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ACCT 5131 Accounting for Administration Control
Review for Midterm Exam
Note: The objective of this review is to help you make better preparations for the midterm exam by providing a general coverage of the exam. There is no guarantee that the testing knowledge of every question is included in this review.
Chapter 1 Fraser and Ormiston
Underlying Assumptions of the Accounting Model
The objective of Financial Accounting is to provide external users financial statements.
What are the standards the audited financial statements should follow?
What is “auditor’s opinion”? What are the categories of auditor’s opinion? What does each category mean?
What information do Footnotes (or notes) to financial statements disclose?
What information does firm’s annual report include? (4)
What is the main content of Statement of Stockholders’ Equity?
- The statement of stockholders’ equity reconciles the beginning and ending balances of all accounts that appear in the stockholders’ equity section of the balance sheet. Some firms prepare a statement of retained earnings, frequently combined with the income statement, which reconciles the beginning and ending balances of the retained earnings account. Companies choosing the latter format will generally present the statement of stockholders’ equity in a footnote disclosure.
What information does Income Statement provide? What information does Balance Sheet provide?
The income or earnings statement presents the results of operations—revenues, expenses, net profit or loss, and net profit or loss per share—for the accounting period. (summarizes the profitability of a company over a period of time. Expenses and losses are subtracted from revenues and gains to produce net income)
The balance sheet or statement of financial position shows the financial position— assets, liabilities, and stockholders’ equity—of the firm on a particular date, such as the end of a quarter or a year. (assets = liabilities + equity)
Chapter 2 Fraser and Ormiston
The three cost flow assumptions most frequently used by U.S. companies are FIFO (first in, first out), LIFO (last in, first out), and average cost. As the terms imply, the FIFO method assumes the first units purchased are the first units sold during an accounting period, LIFO assumes that the items bought last are sold first, and the average cost method uses an average purchase price to determine the cost of products sold.
Weighted Average Total= (total cost of all units/#of units in inventory)x #of units sold
LIFO= Reduced Tax Bill, Lowest Ending Valuation of Inventory. LIFOLEVI
FIFO= Pays MORE TAX, Higher Ending Valuation of Inventory. FIFOHEVI
Straight line depreciation: An accounting procedure under which equal amounts of expense are apportioned top each year of an asset’s life.
( [Depreciable base - (salvage value)]/ Depreciation period) = Depreciation expense $50,000 - $0/5 years = $10,000
Double-declining balance method: An accounting procedure for depreciation under which the straight-line rate if depreciation is doubled and applied to the net book value of the asset.
Cost less accumulated depreciation x twice the straight-line rate = Depreciation expense $50,000 x (2 x 0.2) = $20,000
Current liabilities include accounts and notes payable, the current portion of long-term debt, accrued liabilities, unearned revenue, and deferred taxes.
Current Assets: Cash equivalents, inventory, prepaid expenses.
When: Goodwill must be evaluated annually to determine whether there has been a loss of value. If there is no loss of value, goodwill remains on the balance sheet at the recorded cost indefinitely.
How: Goodwill arises when one company acquires another company (in a business combination accounted for as a purchase) for a price in excess of the fair market value of the net identifiable assets (identifiable assets less liabilities assumed) acquired. This excess price is recorded on the books of the acquiring company as goodwill.
Stockholders’ Equity: Claims against assets by the owners of the business; represents the amount owners have invested including income retained in the business since inception. P.281
Found in the Stockholders Equity: Common stock, additional paid-in capital, retained earnings.
Lastly, you will need to subtract the company's total liabilities from the company’s total assets to find the shareholders' equity in the business. For example, if a company has $100,000 in total assets and $50,000 in liabilities, the shareholders ‘equity is $50,000
Chapter 3 Fraser and Ormiston
What are the components of Comprehensive income? foreign currency translation effects, unrealized gains and losses on available for sale securities, additional pension liabilities, and unrealized gains and losses on cash flow hedges
The Revenue Recognition Principle requires that four conditions be met for a transaction to be recorded as a revenue item. the four conditions are (1) the revenues must be earned (the sale is complete), (2) the amount of the revenue must be measurable, (3) the costs of generating the revenue can be determined, and (4) the revenue must be realizable. (Fraser)
Common-Size Income Statement
As discussed in Chapter 2, common-size financial statements are a useful analytical tool to compare firms with different levels of sales or total assets, facilitate internal or structural analysis of a firm, evaluate trends, and make industry comparisons. The common-size income statement expresses each income statement item as a percentage of net sales. The common-size income statement shows the relative magnitude of various expenses relative to sales, the profit percentages (gross profit, operating profit, and net profit margins), and the relative importance of “other” revenues and expenses. Exhibit 3.3 presents the common-size income statement for Sage Inc. that will be used in this chapter and Chapter 5 to analyze the firm’s profitability.
Chapter 4 Fraser and Ormiston
Statement of Cash Flows: The financial statement that provides information about the cash inflows and outflows from operating, financing, and investing activities during an accounting period. P.281
- selling goods and providing services;
- purchasing inventory, paying wages, paying rent, and paying other operating expenses;
- receipt of interest and dividends;
- payments of interest;
- payment of income taxes; and
- payments for the purchase of and receipts from the sale of trading securities (in some cases).
Information associated with operating activities is often found in the income statement, under current assets in the balance sheet, and under current liabilities in the balance sheet.
- purchases and sales of land, buildings, equipment, and other assets not generally held for resale;
- purchases and sales of non-trading securities;
- loans to other entities;
- receiving the principal on loans to other entities; and
- some non-trade notes receivables.
Information associated with investing activities is often found under non-current assets in the balance sheet.
