BSNS115 Exam Preparation Guide

Assets

What a company owns (e.g., cash, inventory, property)

Liabilities

What a company owes (e.g., loans, accounts payable)

Equity

The owners claim on the assets (e.g., capital invested, retained earnings)

Balance sheet

Shows the company's financial position at a specific point in time, listing assets, liabilities, and equity

Income statement

Shows the company's performance over a period, listing revenues, expenses, and profit or losses

Cash flow statement

Shows the cash inflows and outflows over a period, divided into operating, investing, and financing activities

Double-entry accounting

Every transaction affects at least two accounts, ensuring debits equal credits

Journal entries

Used to record transactions, including date, accounts affected, debit and credit amounts, and description

Adjusting entries

Made at the end of an accounting period to reflect accurate financial positions

Reconciliation

Comparing internal records with external documents to ensure accuracy and correct errors

Statement of changes in owner's equity

Shows how the equity section of the balance sheet has changed during the accounting period

Retained earnings

Accumulation of earnings over time, adjusted for net income and dividends

Share capital/common stock

Total value of shares issued by the company

Additional paid-in capital

Excess amount paid by investors over the par value of the stock

Other comprehensive income

Includes items not in net income, like foreign currency translation adjustments or unrealized gains/losses

Cash accounting

Records transactions when cash changes hands, recognizing revenue when cash is received

Accrual accounting

Records revenues and expenses when earned or incurred, regardless of cash exchange

Transaction analysis

Examining financial transactions to determine their impact on the accounting equation

Debit

Increases assets and expenses; decreases liabilities and equity

Credit

Increases liabilities and equity; decreases assets and expenses

Journal entry

Record of a business transaction showing debits and credits

Accounting equation

Assets = liabilities + equity

Balance Sheet

Financial statement showing a company's financial position at a specific time

Current assets

Expected to be converted into cash, sold, or consumed within one year

Non-current assets

Long-term investments held for more than one year

Current liabilities

Obligations due within one year

Non-current liabilities

Long-term obligations due after one year

Common stock

Capital raised from issuing shares to shareholders

Treasury stock

Shares repurchased from shareholders, reducing total equity

Statement of Changes in Owners' Equity

Explains changes in a company's equity over a period of time

Income Statement

Shows a company's financial performance over a specific period

Revenue

Total amount earned from selling goods or services

Cost of goods sold (COGS)

Direct costs of producing goods sold by the company

Gross profit

Revenue minus COGS, measuring production efficiency

Operating expenses

Indirect costs not directly tied to production

Operating income (EBIT)

Profitability from core operations before financing and taxes

Net income

The bottom line of the income statement showing the company's profit or loss after all revenues and expenses. It's the amount available to shareholders or retained in the business.

Cash flows from operating activities

Cash generated or used in the company's core business operations, including cash receipts from the sales of goods and services and cash payments for operating expenses.

Direct vs Indirect Method

Direct method lists actual cash inflows and outflows, while the indirect method starts with net income and adjusts for non-cash transactions and changes in working capital.

Cash Flows from Investing Activities

Cash used for or generated from investments in long-term assets, including cash outflows for purchases of property, plant, and equipment and cash inflows from the sale of assets.

Cash Flows from Financing Activities

Cash flows related to the company's funding from shareholders and lenders, including cash inflows from issuing stock or obtaining loans, and cash outflows for loan repayments or dividends.

Net Increase (Decrease) in Cash

Reflects the overall change in the company's cash position during the period, calculated as cash flow from operations plus cash flow from investing and financing activities.

Cash at Beginning and End of Period

Shows the company's cash position at the start and end of the period, calculated as beginning cash plus net increase (decrease) in cash.

Fixed costs

Costs that do not change with the level of production or sales volume, such as rent, salaries, and insurance.

Variable costs

Costs that vary directly with the level of production, like raw materials, direct labor, and sales commissions.

Direct costs

Costs that can be directly traced to a specific product or service, like raw materials for manufacturing.

Indirect costs

Costs that cannot be directly traced to a single product, such as utilities or administrative salaries.

Opportunity cost

The cost of foregoing the next best alternative when making a decision.

