ACCOUNTING 211 FINAL EXAM TERMS

objectivity

arms lengths negotiation

going concern

company will be around long enough to use up assets and pay all liabilities

consistency

follow the same procedures each accounting period so can compare financial statements

conservatism

if multiple options exist, pick the least favorable

full disclosure

must disclose all relevant information

fair

estimate of value based on references to other objective values and/or auditor’s opinion after considering all management assertions in the financial statements

responsibility accounting

allocating accounting information to those people who are accountable for controlling it

controllable costs

costs which the assigned manager can control or influence significantly or not

non-controllable costs

costs that are beyond the control of anyone in the organization

static budget

planning budget with projected level of activity

flexible budget

planning budget updated for the actual level of activity

variance

compares actual result to standard or projected result

what does variance affect?

effect on net income

favorable variance

revenue: actual > standard; expense: S > A

un-favorable variance

revenue: S > A; expense: A > S

target cost

given a specific price target: price - margin = target cost

design to cost

manufacturing a product to a specific cost target

cost plus

price is a markup on cost

Time and Materials (T & M)

labor price and/or materials price includes allocation of both overhead and margin

margin (calculation)

price minus cost

mark up %

margin divided by cost

margin %

margin divided by revenue

hurtle rate

required minimum rate of return

weighted average cost of capital (WACC)

economic cost of liability and equity components weighted for their presence in the capital structure; frequently approximated by “10%” or the incremental borrowing rate

risk adjusted rate of return

arbitrarily defined (higher) rate of return due to the uncertainties of the cash flows

What kind of cash flow is used for capital budgeting?

Time value of money, discounted cash flow

Why do we use cash and not accounting data?

accounting data based on transactions; accounting data has non-cash elements

NPV vs IRR

NPV: at assumed discount rate; IRR: discount rate where NPV = 0

NPV decision rule

do project if NPV > 0

IRR decision rule

do project if IRR > hurtle rate

What are profit and loss based off of?

accrual accounting (accounting concept)

What is rate of return (aka DCF) based off of?

time value of money and cash in/out (finance concept)

basic assumptions of DCF analysis

all cash flows occur at the end of the period and are immediately reinvested at the discount rate

reinvestment rate fallacy

fallacy that all cash flows will actually be reinvested and earn the discount rate

What is the quote on the monument to Luca Pacioli on the Chapman campus?

“Without mathematics there is no art”

Why might Luca Pacioli be of special interest to accountants?

He is the grandfather of accounting

What is the quote on the monument to Milton Friedman on the Chapman campus?

“A society that puts equality…ahead of freedom will end up with neither equality nor freedom…a society that puts freedom first will, as a happy by product, end up with both greater freedom and greater equality.”

how to solve bond problem:

use two step method to determine price, discount or premium, J/E to buy, sell, pay and receive interest (assuming straight-line amortization)

CAGR (acronym)

compound annual growth rate

how to calculate CAGR?

calculate “i”

rule of 72

to estimate roughly how long it will take for an investment to double in value, divide the interest rate as a number by 72

cost behavior

how costs react to changes in the level of activity

variable costs

costs vary with the cost object

fixed costs

costs that do not vary with the cost object

cost object

the object which costs are gathered

how variable cost behaves when production goes down or up?

unit: no change; total: down or up

how fixed cost behaves when production goes down or up?

unit: down or up; total: no change

the three golden rules for cost allocation

just because you can does not mean you should; when in doubt do not allocate; “what difference does it make?” (in behavior)

relevant costs aka differential costs aka incremental costs

costs that differ between two alternatives

sunk cost

cash already spent; irrelevant to decision making

opportunity cost

the cost of the road not taken

traceable fixed costs

fixed costs that can be traced to a particular product or business segment (think “direct fixed costs”)

common fixed costs

fixed costs that cannot be directly traced to a particular product or business segment and are common to all (think “indirect fixed costs”)

contribution margin

revenue minus VC; contributes towards covering fixed costs

segment margin

contribution margin minus traceable fixed costs; contributes towards covering common fixed costs

transfer pricing

price established between related parties

short term pricing

covers variable costs and contributes to covering fixed costs (aka variable pricing, contribution margin)

long term pricing

covers all costs (fixed and variable)

Why is long term and short term pricing important?

companies must price for the long term to cover all expenses and ROI but can take advantage of specific opportunities in the short term with short term pricing

unit contribution margin

revenue minus VC divided by # of units

contribution margin

revenue minus VC

contribution margin ratio

revenue minus VC divided by revenue

breakeven point (sales dollars)

FC divided by CMR

breakeven point (sales units)

FC divided by UCM

margin of safety (sales dollars)

sales minus breakeven sales dollars

margin of safety (units)

units minus breakeven units

weighted-average contribution margin

sales mix percentage times contribution margin ratio plus additional pools

weighted-average contribution margin ratio

sales mix percentage times contribution margin ratio plus additional pools

Financial Accounting

keeping the financial score for the entity

Cost Principle

all costs are historical

Earned Revenue Recognition

rendered goods and services

Recognized Revenue

expectation of payment

Matching

match expenses with revenues in the period they occur

Materiality

if you knew the fact, it could change your mind; 5% of something

Assets

something of future economic value

Liability

something owed

Contingent liability

liability that cannot be objectively quantifiable

Stockholder's Equity

capital plus retained earnings

Capital

investment by the stockholders

Retained Earnings

Earnings retained in the business

Ending Retained Earnings

Beginning RE plus NIAT minus dividends

Dividend

distribution of retained earnings to stockholders

Expense

expired asset

Revenue

rendered goods and/or services with the expectation of payment

Chart of Accounts

list of the names and account numbers for all accounts

General Journal

shows the debits and credits for each accounting transaction

General Ledger

list of all transactions for the accounting period sorted by account number

Contra account

an account used to keep the balance in another account visible

Accrual Basis

accounting based on transactions

Cash Basis

accounting based on cash in/cash out

GAAP

Generally Accepted Accounting Principles

Income Statement

matches revenue with expense over a period of time

Cost of goods sold

cost of what is not there

Formula for Cost of Goods Sold

beginning inventory plus net purchases minus ending inventory

Non-cash charges

deduction on income statement but no cash paid out

Examples of Non-cash charges

depreciation, amortization, depletion, capital gain or loss

Gross Profit

Net Revenue minus COGS

SG&A

selling, general, and administrative expense (aka operating expenses)

Operating income

Gross profit minus S, G & A; income from the core business

Non-Operating Incomes (aka “other” income and expenses on the income statement)

interest income and expense, capital gain or loss