ACCT 526 CH 1

Financial accounting

the process of identifying, recording and communicating business information in the form of financial statements, prepared following GAAP, to external users

Assets

resources owned by the business. Includes cash, receivables, inventory, plant assets

Liabilities

amounts owed to creditors. Includes all types of payables

Capital (Common) stock

the owners' claim to the resources of the company that are not owed to creditors

Revenues

earnings of the company resulting from the sale of goods or the provision of services

Expenses

costs to the company necessary to provide the product or service

Dividends

distribution of earnings to the stockholders' (owners) of the company

The four financial statements required by GAAP

Income Statement

Statement of Retained Earnings

Balance Sheet

Statement of Cash Flows

Income Statement Equation

Sales - Cost of Goods Sold = Gross Profit - Operating Expenses = Income from Operations + Other Revenue and Gains - Other Expenses and Losses = Net Income

Statement of Retained Earnings Equation

Retained Earnings (beginning of period) + Net Income (or - Net Loss) - Dividends Retained Earnings (end of period)

Statement of Retained Earnings

the retained earnings statement explains how much of the income is left in the business after the distribution of dividends to the owners

Balance Sheet Equation

Total Assets = Total Liabilities + Stockholders' Equity

Stockholders' Equity

In a corporation's balance sheet, the owners' claims to the business are called stockholders' equity. The equity is divided into two parts: (1)paid-in-capital and (2)retained earnings

Paid-in capital

represents the money invested by the owners

Retained earnings

represents the earnings of the corporation that the owner's have left inside the corporation

Merchandiser

a company that purchases a product and turns around and sells that product without making any changes to the product

Manufacturer

a company that purchases one product and turns it in to something else before it sells the product

Period Costs

a merchandiser's operating expenses (selling and administrative) are all period costs

Product Costs

a manufacturer will have the same period costs (operating expenses) as a merchandiser. In addition, he will have manufacturing/product costs

Period Costs appear

first on the Income Statement. They are expensed an incurred (used) because they are considered to be an expense of the current period. Period costs are shown as Operating Expenses.

Product costs appear

first on the Balance Sheet. They are included in the Inventory Account until they are sold. When the product is sold, the cost is moved from the Balance Sheet to the Income Statement. Product costs are shown as Cost of Goods Sold.

three manufacturing/product costs:

direct materials

direct labor

manufacturing overhead

manufacturing overhead

If the cost is Incurred (used) in the plant/factory and can't be classified as direct materials or direct labor, then it must be ________

product cost

period cost

It the cost is incurred (used) in the office or store, then it is NOT a ______, it is a _______

direct materials

raw materials that are physically and directly associated with the finished product

direct labor

work of factory employees that can be physically and directly associated with the finished product

manufacturing overhead

everything else that happens in the factory that can't be called direct materials or direct labor

examples of direct materials

wood in furniture; bicycle tires on a bicycle; windshield in an automobile

examples of direct labor

assembly line workers

examples of manufacturing overhead

indirect materials; indirect labor; cleaning the factory; repairs to factory equipment; factory utilities; factory depreciation

managerial accounting information

- used to identify problems and opportunities, solve problems and exploit opportunities, and assess organizational strategy and evaluate performance

- helps managers in planning, controlling, and decision making

planning

a management activity that involves the detailed formulation of action to achieve a particular end

controlling

the managerial activity of monitoring a plan's implementation and taking corrective action as needed

decision making

the process of choosing among competing alternatives

Managerial accounting

- intended for internal users

- not subject to rules for external financial reporting (e.g., GAAP and SEC regulations)

- subjective

- able to use both financial and nonfinancial measures of performance

- able to give a broader, interdisciplinary perspective

Financial accounting

- directed toward external users

- subject to externally imposed rules (e.g., GAAP and SEC regulations)

- able to provide audited, objective financial information

Cost leadership

provide the same or better value to customers at a lower cost than competitors

value chain

the set of activities required to design, develop, produce, market (and deliver), and service products and services to customers

continuous improvement

searching for ways to increase the overall efficiency and productivity of activities by decreasing waste, increasing quality, and reducing costs.

total quality management

a management philosophy in which manufacturers strive to create an environment that will enable workers to manufacture perfect (zero-defect) products

lean accounting

an accounting practice that organizes costs according to the value chain to help managers eliminate waste and, ultimately, reduce costs and improve financial performance

managerial accountants

- play a critically important decision-making support role in an organization

- assist those individuals who are responsible for carrying out an organization's basic objectives by providing them with various types of performance measurement information

line positions

represents the firm's internal accounting system designed to provide the necessary financial and nonfinancial information that helps company managers make the best possible decisions.

staff positions

Positions that are supportive in nature and have only indirect responsibility for an organization's basic objectives

controller

the chief accounting officer in an organization

treasurer

the individual responsible for the finance function; raises capital and manages cash and investments

ethical behavior

choosing actions that are right, proper, and just

Sarbanes-Oxley Act (SOX)

passed in response to revelations of misconduct and fraud by several well-known firms, this legislation established stronger governmental regulation of public companies in the United States, from enhanced oversight (PCAOB) to increased auditor independence and tightened regulation of corporate governance

Identify and explain the current focus of managerial accounting

- It supports management focus on customer value, total quality management, and time-based competition.

- Information about value chain activities and customer sacrifice (such as post-purchase costs) is collected and made available.

- Activity-based management is a major innovative response to the demand for more accurate and relevant managerial accounting information.

- The nature of managerial accounting information system may depend on the strategic position of the firm:

Cost leadership strategy

Product differentiation strategy

Lean accounting

Describe the role of managerial accountants in an organization

- They are responsible for identifying, collecting, measuring, analyzing, preparing, interpreting, and communicating information.

- They must be sensitive to the information needs of managers.

- They serve as staff members of the organization and are part of the management team.

Explain the importance of ethical behavior for managers and managerial accountants

- A strong ethical sense is needed to resist efforts to change economic information that may present an untrue picture of firm performance.

- Many firms have a written code of ethics or code of conduct.

- The IMA has a code of ethics for managerial accountants.