Sunk cost

Costs that have already been incurred and cannot be recovered; they should not influence current decisions.

Marginal cost

The additional cost of producing one more unit of a product.

Relevant cost

Costs that will be affected by a decision and are considered in decision-making processes.

Integrity

Being honest and straightforward in all professional and business relationships.

Objectivity

Not allowing bias, conflicts of interest, or undue influence to override professional judgment.

Confidentiality

Respecting the confidentiality of information acquired as a result of professional relationships and not disclosing it without proper authority.

Professional competence and Due care

Maintaining professional knowledge and skill at the required level to ensure competent service.

Professional behavior

Complying with laws and regulations and avoiding actions that discredit the profession.

Cost behavior

Refers to how costs change in response to changes in business activity levels.

Mixed costs

Contain elements of both fixed and variable costs, such as utility bills.

Contribution margins

Sales price per unit minus variable cost per unit, showing how much each unit contributes to covering fixed costs and generating profit.

Contribution Margin Ratio

Calculated as contribution margin per unit divided by sales price per unit, indicating the portion of each sale that contributes to covering fixed costs and profit.

Break-even point

The level of sales at which total revenue equals total costs, resulting in zero profit.

Break-even analysis

Determines the break-even point in units or sales dollars, a part of CVP analysis.

Target profit analysis

Extends break-even analysis by calculating the sales needed to achieve a desired level of profit.

Cost behaviour

Understanding how costs change with activity levels for cost control and forecasting

CVP analysis

Analyzing relationships between costs, volume, and profit for strategic planning

Product costing

Determining total cost to produce a product, including direct and indirect costs

Overhead allocation rates

Rates used to allocate indirect costs to products based on cost drivers

Direct materials

Raw materials directly used in product creation

Direct labour

Wages for workers directly involved in production

Indirect materials

Supplies used in production but not directly in the product

Indirect labour

Wages for employees not directly in production

Factory overhead

Costs to maintain production operations like rent and utilities

Overhead allocation rate formula

Total overhead costs divided by a cost driver for allocation

Product costing steps

Calculate direct costs, allocate indirect costs, determine total cost

Total Product Cost formula

Sum of direct materials, direct labor, and allocated overhead

Cost-plus pricing

Adding markup to total product cost for profitability

Target costing

Setting a target price and working backward to ensure profitability

Break-even pricing

Setting a price to cover costs without generating profit

Relevant costing

Focuses on costs and revenues that change in decision-making

Relevant costs

Costs directly affected by a decision

Irrelevant costs

Costs that do not change with a decision

Sunk costs

Past costs that cannot be recovered and are irrelevant for decisions

Make or buy decisions

Deciding to produce internally or purchase externally based on relevant costs

Variable Cost

Costs that vary with production volume, e.g., materials and labor.

Fixed Cost

Costs that remain constant regardless of production volume, e.g., machine cost.

Total Variable Cost

Sum of variable costs per unit, e.g., $22 for in-house production.

Make or Buy Decision

Choosing between producing internally or purchasing based on cost analysis.

Contribution Margin

Revenue minus variable costs, crucial for decision-making.

Scarce Resource Allocation

Deciding how to distribute limited resources for maximum profitability.

Special Order Decision

Accepting or rejecting non-routine orders based on incremental costs and revenue.

Incremental Costs

Additional costs resulting from a specific decision, relevant for analysis.

Avoidable Costs

Expenses that can be eliminated with a particular choice, e.g., ceasing product production.

Opportunity Costs

Benefits foregone by selecting one option over another.

Operating Budget

Forecasting day-to-day revenues and expenses for business operations.

Capital Budget

Planning long-term investments in fixed assets like machinery and infrastructure.

Cash Budget

Predicting cash flows to ensure liquidity for meeting financial obligations.

Master Budget

Comprehensive financial plan combining operating, capital, and cash budgets.

Data Processing

Transforming raw financial data into meaningful reports for decision-making.

Data Storage

Storing processed financial data for future reference and retrieval.

Transaction Processing Systems (TPS)

Handling day-to-day operations by processing transactions like sales and purchases.