- the issuance of stock;
- borrowing money;
- paying cash dividends;
- paying off loans; and
- repurchasing stock (treasury stock).
Information related to financing activities is often found in the under long-term liabilities and equity parts of the balance sheet.
Indirect Method: On the statement of cash flows, a method of calculating cash flow from operating activities that adjusts net income for deferrals, accruals, and noncash and nonoperating items. P.278
Noncash Transactions: Investing or financing activity that does not affect the cash inflows or outflows, but involves only owners' equity or long-term assets and liabilities. If it represents a significant amount, a noncash transaction is disclosed in the notes (footnotes) to the cash flow statement.
Normally, transactions involving the generation or use of cash are recorded in the statement of cash flows, but since we're looking at non-cash transactions, we cannot use the exact same technique.
Instead, to record a non-cash investing and financing activity, you should include a footnote on the bottom of the statement of cash flows or in the notes of the financial statements. You can also disclose the non-cash investing and financing activity in a separate schedule or list.
Chapter 1 Datar and Rajan
Management Accounting: Managers of the organization
Financial Accounting: External users such a investors, banks, regulators, and suppliers
Chapter 2 Datar and Rajan
All costs in the income statement other than inventoriable costs are period costs.
All costs other than cost of goods sold, for example, marketing and distribution costs, are period costs. These costs are matched against revenues in the period in which they occur.
Period costs are all costs in the income statement other than cost of goods sold. Period costs, such as marketing, distribution, and customer service costs, are treated as expenses of the accounting period in which they are incurred because managers expect those costs to benefit revenues in only that period and not in future periods.
For manufacturing-sector companies, period costs in the income statement are all nonmanufacturing costs (for example, design costs and costs of shipping products to customers). For merchandising-sector companies, period costs in the income statement are all costs not related to the cost of goods purchased for resale. Examples of these period costs are labor costs of sales floor personnel and advertising costs. Because there are no inventoriable costs for service-sector companies, all costs in the income statement are period costs.
Newcomers to cost accounting frequently assume that indirect costs such as rent, telephone, and depreciation are always costs of the period in which they are incurred and are not associated with inventories. When these costs are incurred in marketing or in corporate headquarters, they are period costs. However, when these costs are incurred in manufacturing, they are manufacturing overhead costs and are inventoriable.
The manufacturing costs of finished goods include direct materials, other direct manufacturing costs such as direct manufacturing labor, and manufacturing overhead costs such as supervision, production control, and machine maintenance. All these costs are inventoriable: They are assigned to work-in-process inventory until the goods are completed and then to finished goods inventory until the goods are sold. All nonmanufacturing costs, such as R&D, design, and distribution costs, are period costs.
Treated as expenses of the accounting period in which they are incurred
All costs that are attached to purchasing materials that are held and directly tied to revenue are inventoriable costs. All other cost direct or indirect are period costs (R&D, Design, Distribution, Sales People, Supervision, Marketing, Corporate Functions, Rent, Telephone, Depreciation, Shipping)
Ex: Salespersons’ commissions, shipping cost of finished product, storage costs of finished product, customer service costs, advertising costs
Ex: CEO’s salary, depreciation on administrative office equipment, rent on administrative offices, accountant’s salary
Direct materials inventory. Direct materials in stock and awaiting use in the manufacturing process (for example, computer chips and components needed to manufacture cellular phones).
Direct material costs are the acquisition costs of all materials that eventually become part of the cost object (work in process and then finished goods) and can be traced to the cost object in an economically feasible way. Acquisition costs of direct materials include freight-in (inward delivery) charges, sales taxes, and customs. Material Costs are all costs associated with the acquisition and movement of an item. EX. Freight-In Charges, Sales Tax, Customs
Direct manufacturing labor costs include the compensation of all manufacturing labor that can be traced to the cost object (work in process and then finished goods) in an economically feasible way. Examples include wages and fringe benefits paid to machine operators and assembly-line workers who convert direct materials purchased to finished goods.
Indirect manufacturing costs are all manufacturing costs that are related to the cost object (work in process and then finished goods) but cannot be traced to that cost object in an economically feasible way. Examples include supplies, indirect materials such as lubricants, indirect manufacturing labor such as plant maintenance and cleaning labor, plant rent, plant insurance, property taxes on the plant, plant depreciation, and the compensation of plant managers. This cost category is also referred to as manufacturing overhead costs or factory overhead costs. We use indirect manufacturing costs and manufacturing overhead costs interchangeably in this book.
Indirect Manufacturing Costs, Manufacturing Overhead Costs, Factory Overhead Costs: 3 terms used interchangeably to describe costs incurred that cannot be directly tied to a specific product. EX. Indirect Supplies, Labor, Maintenance, Cleaning, Rent, Insurance, Property Tax, Plant Depreciation, Compensation.
Schedule of Cost of Goods Manufactured
Beginning direct materials inventory
+ Direct material purchased
Cost of direct materials available for use
- Ending direct materials inventory
Direct materials used in production
+ Direct manufacturing labor
+ Manufacturing overhead
Total manufacturing costs
+ Beginning work-in-process inventory
Total manufacturing costs to account for
- Ending work-in-process inventory
Cost of goods manufactured (COGM)
Schedule of Cost of Goods Sold
Beginning finished goods inventory
+ Cost of goods manufactured
Cost of goods available for sale
- Ending finished goods inventory
Cost of goods sold
OT=Premium rate paid for excess work categorized as Indirect Labor Cost or Overhead cost. Due to overall heavy volume of work.
Direct Labor= labor that can be directly traced to a specific product.
Idle Time= Wages paid for unproductive work because of: Breakdowns, Scheduling, Lack of Orders. Indirect Labor Cost
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