FINC 420- chapter 3!

Cost of sales/COGS; what did he say to think of it as

marginal cost each unit produced

COGS for a beer company

raw ingredients

wages for employees

repairs and maintenance

COGS is considered an __________

expense on the income statement

Gross profit =

Revenue - COGS

operating profit is a ___________

expense

sales and marketing are an _______________

operating expense

what would constitute an expense

cost incurred in the process of generating revenue

operating expenses are used to

general overall costs to improve the companies position; expenses that create value not just in current quarter but subsequent quarter

how do we think about revenue

going to be what they generate from their normal course of operations

example given about to think about revenue

Coors normally makes their profits by selling beer, so if they were to sell a property or something like that and make a profit its not going to go to revenue

expenses

depletion of assets, the outflows, the liabilities, and then the costs incurred in the course of business operations. the costs incurred in the course of business operations would be salaries, rent, utilities, and materials (operating expenses)

Operating Profit =

Revenue - operating expenses

in accounting when you have subtotals it going to be referred to as _________

multistep format

If you don’t have subtotals its going to be referred to as _________

single step format

in financial subtotal are good. why

in financial analysis they like to compare the subtotals and come up with ratios; easier if easier if you can get provided so you don’t have to do the legwork to figure out the differences

Companies that are making physical good are more likely to have higher cost of goods sold than companies t

who would have a higher cost of goods sold Facebook or Mulson Pours (beer company)

Mulson Beers because the raw inputs, the depreciation of the equipment, the owners salaries

Gross profit

is the revenue from sales minus the cost of goods sold

gross profit margin

gross profit divided by revenue

Companies that don’t sell physical products will generally be spending a lot of money on operating expenses (T/F)

True; operating expenses are advertising sales so it would make senes they are spending on a lot money to promote their product

what should we recognized with revenue and cash in terms of recognizing it

its going to be separate from cash movements

revenue is going to be recognized on the income statement in ___________

the period it is earned

what are the 5 steps to determine if you should recognize revenue

1. identify the contracts with a customer

2. identity the separate of distinct performance obligations in the contract

3. determine the transaction price

4. allocate the transaction price to the performance obligation within the contracts and

5. recognize revenue when (or as ) the entity satisfies a performance obligation

what is it called when we match revenues with expenses

matching principle

what type of returns would we expect to see on the first day of a firm’s IPO?

high volatility and higher market prices

Gross profit is

sales minus cost of goods sold

If net sales are 12million and COGs are 2.5 million, then which of the following closely approximates gross margin

gross margin is net sales minus cost of goods sold,which equals 9.5 million, or approximately 79.2%.

If net sales are 12mil, COGS are 2.5 mil and operating expenses are 6.5 mil, then which of the following must closely approximates operating margin

operating margin is operating profit divided by net sales, so operating profit is net sales (revenue) - operating expenses divided by net sales, so it would be 12-6.5-2.5/ 12 which equals 0.25; the answer would be 25%

How should lyft allocate the revenue or what revenue should Lyft recognize. The ride is $30. That’s how much money the rider hands to the person driving them home. Lyft keeps $3. $27, the rest of the money goes to the driver. Should lyft count the entire $30 as revenue or should they count the $3 for commission.

The driver is responsible for providing the service, Lyft can only recognize its revenue as the commission it retains, which is $3.

Fundamental principle of expense recognition

a company recognizes expenses in the period in which it consumes (uses up) the economic benefits associated with the expenditure

Costs are matched with revenues, which is the ________ principle

matching

revenues are reported as gross if the company is acting as ________

principal (meaning they are the one’s responsiblefor delivering the goods or services)

if company is acting as agent then _____

net (because they are not responsible for delivering the goods or services; they simply facilitate the transaction)

what does FIFO give you in terms of COGS? *when you have inflations meaning prices are rising

FIFO will give you the lowest COGS but the highest ending inventory value

what does LIFO give you in terms of COGS? *when you have inflations meaning prices are rising

LIFO will give you the highest COGS but lowest ending inventory value

If one company uses LIFO and one company uses FIFO, then they might have the exact same operations but one company might have higher expenses than the other simply because they use a different __________ methodology.

accounting

A company purchases the following products throughout January

• January 2- 100 units @ $10

• January 10 - 150 units @ $12

• January 20 - 200 units @$14

On January 25, the company sold 250 units. Assume LIFO calculate COGS and ending inventory.

COGS= 3400 and Inventory = 2200

LIFO stands for Last in First out. that means you would choose the one that is most _______ purchased or produced inventory

recently

• most recent date

In an inflationary environment, would firm prefer to use FIFO or LIFO for its inventory management

We would say FIFO since it will give you the lowest COGS and the highest ending inventory value but…..it may also result in higher taxes due to higher net income. Higher net income means more pre taxes that you will have to pay. You would choose LIFO because that would increase your expenses (the public isn’t looking at your income statement) and decrease your taxes right now.

Depreciation

process of systematically allocating costs of long lived assets over the period during which the assets are expected to provide economic benefits

Current asset

asset that will be used up or converted to cash within a year

cash, accounts receivables, and inventory are exampls of ________ assets

current

non current assets

used up over a period longer than one year

the two depreciation methods that we focus on are straight line and the ______ method

accelerated

straight line depreciation

depreciate the same amount every year over the asset's useful life

annual depreciation expense

(cost - residual value)/ useful life

Given a price of 10,000 what is the annual straight line deprecation expense if the estimated salvage value is 5,000 and the useful life is 10 years

(10000-5000)/10= 500