Accounting 222

Financial Accounting

External users (like investors and creditors)

Regulated by FASB and GAAP

Information reported periodically, at the end of the year

Managerial Accounting

Internal users like executives, managers, and employees

Information reported anytime (managers cannot wait until the end of the year to find and solve potential problems)

reports what is expected to happen tomorrow

Operations Management

Lowest level of management

Need current and frequent details to make tactical day-to-day decisions

Rely on frequent reports that provide specific cost information

Upper-Level Management

Upper level of management

Strategic decisions are more long-term in nature

Focus on overall company goals

Rely on summarized, infrequent reports

3 primary uses of Managerial Accounting

1. Product Costing

2. Planning and Control

3. Nonroutine Decision-Making

Product Costing

Costs of manufacturing a product or providing a service

Planning and Control

Image

Financial data needed for budgeting (financial plan)

Nonfinancial data needed to ensure the quality of products and services

Nonroutine Decision-Making

Nonregular, special strategic decisions

Structured data

Uniform data that exists in a record or file (ex: Transactional data like sales revenue)

Unstructured data

data that is not standardized or cannot easily fit into a relational database (ex: text data like comments left on social media)

Big data analysis

The process of collecting and analyzing large amounts of digital data to assist decision-making

Descriptive Analytics

Simplest form of analytics

Often summarizes past trends in the business

financial or nonfinancial

Cannot tell a company why something happened, only what happened

Diagnostic Analytics

Used to answer why something happened

Historical data is often compared to other data (financial or nonfinancial)

Helps understand what has occurred in the past

Predictive Analytics

Used to determine what is likely to happen in the future

Uses findings from descriptive and diagnostic analytics to make predictions.

Techniques include machine learning and statistical modeling

Prescriptive Analytics

Most complex form of analytics

Provides suggestions for future actions

The 4 financial statements

Income Statement

Statement of Retained Earnings

Balance Sheet

Statement of Cash Flows

Income Statement

Revenues - Expenses ± Gains/Losses = Net income

Statement of retained earnings

Capital: money invested by owners in a company

Retained earnings = Beginning retained earnings + Net income - dividends

Balance Sheet

Assets = Liabilities + Stockholders’ Equity (Common stock + retained earnings)

Statement of Cash flows

Operating Activities: all activities related to earning income based on cash

Investing Activities: all activities related to buying or selling long-term assets

Financing Activities: all activities related to long-term liabilities or equity transactions

Limitations of the Financial Statement

Historical cost—can be verified and is reliable but does not necessarily represent current value, especially in periods of rising prices

Conservatism principle—many costs are expensed immediately rather than recorded as an asset

Horizontal Analysis

analyzes the financial statements of an organization across time periods

Current year - prior year/prior year

Trend percentage

similar to a horizontal analysis, except that several years are compared against a base year to see the percentage change over time.

Actual year / Base Year x 100

Vertical Analysis

shows the relationship of each item on the financial statement to a base amount

Net Income

= Gross Profit - Operating Expenses

Current Ratio

Current Ratio = Current Assets / Current Liabilities

The current ratio also measures the company’s ability to pay for its current obligations with its current assets

Inventory Turnover

Inventory Turnover = COGS / Average Inventory

It indicated how often the inventory is sold and replaced over a certain period

Raw materials inventory

materials not yet placed into production

Work in process inventory

Inventory in the production process that is not completed and ready for sale at the end of the accounting period

Finished goods inventory

Completed inventory that is ready to be sold to a retail customer

Direct Costs

Can be accurately traced to a specific cost object

Prime Cost

These are the two types of direct costs

Direct material: raw materials used to produce a product that are significant enough to warrant trackingI

Direct labor: labor costs for workers directly involved in producing goods

Indirect Costs

AKA: Manufacturing Overhead

Costs incurred in the manufacturing process that cannot easily and accurately be traced to a cost object (Ex: Depreciation of production equipment, indirect materials and supplies)

Conversion Costs

The costs incurred to convert direct materials into a finished product

Direct Labor and Manufacturing Overhead

Period Costs

Costs outside of the “production” element of the value chain (expensed immediately

SG&A

Selling Cost

Marketing, advertising, other sales costs

Administrative Costs

Operational or managerial costs not attributed to a specific product or service (e.g., C E O’s salary, legal and accounting fees, licensing costs)

Product Costs Flow

Product Cost

Direct Materials + Direct Labor + Overhead

Asset until sold, then expensed through COGS

Beginning Inv. + Product Costs - COGS = Ending Inv.

Selling, General & Administrative Costs (SG&A)

Expensed Immediately

Job Costing

Tracks costs by individual jobs - each job is unique and tracked separately

Product Costing

Applies an average cost to each product - products are identical or very similar

Overhead Rate

Total Indirect Costs / Direct Labor Hours

Underapplied overhead

Actual overhead is more than allocated overhead

Overapplied overhead

Actual overhead is less than allocated overhead

Single Overhead Rate

= Total Expected indirect costs / Estimated Cost driver

Problem: Might not properly allocate the overhead being used by the different product lines, especially if lines use varying amounts of resources

Departmental overhead rate

= Expected departmental rates / Estimated departmental cost driver

Are more expensive and time consuming, but provide a more accurate allocation of indirect costs

Activity-Based Costing (ABC)

a cost management tool that help management understand how resources are used and how costs are derived

Resource Driver

An activity that causes costs to increase

Ex: machine setup, quality inspection

Activity Drivers

Measurement of activity being used

e.g., number of setups, inspection hours

Storyboarding

A visualization tool that illustrates a sequence of events or a process

Worker Interviews

Conversations with employees who perform the activities

Cost Hierarchies in ABC

Unit-Level Costs

Batch-Level Costs

Product & Customer-Level Costs

Facility-Level Costs

Unit-Level Costs

Incurred each time a unit is produced service is rendered, job finished, or customer served

More specific, directly traceable

Batch-Level Costs

Incurred in small group (batch) with all item in batch carrying same costs

Product & Consumer-Level Costs

Incurred to support entire product lines or classes of customers

Ex: Customer service hotline

Facility-Level Costs

Incurred to support the company

Ex: building rent, executive salaries