Financial and Managerial Accounting: Key Concepts and Internal Controls

What is the primary focus of financial accounting?

Providing information to external users.

Who are considered internal users of accounting information?

Individuals within a company, such as marketing managers, production supervisors, and finance directors.

What types of information do internal users need?

Reports showing projections of income, forecasts of cash needs, and financial comparisons of operating alternatives.

Who are external users of accounting information?

Investors, creditors, taxing authorities, customers, labor unions, and regulatory agencies.

What does the income statement summarize?

All revenues and expenses for a specific period.

What information does the statement of cash flows provide?

Financial information about cash receipts and cash payments for a specific period.

What does the balance sheet report?

Assets and claims to assets (liabilities and stockholders' equity) at a specific point in time.

What is the basic accounting equation?

Assets = Liabilities + Stockholders Equity.

What is the primary difference between financial and managerial accounting?

Financial accounting is for external users, while managerial accounting is for internal users.

What are the three functions of managerial accounting?

Planning, directing, and controlling.

What do service companies primarily do?

Provide services to customers rather than selling products.

What distinguishes merchandising companies?

They sell products to customers but do not manufacture them.

What is the role of manufacturing companies?

Create products by converting raw materials into finished goods.

What are direct materials in manufacturing costs?

Raw materials that become an integral part of the finished product.

What is direct labor?

The work of factory employees directly associated with converting raw materials into finished goods.

What does manufacturing overhead include?

All manufacturing costs indirectly associated with the manufacture of the finished product.

What are product costs?

Costs incurred in manufacturing a product, recorded as inventory on the balance sheet.

What are period costs?

Non-manufacturing costs recorded as expenses on the income statement when incurred.

What is a job order cost system?

A system used when a company produces in jobs or batches, each with distinguishing characteristics.

What is cost behavior?

The study of how specific costs respond to changes in the level of business activity.

What are variable costs?

Costs that vary in total directly with changes in the activity level.

What happens to total variable costs if production increases by 10%?

Total variable costs increase by 10%.

What are fixed costs?

Costs that remain the same in total regardless of changes in the activity level.

Give an example of a fixed cost.

Property taxes, insurance, rent, or supervisory salaries.

What are mixed costs?

Costs that include both variable and fixed cost components.

Provide an example of a mixed cost.

Renting a truck for a fixed daily fee plus a variable cost per mile driven.

What is Cost-Volume-Profit (CVP) Analysis?

The study of the effects of changes in costs and volume on a company's profits.

What does the contribution margin represent?

The net amount available to cover fixed costs, calculated as sales revenue minus total variable costs.

What is the breakeven point?

The level of activity at which total revenues equal total costs (both fixed and variable).

What is target profit?

The specific net income or profit amount a company aims to achieve in a given period.

What are relevant revenues and costs?

Revenues and costs that must occur in the future and differ between alternatives.

What is an opportunity cost?

The lost potential benefit from choosing one course of action over another.

What are sunk costs?

Costs that have already been incurred and cannot be changed or avoided by any present or future decisions.

What is the decision rule for accepting a special order?

Accept the special order if the incremental revenue from the order is greater than the incremental costs needed to complete it.

What factors should be considered when deciding to make or buy component parts?

The incremental costs of the make and buy alternatives and any opportunity costs.

What are the components of pricing a product?

Costs, competitors, customer price sensitivity, customer demographics, and market share.

What is target costing?

The process of determining the cost at which a product must be produced to earn a desired profit, calculated as market price minus desired profit.

What is cost-plus pricing?

A pricing method where a company sets its price relative to the cost of the product, adding a markup to determine the target selling price.

What are the three main factors of fraud?

Opportunity, financial pressure, and rationalization.

What is the principle of establishment of responsibility?

Only one person should be responsible for a task to quickly isolate accountability.

What is the principle of segregation of duties?

Different individuals should be responsible for related activities to reduce the risk of fraud.

What is the purpose of having different individuals handle different parts of the purchasing process?

To prevent fraud, such as authorizing payment for fictitious invoices.

What are documentation procedures in the context of internal controls?

They provide evidence that transactions have occurred and identify responsible individuals.

Why should companies use prenumbered documents?

To ensure all documents are accounted for and to prevent fraud.

What do physical controls relate to in internal controls?

The safeguarding of assets to enhance the accuracy and reliability of accounting records.

What is independent verification?

The review of data prepared by employees to ensure accuracy and detect discrepancies.

What are examples of independent verification?

Counting inventory and reconciling cash balances with bank reports.

What are human resources controls?

Controls designed to minimize risks introduced by the human element, such as bonding employees who handle cash.

What is the purpose of bonding employees?

To provide insurance protection against theft by employees.

What is the purpose of budgeting in an organization?

To communicate objectives, evaluate performance, and promote efficiency.

What is a master budget?

The combined budget that starts with the sales budget and includes operating and financial budgets.

What does the production budget show?

The number of units to produce to meet anticipated sales demand.

What are the three sections of a cash budget?

Cash receipts, cash disbursements, and financing.

What is a static budget?

A projection at a single level of activity before any actual activity occurs.

What is a flexible budget?

A budget that projects data for various levels of activity and adapts to changing conditions.

What are variances in budgeting?

Differences between actual and flexible budget results, labeled as favorable or unfavorable.

What is management by exception?

A strategy where managers focus on significant deviations from a set standard or plan.

What is a cost center?

A department that incurs costs but does not generate revenue.

What is a profit center?

A department that incurs costs and generates revenue.

What is an investment center?

A center that incurs costs, generates revenue, and controls asset-related decisions.

What is a standard in performance measurement?

A benchmark or norm used to measure performance.

What is the direct materials price standard?

The expected cost per finished unit of direct materials.

What is the direct materials quantity standard?

The quantity of direct materials expected to be used per unit of finished goods.

What is the direct labor price standard?

The expected rate per hour for direct labor.

What is the direct labor quantity standard?

The expected time required to produce one unit of product.

What does it mean when a variance is labeled as unfavorable?

When actual costs exceed standard costs.

What does it mean when a variance is labeled as favorable?

When actual costs are less than standard costs.