Specific exam II terms accounting 211

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, NCF = NIAT + non-cash charges

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

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.”