Acct 202- Final Exam

MANAGERIAL ACCOUNTING

period costs

- costs that are expensed in the period in which they are incurred

- examples: selling and administrative expenses

- found only on the Income Statement

product costs

- manufacturing costs

- direct materials, direct labor, and manufacturing overhead

- recorded as inventory

- expenses when the product is sold

- on the Balance Sheet as Inventory until the product is actually sold

- then it moves to the Income Statement as COGS

inventory accounts

COGM (calculation)

work in process inventory, beginning + total manufacturing costs = total cost of work in process - work in process, ending = ____________

COGS (calculation)

finished goods inventory, beginning + cost of goods manufactured = cost of goods available for sale - finished goods inventory, ending = ___________________

JOB ORDER COSTING

job order costing

- assigns costs to each job or batch of goods

- each job has some distinguishing characteristic such as a house that is custom built, a CPA firm's consulting engagement, or a print shop's batch of brochures

- the goal is to assign costs to the individual jobs

process costing

- used when companies manufacture a large volume of similar good such as cereal or paint

predetermined overhead rate

estimated annual overhead cost / estimated annual activity base = ________

- is then applied to the actual activity level to assign overhead to the individual jobs

- the estimated numbers are used to calculate the predetermined rate and then never used again

- use the predetermined overhead rate to assign overhead to work in process

over applied overhead

- if applied costs are greater than actual, the account will have a credit balance

- Manufacturing Overhead

Cost of Goods Sold

under applied overhead

- if actual costs are greater than applied costs, the account will have a debit balance

- Cost of Goods Sold

Manufacturing Overhead

determine the cost of a job (calculation)

CVP ANALYSIS

cost behavior

CVP income statement

- classifies all costs as either variable or fixed, and compute a contribution margin

- CM: can be stated as a whole dollar amount and/or as a per unit amount

- Sales - variable costs = contribution margin - fixed costs = net income

break-even point (calculation)

- the point where total revenue exactly equals total cost

- put in another way, it is the point where total contribution margin exactly equals total fixed costs

- net income is ZERO

- can be expressed in terms of sale units or sales dollars

- can be calculated using a mathematical equation or by using the contribution margin, or CVP graph

margin of safety

- the difference between actual or expected sales and sales at the break-even point

- actual (or expected) sales - break-even sales = MOS $

- margin of safety $ / actual (or expected) = MOS ratio

- the higher the number is, the greater the "cushion" is

INCREMENTAL ANALYSIS

opportunity costs

- the benefit given up from some course of action other than the one chosen

sunk costs

- costs that have already been incurred and will not change due to any current or future decision

- NOT relevant and should not be considered

relevant costs

- revenues or costs that are in the future and differ across alternatives

- these are the only factors to be considered

- costs and revenues that are in the past, or do not differ across alternatives can be ignored

special order (decisions)

- if a special order can be filled within existing plant capacity, then the only costs that are relevant are variable costs

- if the special price is greater than variable costs, the company should NOT be considered unless the plant is already at full capacity

make or buy (decisions)

- compares relevant costs to make some component part of product versus buying it from another company

- fixed costs are frequently affected by this decision, and so may be partially relevant

- also potentially relevant are opportunity costs- if the company is unable to take advantage of some other source of revenue because plant capacity is being consumed by production of the component part, then the lost revenues from the missed opportunity should be considered part of the cost to make the part

retain or replace (decisions)

- cost and book value of the old equipment are sunk costs and are not relevant (this includes depreciation)

- operating costs for both old and new equipment ARE relevant, as is the purchase price of the new and the proceeds from selling the old (if applicable)

sell or process further (decisions)

- the basic decision rule is: process further as long as the incremental revenue from such processing exceeds the incremental processing costs

eliminate an unprofitable segment (decisions)

- focus on relevant costs

- in this decision, fixed costs are frequently relevant, since they may have to be absorbed by the remaining segments or products

BUDGETING

basic definitions

master budget

- a set of interrelated budgets for a specified time period

- contains two types of budgets: operating and financial

- operating budgets: the individual budgets that lead to the preparation of the budgeted income statement

- financial budgets: focus on cash resources needed to fund operations and planned capital expenditures

- these include: the capital expenditure budget, the cash budget, and the budgeted balance sheet

cash budget (calculation)

- shows whether the expected amount of cash generated by operating activities will be sufficient to pay anticipated expenses during the period covered by the operating budget

beginning cash + cash receipts - cash disbursements (+/- financing section) =

static budget

- unchanging; doesn't allow for changes in activity level

- budget prepared at a single level of activity, generally the activity level that was used to develop the master budget

