventory system Perpetual Inventory System- how do we find ending inventory?
 Cost of Goods available for sale - cost of goods sold = Ending Inventory Periodic Inventory System-> Cost of Goods Sold = Cost of Goods Available for sale - Ending Inventory Periodic Inventory System- How do we find Cost of Goods sold?
 Cost of Goods available for sale - Ending Inventory = Cost of Goods sold Perpetual Inventory System-> Ending Inventory = Cost of Goods available for sale - Cost of Goods Sold Perpetual Inventory System- cost of goods sold and inventory balances are known at all times How will you remember Perpetual Inventory System?
 Self-Checkout -> Cost and inventory is counted at every scan Periodic Inventory System- records are determined at end of accounting period Perpetual vs Periodic Perpetual- up to date info on inventory and cost of goods sold, may reduce need for frequent inventory counts Periodic- less expensive to do, simpler In perpetual inventory system, inventory account is affected every time inventory is bought or sold FOB Destination- seller pays for shipping FOD Shipping Point- Buyer pays for shipping Freight paid by buyer (FOB shipping point) is part of cost of merchandise purchased (inventory account) What accounts do freight costs affect (Shipping point)?
 Inventory (Increase) and cash (Decrease) Inventory is an asset account What accounts do purchase returns affect (from buyer side)?
 Accounts payable/cash (Increase) and inventory (decrease) Cost of goods sold is an expense account What accounts do adjustments for shortages affect?
 COGS (Cost of goods sold) (Increase) and Inventory (Decrease) perpetual system- what are the 2 entries required? Sales revenue Cost of merchandise sold What accounts are affected when recording sales revenue?
 Cash/AR (Increase) and Sales Revenue (Increase) What accounts are affected when recording sales revenue if it was paid in advance?
 Deferred Revenue (decrease) and Sales revenue (Increase) Estimated Inventory Returns- used to record cost of goods expected to be returned What accounts are affected when recording cost of merchandise sold?
 COGS (increase) and Inventory (Decrease) How is freight cost recorded when freight is FOB destination?
 Operating expense Refund Liability- used to track expected sales returns and allowances Refund Liability vs Estimated Inventory Returns Refund Liability- if cash is to be returned Estimated Inventory Returns- if inventory levels change due to returns Estimated Inventory Returns = ( Refund Liability / cash or AR ) x Inventory When selling merchandise to customers, if we know the rate of return, what accounts are affected?
 Cash or AR (Increase), Sales Revenue (increase), refund liability (increase), Cost of goods Sold (increase), Estimated Inventory Returns (increase), Inventory (Decrease) When sales are returned by customers, what accounts are affected?
 Refund Liability (Increase), Cash or AR (decrease), Inventory (increase), Estimated Inventory Returns (Decrease) Estimated Inventory Returns is a contra asset account Profit margin = net income / sales Gross profit margin = gross profit / sales x 100 (to get percentage) Paying freight costs FOB Destination, what accounts are affected?
 Freight Out (Increase), cash (decrease) Gross Profit = Sales - cost of goods sold Income from Operations = Gross profit - operating expenses Net income = income before income tax - income tax expense In single-step statement of income, revenues and expenses include both operating and non operating activities 2 categories of single-step statement of income Revenues Expenses In multi-step statement of income, operating and non operating activities are separate Comprehensive Income- not included in determining net income, but include things like unrealized gains and losses on investments Gross profit margin is a percentage higher gross profit margin is better. why?
 Means company will earn more profit for every sale they earn Higher profit margin is better. why?
 Means company will have more money after paying all expenses High turnover of inventory = Lower gross profit margin and profit margin Low turnover of inventory = high gross profit margin and profit margin Perpetual vs Periodic- Purchase of merchandise on credit, which accounts are affected? Perpetual- Inventory (Increase), AP (Increase) Periodic- Purchases (Increase), AP (Increase) Perpetual vs Periodic- Freight costs on purchases, which accounts are affected? Perpetual- Inventory (Increase), Cash (Decrease) Periodic- Freight In (Increase), Cash (Decrease) Periodic- Purchase Returns and Allowances is a contra expense account Perpetual vs Periodic- Purchase returns and allowances, which accounts are affected? Perpetual- AP (Decrease), Inventory (Decrease) Periodic- AP (Decrease), Purchase Returns and Allowances (decrease) Ethical behavior is accepted as "good" or "right" as opposed to "bad" or "wrong" An illegal action does not necessarily make it ethical Personal values help determine individual ethical behavior Terminal values- preferences about desired ends or goals in life Instrumental values- modes of behavior to achieve terminal values Procedural Justice- policies and rules fairly applied to all individuals what are the 4 alternative ethical views? Utilitarian- delivers greatest good to the most people Individualism- advances self-interests Moral rights- respects and protects rights of all people Justice- fair and impartial treatment of people according to legal rules and standards Distributive Justice- fair distribution of outcomes to all concerned Interactional Justice- all persons treated with dignity and respect Commutative Justice- fairness of exchanges or transactions to all involved What are some cultural issues in ethical behavior?
