budeting: formal statment of plans expressed in dollars and units.

budgeting benefits: plan, control, coordinate, communicate, and motivate

budgeting guidelines:

1. employees affected should help prepare (particapitaory budgetting)

2. goals should be challening but attainable

3. chance to expalin differeneces between actaul and budgeted amounts.

Budgeted income statement:

sales

COGS

GROSS PROFIT

selling admin and general expesnses

income before income taxes

income tax expense

net income

Budgeted balance sheet

cash

accounts receivable

raw materials inventory

finished goods inventory

equipment

less: accumalted depreciation

total assets

liabilities and equity

liabilities:

accounts payable

income taxes payable

Equity:

common stock

retained earnings

total liability. and equity

fixed budget: based on a single activity level

flexible budget: based on several activity levels

varaince: difference between budgeted and actaul amounts is: favorable- leads to higher income, unfavorable - leads to lower income

fixed budget (one activity level):

1. sales (in units)

2. sales (per unit)

3. variable costs

4. contribution margin

5. fixed costs

6. income

standard costing- preset cost for a product or service

management by exception- when managers focus on signifcant differences between actual costs and standard costs

cost variance: actaul cost < standard cost - favorable

actual cost > standard cost - unfavorable

payback period: expected time to recover initial investment

payback period with unequal cash flows: determine when cumultaive net cash flows change from negative to positive.

accoutning rate of return (ARR): percentage accounting return on average investment.

net present value (NPV): discounted net cash flows - inital investement

cost of capital (hurdle rate): required rate of return on potential investment

net present value decison rule: if NPV>0, then invest

annuity: series of cash flows of equal dollar amounts.

For profitbaility index, the rule is: Pick project with highest profitablility index (must exceed 1.0)

IRR: discount rate that yields NPV of zero for an investment

Internal rate of return decision rule: if IRR > hurdle rate, then invest.

Here are the flashcards converted to Q&A format:

1. Question: What is budgeting?Answer: Formal statement of plans expressed in dollars and units.

2. Question: What are the benefits of budgeting?Answer: Plan, control, coordinate, communicate, and motivate.

3. Question: What is participatory budgeting?Answer: Involvement of employees affected in the preparation of the budget.

4. Question: What is a fixed budget?Answer: Based on a single activity level.

5. Question: What is a flexible budget?Answer: Based on several activity levels.

6. Question: What is variance?Answer: Difference between budgeted and actual amounts; favorable leads to higher income, unfavorable leads to lower income.

7. Question: What is standard costing?Answer: Preset cost for a product or service.

8. Question: What is the payback period?Answer: Expected time to recover initial investment.

9. Question: What is net present value (NPV)?Answer: Discounted net cash flows minus initial investment.

10. Question: What is the cost of capital (hurdle rate)?Answer: Required rate of return on potential investment.

11. Question: What is the internal rate of return (IRR)?Answer: Discount rate that yields NPV of zero for an investment.

12. Question: What is a budgeted income statement?Answer: Includes sales, COGS, gross profit, selling and admin expenses, income before taxes, tax expense, and net income.

13. Question: What is a budgeted balance sheet?Answer: Includes cash, accounts receivable, raw materials inventory, finished goods inventory, equipment, accumulated depreciation, total assets, liabilities, and equity.

14. Question: What are liabilities?Answer: Obligations owed, such as accounts payable and income taxes payable.

15. Question: What is equity?Answer: Owner's claim on total assets; includes common stock and retained earnings.

16. Question: What is the accounting rate of return (ARR)?Answer: Percentage accounting return on average investment.

17. Question: What is the profitability index?Answer: Ratio used to rank projects based on their profitability; projects should exceed a value of 1.0.

18. Question: What is management by exception?Answer: Focus on significant differences between actual costs and standard costs.

19. Question: What is cost variance?Answer: Actual cost compared to standard cost; a favorable variance occurs when actual cost is less than standard.

20. Question: What is an annuity?Answer: A series of cash flows of equal dollar amounts.

21. Question: What is the net present value decision rule?Answer: Invest if NPV is greater than zero.

22. Question: What are the budgeting guidelines?Answer: Include participatory budgeting, challenging but attainable goals, and explanation of differences between actual and budgeted amounts.

23. Question: What are the components of a budgeted income statement?Answer: Includes sales, COGS, gross profit, expenses, income before taxes, tax expense, and net income.

24. Question: What are the characteristics of a fixed budget?Answer: Based on a predetermined single level of activity.

25. Question: What are the characteristics of a flexible budget?Answer: Allows for adjustments based on varying levels of activity.

26. Question: What is cost variance determination?Answer: Identifying whether actual costs are favorable or unfavorable against standard costs.

27. Question: What does payback period evaluation involve?Answer: Analysis to determine when cumulative cash flows become positive.

28. Question: What does investment analysis metrics include?Answer: Include NPV, ARR, and IRR to assess the viability of investment projects.

29. Question: What is cumulative cash flow?Answer: Ongoing total of cash inflows minus cash outflows, indicating investment recovery time.

30. Question: What is the importance of budget coordination?Answer: Ensures all departments align to achieve the overall organizational budget goals.