- the master budget is itself a static budget

- it is usually only appropriate for fixed costs, costs that remain the same IN TOTAL regardless of changes in activity level

flexible budget

- multiple static budgets prepared at different activity levels

budget

- a formal written statement of management's plans for a specified future time period, expressed in financial terms

- may be prepared for any length of time

- however, the most common budget period is one year

- many companies use continuous 12-month budgets, which drop the month just ended and add a future month

standard

- budget expressed on a per unit basis

- budgets are total amounts, so is basically the same thing, just expressed on a per unit amount

CORPORATIONS

journal entry for issuance of common stock

- when issuing par value common stock, the Common Stock account is credited for the amount of par value only. anything received above that amount is credited to Paid-in Capital in Excess of Par- Common Stock

- Ex. Issue 1,000 shares of $1 par value common stock for $5 per share

Cash 5,000

Common Stock 1,000

Paid-in Capital in Excess of Par- C/S 4,000

- to issue no par common stock, but which has a stated value, the entry is identical to the one above except that the account title changes to Paid-in Capital in Excess of Stated Value- Common Stock

- to issue no par common stock with no stated value, the entry is simply:

Cash

Common Stock

- sometimes companies issue stock in exchange for things other than cash. in this case, the transaction is recorded at the fair value of what is received or what is given, whichever is easier to determine. if a company's stock is actively traded on an organized exchange, there is no better determination of the fair value of the transaction than the current market price of the stock. on the other hand, if a company is not publicly held (not actively traded), then the fair value of what is received is likely more clearly determinable

- Ex. by agreement, a new company issues 1,000 shares of its $1 par value common stock as payment of the $10,000 bill from the attorney who handled the incorporation process

Organization Costs 10,000

Common Stock 1,000

PIC in Excess of Par- Common Stock 9,000

- IN CONTRAST: Ex. A company, whose stock is actively trading for $12 a share, is issuing 10,000 shares of its $5 par value stock to purchase land that is advertised for sale at $125,000. because the company's stock is actively traded, the market price of the stock is used to determine the price paid to purchase the land

Land 120,000

Common Stock 50,000

PIC in Excess of Par- Common Stock 70,000

journal entry for issuance of preferred stock

- preferred stockholders receive preferences over common stockholders with respect to dividends and the distribution of assets in the event of liquidation

- generally, preferred stockholders do NOT have voting rights

- every corporation must have common stock, but preferred stock is optional. therefore, when preparing the Stockholders' Equity of the balance sheet, Preferred Stock is always listed before Common Stock. (in both the PIC and the Additional PIC sections)

- the entry to record the issuance of preferred stock looks very similar to the entry for common stock with a *credit to Preferred Stock for the amount of par value and any excess credited to PIC in Excess of Par- P/S)

- although companies do not have to pay dividends at all, when they do, preferred stockholders have the right to receive a certain amount before common stockholders

- some preferred stock is referred to as cumulative. this means that preferred stockholders not only receive the current years dividends, but also any unpaid prior-year dividends before common stockholders receive any. when preferred stock is cumulative, undeclared dividends in a given period are called dividends in arrears. this is not a liability account because the company never has to pay a dividend unless it declares one. therefore, dividends in arrears can only be found in the notes of the financial statements

journal entry for cash dividends (common stock only)

- a dividend is a distribution of earnings by a corporation to its stockholders on a pro rata basis. the two most common types of dividends are cash and stock dividends. both types of dividends will result in a decrease in Retained Earnings

- dividends are NOT an expense. dividends are shown in the Statement of Retained Earnings as a reduction of Retained Earnings. dividends are paid on the number of shares outstanding.

- in order to pay a cash dividend, a corporation must have: 1. retained earnings 2. adequate cash 3. formal declaration of dividends

- three important dates with respect to dividends:

- declaration date: the date the board of directors makes a formal announcement of the dividend. the announcement commits the company to a legal obligation, meaning it must recognize a liability. the journal entry:

*Cash Dividends

Dividends Payable (PS. this is a current liability)*

- date of record: this date determines who will receive the dividend. stockholders of record as of this date receive dividend payments. NO JOURNAL ENTRY

- payment date: the date the company actually makes payment. debit Dividends Payable and credit Cash

- the cumulative effect of the declaration and payment of a cash dividend on the accounting equation of the corporation is that Assets and Stockholders' Equity (in particular, Retained Earnings) are decreased

journal entry for stock dividends

- sometimes companies issue shares of stock as a dividend instead of cash. this reduces Retained Earnings and increases Paid-in Capital. assuming it is a small stock dividend, the transaction is recorded at the fair value per share. The journal entry:

