BUSN Ch.8 Accounting Decision Making by the Numbers

Account: Who uses it? Managers

Need sales, debt, cash, inventory, and capital info for operations.

Account: Who uses it? Stockholders

Owners interested in financial performance and investment returns via statements.

Account: Who uses it? Employees

Use financial performance data to gauge pay raises, bonuses, or layoff risks.

Account: Who uses it? Creditors

Lenders who assess a firm's creditworthiness using financial statements before granting loans.

Account: Who uses it? Suppliers

Check if a company can pay for its orders before supplying goods.

Account: Who uses it? Government agencies

Require accurate accounting info to meet IRS, SEC, and regulatory reporting rules.

Accounting: Who does it? Public accountants

Provide tax preparation, external auditing, and management consulting to clients on a fee basis.

Accounting: Who does it? Management accountants

Work within a company to provide analysis, prepare financial statements, and assist managers.

Accounting: Who does it? Internal auditors

Work within organizations to detect internal problems such as waste, mismanagement, embezzlement, and employee theft.

Accounting: Who does it? Government accountants

Perform accounting functions for local, state, or federal agencies, ensuring tax revenues/expenditures comply with regulations.

Accounting: Who does it? CPA certification requirements

Requires 150 semester hours of college, a rigorous four-part exam, and one year of direct work experience.

financial accounting

The branch of accounting that prepares financial statements for use by owners, creditors, suppliers, and other external stakeholders.

generally accepted accoungting principles (GAAP)

A set of accounting standards that is used in the preparation of financial statements.

Financial Accounting Standards Board (FASB)

The private board that establishes the generally accepted accounting principles used in the practice of financial accounting.

GAAP standard: Relevant

Must help users understand the firm's financial performance and condition.

GAAP standard: Reliable

Must provide information that is objective, accurate, and verifiable.

GAAP standard: Consistent

Must use the same core assumptions and procedures over time.

GAAP standard: Comparable

Must present statements in a standardized way to track and compare results.

Regulatory response to accounting scandals

Many state accounting boards passed new ethics-related requirements.

balance sheet

A financial statement that reports the financial position of a firm by identifying and reporting the value of the firm's assets, liabilities, and owners' equity.

accounting equation

Assets = Liabilities + Owners' Equity

assets

Resources owned by a firm.

liabilities

Claims that outsiders have against a firm's assets.

owners' equity

The claims a firm's owners have against their company's assets (often called "stockholders' equity" on balance sheets of corporations).

income statement

The financial statement that reports the revenues, expenses, and net income that resulted from a firm's operations over an accounting period.

revenue

Increases in a firm's assets that result from the sale of goods, provision of services, or other activities intended to earn income.

accrual-basis accounting

The method of accounting that recognizes revenue when it is earned and matches expenses to the revenues they helped produce.

expenses

Resources that are used up as the result of business operations.

net income

The difference between the revenue a firm earns and the expenses it incurs in a given time period.

statement of cash flows

The financial statement that identifies a firm's sources and uses of cash in a given accounting period.

Statement of retained earnings

A simple statement that shows how retained earnings have changed from one accounting period to the next.

Change in retained earnings calculation

Found by subtracting dividends paid to shareholders from net income.

Stockholders' equity statement

A statement that shows net income, dividends, and other changes in stockholders' equity such as the issuance of additional shares.

horizontal analysis

Analysis of financial statements that compares account values reported on these statements over two or more years to identify changes and trends.

budgeting

A management tool that explicitly shows how a firm will acquire and use the resources needed to achieve its goals over a specific time period.

Budgeting benefit: Resource allocation and goal specification

Helps managers clearly specify how they intend to achieve goals and how limited resources will be allocated.

Budgeting benefit: Communication and coordination

Encourages communication and coordination among managers and employees in various departments by providing insights on challenges and resource needs.

Budgeting benefit: Motivation

Serves as a motivational tool by clearly identifying goals and action plans, making employees more motivated when goals are ambitious yet achievable.

Budgeting benefit: Evaluating progress and performance

Allows managers to compare actual performance to budgeted figures to determine progress and take corrective action if actual performance falls short.

top-down budgeting

A budget preparation approach where top management creates the budget with little or no input from middle and supervisory managers.

Top-down budgeting advantage

Top management knows the long-term strategic needs of the company and sees the big picture.

bottom-up (participatory) budgeting

A budget preparation approach where middle and supervisory managers actively participate in the creation of the budget.

Bottom-up budgeting advantages

Middle managers know more about departmental issues, challenges, and necessary resources than top management.

Managers are more highly motivated to achieve budgetary goals when they have a say in their development.

Bottom-up budgeting disadvantage

It is more time consuming and resource intensive to carry out than the top-down approach.

budgetary slack

When middle managers overstate their needs or set low budget goals to make their jobs easier.

Commonality of budgeting approaches

Despite drawbacks, the participatory approach is currently more common than the top-down process.

financial budgets

Budgets that focus on the firm's financial goals and identify the resources needed to achieve these goals.

master budget

A presentation of an organization's operational and financial budgets that represents the firm's overall plan of action for a specified time period.

static budget

A budget based on a single assumed level of sales, which is excellent for planning but has weaknesses when used to measure progress, evaluate performance, and identify problem areas.

Weakness of static budgets

Real-world sales can vary considerably from forecasted values for reasons outside management's control, causing all related budget figures to become erroneous.

flexible budget

A budget that isn't based on a single assumed level of sales, but is instead developed over a range of possible sales levels to show appropriate budgeted costs for each level.

Flexible budget advantage

Enables managers to make more meaningful comparisons between actual costs and budgeted costs for control purposes.

managerial (or management) accounting

The branch of accounting that provides reports and analysis to managers to help them make informed business decisions.

cost

The value of what is given up in exchange for something.

out-of-pocket cost

A cost that involves the payment of money or other resources.

implicit cost

The opportunity cost that arises when a firm uses owner-supplied resources.

fixed costs

Costs that remain the same when the level of production changes within some relevant range.

variable costs

Costs that vary directly with the level of production.

direct cost

Costs that are incurred directly as the result of some specific cost object.

indirect costs

Costs that are the result of a firm's general operations and are not directly tied to any specific cost object.

activity-based costing (ABC)

A technique to assign product costs based on links between activities that drive costs and the production of specific products.

Accounting information recipients

Provides vital information to both internal and external stakeholders of a firm.

Main outputs of financial accounting

The balance sheet, income statement, and statement of cash flows.

Purpose of financial accounting outputs

Help external stakeholders, such as owners and creditors, evaluate the financial performance of a firm.

Role of managerial accounting

Helps managers make better decisions by providing relevant information on costs and benefits.

Value of basic accounting knowledge

Helps you succeed in just about any career path you choose.