ACCT 212: Exam 3

What is budgeting?

Formal statement of plans expressed in dollars and units.

What are the benefits of budgeting?

Plan, control, coordinate, communicate, and motivate.

What is participatory budgeting?

Involvement of employees affected in the preparation of the budget.

What is a fixed budget?

Based on a single activity level.

What is a flexible budget?

Based on several activity levels.

What is variance?

Difference between budgeted and actual amounts; favorable leads to higher income, unfavorable leads to lower income.

What is standard costing?

Preset cost for a product or service.

What is the payback period?

Expected time to recover initial investment.

What is net present value (NPV)?

Discounted net cash flows minus initial investment.

What is the cost of capital (hurdle rate)?

Required rate of return on potential investment.

What is the internal rate of return (IRR)?

Discount rate that yields NPV of zero for an investment.

What is a budgeted income statement?

Includes sales, COGS, gross profit, selling and admin expenses, income before taxes, tax expense, and net income.

What is a budgeted balance sheet?

Includes cash, accounts receivable, raw materials inventory, finished goods inventory, equipment, accumulated depreciation, total assets, liabilities, and equity.

What are liabilities?

Obligations owed, such as accounts payable and income taxes payable.

What is equity?

Owner's claim on total assets; includes common stock and retained earnings.

What is accounting rate of return (ARR)?

Percentage accounting return on average investment.

What is the profitability index?

Ratio used to rank projects based on their profitability; projects should exceed a value of 1.0.

What is management by exception?

Focus on significant differences between actual costs and standard costs.

What is cost variance?

Actual cost compared to standard cost; a favorable variance occurs when actual cost is less than standard.

What is an annuity?

A series of cash flows of equal dollar amounts.

What is the net present value decision rule?

Invest if NPV is greater than zero.

What are the budgeting guidelines?

Include participatory budgeting, challenging but attainable goals, and explanation of differences between actual and budgeted amounts.

What are the components of a budgeted income statement?

Includes sales, COGS, gross profit, expenses, income before taxes, tax expense, and net income.

What are the characteristics of a fixed budget?

Based on a predetermined single level of activity.

What are the characteristics of a flexible budget?

Allows for adjustments based on varying levels of activity.

What is cost variance determination?

Identifying whether actual costs are favorable or unfavorable against standard costs.

What does payback period evaluation involve?

Analysis to determine when cumulative cash flows become positive.

What does investment analysis metrics include?

Include NPV, ARR, and IRR to assess the viability of investment projects.

What is cumulative cash flow?

Ongoing total of cash inflows minus cash outflows, indicating investment recovery time.

What is the importance of budget coordination?

Ensures all departments align to achieve the overall organizational budget goals.

What is budgeting?

Budgeting is the process of creating a formal statement that outlines an organization's financial plans, including projected revenues and expenditures, expressed in both monetary units and operational metrics.

What are the benefits of budgeting?

The benefits of budgeting include effective planning for future operations, controlling current financial performance, coordinating activities across departments, facilitating clear communication of financial goals, and motivating employees by involving them in the financial planning process.

What is participatory budgeting?

Participatory budgeting is a collaborative approach that involves all employees who will be affected by the budget in its preparation, fostering ownership and accountability for financial outcomes.

What is a fixed budget?

A fixed budget is a type of budgeting that is based on a single level of activity or output, meaning it does not adjust for changes in actual performance or levels of production.

What is a flexible budget?

A flexible budget adjusts for varying levels of activity or output, allowing for real-time changes in budgeted amounts based on actual performance metrics.

What is variance?

Variance refers to the difference between what was budgeted and what was actually achieved in terms of financial performance, with favorable variance leading to greater income and unfavorable variance resulting in reduced income.

What is standard costing?

Standard costing involves assigning predetermined costs to a product or service, providing a benchmark against which actual costs can be compared for performance evaluation.

What is the payback period?

