Accounting CONCISE SUMMARY

What are the core activities in accounting

Identifying, measuring, and communicating financial information

What does GAAP stand for, and why is it important?

Generally Accepted Accounting Principles; provides a common set of rules and standards for financial reporting

Who uses accounting information, and what are their objectives?

Managers (internal decisions), Investors (ROI, lending)

How would you describe today's business enviornment?

Dynamic due to globalization, technology, and regulations

Name the common enterprise types

Service, Merchandising, Manufacturing

What are some examples of ownership structures?

Sole Trader, Partnership, Corporation

What Key Regulations are crucial in establishing accounting practices?

Consumer, Environmental, Employee Safety, Employment, Tax

What is the role of accounting?

• Accountants ensure accuracy, legal compliance, and timely tax payments. 

• They evaluate financial operations, conduct risk analysis, and help improve efficiency.

Outline the accounting process

Identify, summarize, analyze, report transactions; create Financial Statements (ops, position, cash flows)

Who are the Stakeholders of the accounting system?

Managers, community, investors, creditors, government

What are the main two branches of accounting?

Management Accounting and Financial Accounting

What is included in Management Accounting?

includes planning (set goals), operating (daily decisions) and evaluations internally to support managerial decision-making and control.

What is included in Financial Accounting?

includes creating financial statements, reporting financial performance, and ensuring compliance with accounting standards for external stakeholders. (external)

What is CVP Analysis?

Estimates how changes in costs (fixed/variable), sales volume, and price affect profit. Helps managers with pricing, production, break-even points, target profits. Breaks down costs to fixed and variable.

Give the CVP analysis formula

Profit = Revenue - Total Costs; Total Cost = Fixed Cost + Variable Cost; Contribution Margin = Sales Revenue - Variable Costs.

What are some limitations to the CVP?

May not be useful for all businesses such as a service business as they have different variable costs compared to manufacturing businesses. Also may be ineffective in the long term as VC changes and fixed costs can fluctuate, making it challenging to predict outcomes. Additionally businesses should consider non financial impacts

How is the Break-even Point calculated?

Fixed Costs ÷ Contribution Margin per unit

How is Target Profit calculated?

(Fixed Costs + Desired Profit) ÷ Contribution Margin per unit.

How is the Contribution margin calculated?

Contribution Margin = Sales Revenue – Variable Costs 

(W4) What is a Budget?

A financial and non-financial plan and a tool for communication, coordination, planning, identifying issues.

What is a Master Budget?

Comprehensive, interrelated budgets, that start with Sales Budget and end with projected financial statements . Used for goal setting, resource allocation, performance evaluation (actual vs. budgeted).

Who is responsible for the budgeting process?

Budget committee. budget officer, top down, bottom up

What is the Operating Budget?

Revenue & Expenses → Income Statement

What is a Financial Budget?

Assets & Liabilities → Balance Sheet

What is the Entity Concept?

Business separate from owner.

What are Source Documents?

Receipts, invoices are examples.

What is the Monetary Unit Concept?

shows the value of exchange is measured in currency.

What is the Historical Cost Concept?

Recorded at original cost.

What is the Accounting Equation?

Assets=Liabilities+Owner′sEquity(OE). Verifies financial records; shows asset financing (debt vs. equity).

What is the Double Entry System?

Every transaction affects at least two accounts to keep the equation balanced. Forms basis of the Balance Sheet.

What is the Matching Principle?

Expenses matched to revenues in the same period.

What is Accrual Accounting?

Revenues/expenses recorded when earned/incurred (not just cash exchange).

What is Working Capital?

Current Assets - Current Liabilities. Represents readily available funds.

What are some examples of Internal Controls?

cash registers, matching totals, separation of duties, detailed recording

Bank Reconciliation matches internal cash records with bank statements due to things such as…

deposits in transit, outstanding payments, direct deposits/charges, errors

What is the formula for profit or loss?

Net Income = Revenue - Expenses.

What is the core principle of cash flow?

Beginning Cash Balance + Cash Inflows - Cash Outflows = Ending Cash Balance 

What are the three main sections in a CSF and what do they show

Operating Activities: Shows cash flows from a business's day-to-day, principal revenue-generating activities.

Investing Activities: Reflects cash flows related to the acquisition and disposal of long-term assets and investments.

Financing Activities: Accounts for cash flows from investors and creditors, as well as cash used to pay owners.

What are the key cash flow ratios?

Operating Cash Flow Margin:  Net Cash Flow from Operating Activities / Net sales

Cash Return on Total Assets Ratio: Net cash flow from operating activities + interest / average total assets 

Cash Return on Owner's Equity: Net Cash Flow from Operating Activities/Average Owner’s Equity

What is the difference between a CSF and a cash budget

A cash budget is an estimation of future cash flows, whereas the CSF performs a post-analysis of actual cash movements. 

How is Operating Cash Flow Margin calculated?

Net Cash Flow from Operating Activities / Net sales

Deciding whether to drop a product

changing tech and competition, no longer profitable, decreased demand, environmental or social impacts, avoidable costs

Deciding whether to make or buy a part

supplier quality and reliability, short term cost advantage versus long term strategic advantage

Deciding whether to sell a product or process it further

considerations include difference in business profits between two alternatives, impact on environment, availability of skilled employees

What are incremental costs, avoidable costs and opportunity costs?

• Incremental Costs: These are cost increases that arise from a higher volume of activity or an additional activity. 

• Avoidable Costs: Costs that a business can eliminate if it reduces or discontinues a specific activity. 

• Opportunity Costs: The profits a business gives up by choosing one course of action over another.

What are relevant and irrelevant costs

Relevant costs are costs that will be directly affected by a decision, while irrelevant costs are those that will not be impacted by the choice made.

What are sunk and historical costs

Sunk costs are expenses that have already been incurred and cannot be recovered, while historical costs are the costs of assets recorded in the accounting books at the time of acquisition. Both are irrelevant costs

What is the global reporting initiative

the framework for standardised sustainability reporting, taking into account ecological, social and environmental factors.

What is corporate governance?

is the framework of rules, regulations and practices by which a company operates, ensuring compliance with the law

• Aims to protect the rights of stakeholders 

What is the role of an auditor

provide an independent and professional opinion on a business's financial statements, ensuring info is accurately presented