Stock Dividends market value

C/S Dividends Distributable par value

PIC in Excess of Par- C/S any excess

- NOTE common stock dividends distributable is a stockholders' equity account, NOT a liability

- stock dividends change the composition of stockholders' equity, but total equity remains the same. so the cumulative effect of the declaration and payment of stock dividends is no change of the corporations accounting equation

shares authorized

- the number of shares authorized by the state in the company's charter

- this number is larger than the number of shares actually issued

- in order to increase it, the company must amend its charter with permission from the state

shares outstanding

- to calculate the number of shares outstanding, you must subtract the number of Treasury Stock from the number of shares issued

shares issued

- these shares of stock have already been issued by the company and are simply transferred from one stockholder to another

- these transfers have no impact on a corporation's stockholders' equity

treasury stock

- sometimes companies buy back shares of their own stock. Reasons they may do this:

- to give to employees as part of a compensation plan or as bonuses

- because management believes the stock is undervalues in the market

- to use in the acquisition of other companies

- to reduce the number of shares outstanding and increase earnings per share

- to eliminate hostile shareholders

- treasury stock is accounted for using the cost method, debiting the cost of the shares purchased to an account called Treasury Stock

- this is a contra-stockholders' equity account which reduces total stockholders' equity

- because Treasury Stock is a contra-equity account, its normal balance is Debit

- Treasury Stock is shown "dead last" in the stockholders' equity section and subtracts from Total Paid-in Capital and Retained Earnings

- treasury stock is still considered issued stock, but it is not outstanding

- to calculate the number of shares outstanding, you must subtract the number of Treasury Stock from the number of shares issued

- if the number of shares issued and outstanding are the same, the company does not own any treasury stock

parts of stockholders' equity

- paid-in capital: the total amount invested in the company by stockholders in exchange for shares of stock

- retained earnings: is earned capital; consists of accumulated net income less any dividends paid

TOTAL S/E

retained earnings

- retained earnings represent the accumulated net income a company has earned and not paid out in the form of dividends. in the event that net losses exceed net income and the Retained Earnings account has a debit balance, it is referred to as a deficit on the balance sheet

prior period adjustments

- retained earnings can be subject to restriction, that is, it cam be unavailable for dividends. causes include: legal restrictions, contractual restrictions, and voluntary restrictions. when errors are discovered in financial statements after the books have been closed for the period, the correction is known as a prior period adjustment and is debited or credited directly to Retained Earnings

- Ex. Company finds that depreciation expense was understated in a previous period by $2,000

Retained Earnings 2,000

Accumulated Depreciation 2,000

- if depreciation had been overstated, the entry would be the opposite

Accumulated Depreciation 2,000

Retained Earnings 2,000

- prior period adjustments are reported on the Retained Earnings Statement as follows:

Retained Earnings, Jan 1, as reported $100,000

Correction for prior period depreciation error (2,000)

Retained Earnings, Jan 1, as adjusted $98,000

STATEMENT OF CASH FLOWS

usefulness and format

- the statement of cash flows explains where a company got its cash and where it spent its cash during the period. in other words, we are showing how the company got from last year's ending balance to this year's ending balance. only transactions that involve cash should appear in the statement of cash flows

this statement helps readers determine:

- the company's ability to generate future cash flows

- the company's ability to pay dividends and meet its obligations

- reasons for the difference between net income and net cash flows provided (used) by operating activities

- cash investing and financing activities during the period

cash flows, both receipts and payments, are classified as:

- operating activities: items that go into the determination of net income

- investing activities: related to the purchase or sale of investments or long-term assets like property, plant, and equipment

- financing activities: related to long-term debt like bonds or notes and to transactions with stockholders including issuance of stock and payment of dividends

significant noncash activities must be reported in a separate schedule underneath the body of the statement of cash flows or in a footnote to the financial statements. examples include:

- issuance of stock to purchase assets

- conversion of bonds into stock

- issuance of debt to purchase assets

- exchange of plant assets

preparation of the statement of cash flows is aided by the following:

- comparative balance sheets (two or more years presented side by side)

- current income statement

- additional data regarding how cash was provided or used during the period

activities that appear in each section

SOLE PROPRIETORSHIP

characteristics (sole proprietorship)

sole proprietorship equity

PARTNETSHIPS

characteristics (partnership)

partnership equity

formation of a partnership

allocation of income (calculation)