Accounting 222 Midterm

ch 1, 2, 3, 4, and 12

managerial accounting

info for internal users like executives, managers, employees.

regulation: value added principle.

information reported anytime — predictive “what will happen tomorrow”

provides information for product costing, planning and control, and nonroutine decision making

financial accounting

provides information to external users (investors and creditors)

follows gaap, fasb

information reported periodically

product costing

Costs of manufacturing a product or providing a service

Used for decisions about pricing and cost control

planning and control

Financial data needed for budgeting (financial plans)

Nonfinancial data needed to ensure the quality of products and services

direct cost

can be easily and conveniently traced to a specific product service or department

indirect cost

cannot be easily traced to a specific product and is allocated

cost object

anything for which cost information is desired

manufacturing cost categories

direct materials, direct labor, and manufacturing overhead

direct materials

materials that become part of the finished product and can be traced to it

direct labor

labor costs that can be directly traced to a product

manufacturing overhead

all manufacturing costs except direct materials and direct labor

indirect materials

materials used in production that cannot be conveniently traced to specific units

indirect labor

labor involved in production that cannot be directly traced to specific units

product costs

direct materials, direct labor, and manufacturing overhead

period costs

costs outside of the “production” element of the value chain

selling and administrative costs expensed in the period incurred

selling costs

costs incurred to market and deliver products

administrative costs

operational or managerial costs not attributed to a specific product or service. costs related to general management of the business

ex. ceo salary, legal and accounting fees, licensing costs

inventoriable costs

product costs that become inventory until sold

prime cost

direct materials + direct labor

conversion cost

direct labor + manufacturing overhead

product cost formula

direct materials + direct labor + manufacturing overhead

total manufacturing costs

direct materials + direct labor + manufacturing overhead

raw materials inventory

materials waiting to be used in production

work in process inventory

partially completed goods

finished goods inventory

completed goods not yet sold

cost of goods sold

cost of inventory that has been sold

inventory flow

raw materials → work in process → finished goods → cost of goods sold

expense recognition principle

costs are recognized as expenses when related revenue is recognized

job costing

costing system that tracks all costs by individual jobs or batches

used when products or services are unique or customized

also commonly used by service firms

process costing

used when products are identical or very similar

manufacturing costs are cumulated for each process or dept. during production rather than individual jobs. costs then averaged over units produced

job cost sheet

record used to accumulate costs for a specific job

predetermined overhead rate

estimated overhead ÷ estimated activity

applied overhead

predetermined overhead rate × actual activity

actual overhead

overhead costs actually incurred

underapplied overhead

actual overhead exceeds applied overhead

overapplied overhead

applied overhead exceeds actual overhead

cost driver

activity that causes costs to be incurred

machine hours

common overhead allocation base

direct labor hours

common overhead allocation base

estimated activity level

expected amount of allocation base used to compute predetermined overhead rate

normal costing

assigns actual direct costs and applied overhead to jobs

overhead allocation

assigning indirect costs to cost objects using a cost driver

single plantwide rate

uses one overhead rate for the entire company

departmental rate

uses separate overhead rates for each department

activity based costing abc

allocates overhead using multiple activity cost pools

activity rate

activity cost pool ÷ expected activity

abc cost assignment

activity rate × activity consumed

unit level activity

performed each time a unit is produced

batch level activity

performed each time a batch is processed

product level activity

supports an entire product line

facility level activity

supports overall operations of the facility

facility sustaining activity

activity required for overall operation of the organization

spoilage

units that fail standards and must be discarded

rework

defective units that can be repaired and sold

scrap

leftover material with minimal resale value

manufacturing company

purchases raw materials and converts them into finished goods

make goods or products to sell to customers

income statement

reports revenues expenses and net income

statement of retained earnings

reports changes in retained earnings

balance sheet

reports assets liabilities and equity at a point in time

statement of cash flows

reports cash inflows and outflows

assets

resources owned by a business

liabilities

obligations owed to creditors

equity

owners claim on assets

stockholders equity

owners residual interest in assets after liabilities

common stock

amount invested by owners

retained earnings

cumulative profits kept in the business

accounting equation

assets = liabilities + equity

revenues

amounts earned from business activities

expenses

costs incurred to generate revenues

net income

revenues − expenses - dividends

net loss

expenses exceed revenues

gross profit

net sales − cost of goods sold

gross profit formula

net sales − cost of goods sold

operating income

gross profit − operating expenses

or

gross profit - SG&A

net income formula

gross profit − operating expenses

multistep income statement

separates operating activities from nonoperating activities

retained earnings ending balance

beginning retained earnings + net income − dividends

current assets

cash and assets expected to be used within one year

current liabilities

obligations due within one year

working capital

current assets − current liabilities

liquidity

ability to pay short term obligations

solvency

ability to meet long term obligations

current ratio

current assets ÷ current liabilities

quick ratio

(cash + short term investments + net accounts receivable) ÷ current liabilities

debt ratio

total liabilities/total assets

gross margin ratio

gross profit/net sales

gross margin

gross profit/net sales (100)

return on sales

net income/net sales

return on total assets

(net income + interest expense)/average total assets

inventory turnover

cost of goods sold/average inventory

accounts receivable turnover

net credit sales/average net accounts receivable

days sales in receivables

365/accounts receivable turnover

net sales

sales revenue - returns allowances and discounts

credit sales

sales made on account

cost of goods available for sale

beginning inventory + purchases

ending inventory equation

cost of goods available for sale − cost of goods sold

CoGAS = beg inventory + purchases

operating activity

cash flows related to daily business operations

investing activity

cash flows involving purchase or sale of long term assets

financing activity

cash flows involving debt and equity financing

operating activities examples

cash from customers cash paid to suppliers cash paid to employees