The payback period is the expected duration required to recover the initial investment made in a project, calculated through cumulative cash flow analysis.

What is net present value (NPV)?

Net present value (NPV) is a financial metric that represents the difference between the present value of cash inflows and the present value of cash outflows over a period, accounting for the time value of money.

What is the cost of capital (hurdle rate)?

The cost of capital, also known as the hurdle rate, is the minimum required rate of return that an investor expects to earn from an investment, reflecting the opportunity cost of investing capital elsewhere.

What is the internal rate of return (IRR)?

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of an investment equal to zero, representing the project's expected rate of return.

What is a budgeted income statement?

A budgeted income statement contains projected figures for sales revenue, cost of goods sold (COGS), gross profit, selling and administrative expenses, income before taxes, tax liabilities, and net profit, serving as a financial forecast.

What is a budgeted balance sheet?

A budgeted balance sheet provides estimates of an organization's financial position at a future date, including assets like cash and inventory, liabilities such as payables and loans, and equity components such as common stock and retained earnings.

What are liabilities?

Liabilities are financial obligations owed by an organization to external parties, which may include accounts payable, loans, and accrued expenses such as income taxes.

What is equity?

Equity represents the ownership interest in a company, calculated as total assets minus total liabilities, and includes components such as common stock and retained earnings.

What is accounting rate of return (ARR)?

The accounting rate of return (ARR) measures the expected percentage return on an investment based on the average income it generates relative to the average investment cost.

What is the profitability index?

The profitability index is a financial metric that ranks investment projects by comparing the present value of cash inflows to the initial investment; a value above 1.0 suggests that the investment is worthwhile.

What is management by exception?

Management by exception is a practice that focuses managerial attention on significant variances between actual financial performance and budgeted figures, allowing for more efficient resource allocation.

What is cost variance?

Cost variance measures the difference between actual incurred costs and budgeted or standard costs; a favorable variance occurs when costs are less than expected, while an unfavorable variance indicates higher costs.

What is an annuity?

An annuity is a financial product that provides a series of equal cash flows at regular intervals over a specified period, commonly used in retirement planning.

What is the net present value decision rule?

The net present value decision rule states that a project should be accepted if its net present value (NPV) is greater than zero, indicating that projected earnings exceed costs.

What are the budgeting guidelines?

Budgeting guidelines include principles for effective budget preparation, emphasizing the importance of participatory budgeting, the establishment of challenging yet attainable goals, and the need for clear explanations of variances between actual performance and budgeted figures.

What are the components of a budgeted income statement?

The components of a budgeted income statement typically encompass projected sales revenue, cost of goods sold (COGS), gross profit margin, operating expenses, income before taxes, tax expenses, and the resulting net income.

What are the characteristics of a fixed budget?

Fixed budgets are characterized by their reliance on a set level of activity for planning purposes, with no adjustments made for fluctuations in actual performance or changes in operational conditions.

What are the characteristics of a flexible budget?

Flexible budgets are adaptable, allowing the budgeted amounts to be modified based on real-time changes in the level of activity or operational output during a given period.

What is cost variance determination?

Cost variance determination involves the process of assessing actual costs against standard or budgeted costs to identify whether the variances are favorable or unfavorable.

What does payback period evaluation involve?

Payback period evaluation entails analyzing cash flow data to determine the time required for cumulative cash inflows from an investment to offset the initial capital outlay.

What does investment analysis metrics include?

Investment analysis metrics encompass essential measures like net present value (NPV), accounting rate of return (ARR), and internal rate of return (IRR), which are utilized to evaluate the feasibility and potential returns of investment projects.

What is cumulative cash flow?

Cumulative cash flow is the total of cash inflows minus cash outflows over time, reflecting the organization’s liquidity position and indicating how long it will take to recover an investment.

What is the importance of budget coordination?

Budget coordination is crucial as it ensures that various departments or units within an organization are synchronized in their financial goals and operational strategies, ultimately contributing to the overall success of the organization.