 Cultural relativism- no one right way to behave, ethical behavior determined by cultural context Moral absolutism- unacceptable behavior in one's home should not be acceptable anywhere else Ethical imperialism- imposing one's ethical standards on others What are some common examples of ethical dilemmas? Discrimination Sexual harassment Conflicts of interest Product safety Use of organizational resources Steps to solving ethical dilemmas: Recognize ethical dilemma Get facts and identify options Test each option Is it legal? Is it right? Whom did it affect? Who benefits? Who gets hurt? 4. Decide which option to follow 5. Double-check ethics; ask spotlight questions "How will I feel if my family finds out about my decisions" "How will I feel about this if my decision is reported int eh local newspaper or posted on the internet" "What would the person I admire most for their character and ethical judgement say about my decision" 6. Take action Demand Legitimacy- validity and legitimacy of stakeholders' interest in organization Ethical Framework- provides personal rules or strategies for ethical decision making What are the 4 influences on ethical decision-making?
 Person Situation Organization Environment What are the 3 levels of individual moral development?
 Pre conventional- self centered Conventional- social centered Post conventional- principle centered Ethics Intensity- extent to which situations are perceived to pose important ethical challenges Organization Setting- work environment and organizational culture have strong influence on ethics of members Though ethic codes exist in many workplaces, they have limited impact Greater ethics intensity = more attention decision makers will give to ethics issues = more likely their behavior will be ethical Laws reflect social values and define appropriate behavior; can encourage ethical behavior but does not guarantee it What are some things that rationalize unethical behavior?
 Behavior is not really illegal Behavior is really in everyone's best interest Nobody will ever find out Organization will "protect" you 6 Pillars of Character- what is it and what are they?
 Guide for ethical living trustworthiness respect responsibility fairness caring citizenship Moral Management- Managers behave in one of 3 ways: Immoral Manager- chooses to behave unethically Amoral Manager- unknowingly fails to consider ethics Moral Manager- makes ethical behavior a personal goal Whisteblowers- expose people/organizations to preserve ethical standards and protect against wasteful, harmful, or illegal acts What are some barriers to whistleblowing?
 Strict chain of command Strong work group identities Ambiguous priorities Stakeholder Power: capacity of stakeholder to positively or negatively affect operations of organization Issue Urgency- extent to which a stakeholders' concerns need immediate attention What should you consider when dealing with conflicting stakeholder interests?
 Stakeholder power, demand legitimacy, and issue urgency Stewardship- take personal responsibility to always respect and protect interests of all stakeholders What is one of the pillars of stewardship?
 Sustainability Triple bottom line (Think: 3 Ps)- evaluates organizational performance on economic, social, and environmental criteria CSR = Corporate Social Responsibility Perspectives on Social Responsibility: Classical view- maximize profits Socioeconomic view- broader social welfare, not just profits Shared value view- economic and social progress are interconnected Virtuous Circle- socially responsible behavior improves financial performance, leading to more responsible behavior Socioeconomic view vs Shared value view Socioeconomic view- emphasizes moral obligation Shared value view- strategic opportunities What are some arguments AGAINST social responsibility?
 Reduced business profits Higher business costs Dilution of business purpose Too much social power for business Lack of public accountability What are some arguments IN FAVOR OF social responsibility?
 Adds long run profits Improves public image Makes organizations more attractive places to work Avoids more government regulation Businesses have resources and ethical obligation What are the 4 strategies of corporate social responsibility (low to high)? [___ strategy- what responsibilities they meet] Obstructionist Strategy- economic Defensive Strategy- economic and legal Accommodative Strategy- economic, legal, ethical Proactive Strategy- economic, legal, ethical, discretionary Why is ethics self-governance important in leadership and managerial role?
 Everything is a 2 way street; performance achieved with high ethical standards and social responsibility Corporate governance is the responsibility of the board to oversee performance of c-suite executives An organization's social performance can be evaluated based on how well it meets economic, legal, ethical, and discretionary responsibilities (now tie this to the 4 strategies) Discretionary Responsibility- voluntary actions an organization takes beyond its legal and ethical obligations Gross profit margin vs profit margin Gross profit margin- money after paying cost of goods Profit Margin- money after paying for ALL expenses Income before income tax = income from operations + other income - other expenses