WGU C213 Final Exam – Accounting for Decision Maker Review (Latest 2026/ 2027 Update) | 100% Verified Questions & Answers | Grade A

WGU C213 Final Exam – Accounting for Decision Maker Review (Latest 2026/ 2027 Update) | 100% Verified Questions & Answers | Grade A What does accounting focus on? The impact a business's activities have on its relationships with customers The impact a business's activities have on the environment The impact a business's activities have on its public image The impact a business's activities have on its overall financial performance The impact a business's activities have on its overall financial performance What was the 2012 net profit amount if the 2013 pro-forma net profit of $187,000 was based on a 22% increase? $228,140 $182,975 $153,279 $145,860 $153,279 Which report summarizes cash collections and cash expenditures from operating, investing, and financing activities over a period of time? Statement of cash flows Summary of cash receipts Cash flow schedule Cash receipts and disbursements sheet Statement of cash flows Which users would have a primary concern with an organization's ability to provide healthcare benefits? Competitors Vendors Employees Suppliers Employees Which benefit does a corporation gain by following Generally Accepted Accounting Principles (GAAP)? A decrease in the amount of net income it reports An increase in its comparability to other companies An increase in the amount of assets it reports A decrease in its income tax obligations An increase in its comparability to other companie Which body regulates a certified public accounting firm's audit practices when the firm is auditing a large publicly traded company? The Financial Accounting Standards Board (FASB) Another certified public accounting (CPA) firm The Internal Revenue Service (IRS) The Public Company Accounting Oversight Board (PCAOB) The Public Company Accounting Oversight Board (PCAOB) What has had the most significant impact on accounting practices? Certification requirements Mobile computing Information technology New product innovations Information technology What two items of information are revealed on the balance sheet? Choose 2 answers Debt Revenues Ownership Costs Expenses Revenues Expenses Which term is defined as the residual interest in the net assets of a company? Liabilities Owners' equity Revenues Operating income Owners' equity A corporation has total liabilities of $300 million, total owners' equity of $100 million, and current assets of $50 million.What is the value of the firm's long-term assets? $250 million $350 million $400 million $450 million $350 million Which situation should result in revenue recognition on the income statement for the year ending 12/31/14 if the firm is using accrual-basis accounting? In 2014, a company provides services to a customer for which cash will be collected the next year (2015). In 2014, a company collects cash from a customer for services it provided in the previous year (2013). In 2014, a company collects cash from a customer for services it will provide next year (2015). In 2014, a company enters into a contract whereby it agrees to provide services to a customer next year (2015). In 2014, a company provides services to a customer for which cash will be collected the next year (2015). Accrual accounting **Accrual accounting is a method of accounting where revenues and expenses are recorded WHEN THEY ARE EARNED (service performed), regardless of when the money is actually received or paid. ** For example, you would record revenue when a project is complete, rather than when you get paid. This method is more commonly used than the cash method. Which category on the statement of cash flows summarizes cash receipts and payments to owners and creditors of the company? Cash flows from business activities Cash flows from financing activities Cash flows from investing activities Cash flows from operating activities Cash flows from financing activities Cash Flow from Financing Activities Cash Flow from Financing Activities is the net amount of funding a company generates in a given time period, used to finance its business. Finance activities include the issuance and repayment of equity. ... Types include: cash, common, preferred, stock, property, issuance and repayment of debt. Cash Flow from Investing Activities Cash Flow from Investing Activities is the section of a company's cash flow statement. ... that displays how much money has been used in (or generated from) making investments in a specific time period. Investing activities include purchases of long-term assets (such as property, plant and equipment) Where would an investor find a summary of a company's significant accounting policies? In the income statement In the balance sheet In the notes to financial statements In the statement of cash flows ** In the NOTES to financial statements ** The first note in almost every company's financial report gives you the information you need to understand the accounting policies used to develop the financial statements. This note explains the accounting rules the company used to develop its numbers. The note is usually called the "Summary of significant accounting policies." Which assurance does an external audit report provide for its readers? The company will generate net income The company's financial statements fairly reflect its financial position The company will be a good credit risk The company will generate positive cash flows The company's financial statements fairly reflect its financial position 14 Match each accounting term with its definition. Answer options may be used more than once or not at all. Reliable Material Conservatism Relevant Reliable -- Information that can be verified. Material -- Information related to recognizing losses as they occur. Conservatism -- Information that is important enough to make a difference Relevant -- Information having to do with the matter at hand Partial financial information for a company is as follows: Current assets $36,543 Total assets $58,719 Current liabilities $24,824 Total liabilities $48,561 Stockholders' equity $10,158 Sales $46,997 Net Income $ 3,761 Market value of shares $41,316 What is the price-earnings (PE) ratio for this company? 10.985 --- 11.0 What does it mean if a company has a debt ratio of 101.5%? The company has 1.5% more total liabilities than net income. The company has 1.5% more total liabilities than total assets. The company has 1.5% more total liabilities than gross sales. The company has 1.5% more current liabilities than current assets. The company has 1.5% more total liabilities than total assets. What is consistent with a continual decline in gross profit if the firm's cost of goods sold remains the same? Continual increase in taxes Continual decrease in sales Continual increase in interest Continual decrease in salaries Continual decrease in sales Which two cash flow adequacy ratios represent a cash cow? Choose 2 answers $7,589 / $9,210 $8,091 / $9,374 $4,510 / $4,932 $6,991 / $5,486 $5,220 / $1,875 **answer: any ratio 1.0 ** $6,991 / $5,486 $5,220 / $1,875 Which formula yields a cash times interest earned ratio of 11? Cash before interest and taxes of $11,000 / cash paid for acquisitions of $1,000 Cash before interest and taxes of $11,000 / cash paid for interest of $1,000 Cash before interest and taxes of $11,000 / cash paid for income taxes of $1,000 Cash before interest and taxes of $11,000 / cash from operations of $1,000 Cash before interest and taxes of $11,000 / cash paid for interest of $1,000 "material" in accounting Information that is important enough to make a difference "Conservatism" in Accounting principle of conservatism states that the accountant will be conservative in the measurement of financial data, thus understating, rather than overstating, organizational income and assets. The practice of recognizing all losses but not recognizing gains until they are certain. **Which two cash flow adequacy ratios represent a cash cow?** 1. Anything above "1" 2. Cash Flow Adequacy Ratio = Cash from operations / Cash required for investing activities Which form of debt should be reported in the long-term liability category? Unearned revenue that will be earned in 9 months Salaries payable due in 2 weeks Accounts payable due in 30 days Notes payable expected to be paid in 18 months Notes payable expected to be paid in 18 months In January of year 1, a company began doing business as a corporation in order to sell technology-related accessories and services. During its first month of operations, the following events occurred: January 1 The corporation received $1,000,000 in cash in exchange for stock issued to stockholders. January 3 The corporation borrowed $250,000 from bank. The loan is a four-year loan with an interest rate of 12 percent, payable each year on January 1 beginning in year 2. January 5 The corporation purchased equipment to be used in the business for $200,000 cash. January 8 The corporation purchased inventory costing $200,000 by paying $120,000 in cash. The remainder was put on credit accounts with suppliers. January 15 The corporation hired five employees. Each employee will be paid $1,000 at the end of each month. January 30 The corporation paid $6,000 cash for a one-year insurance policy. The policy period will begin on February 1, year 1. What will be the impact of the January 5 event on the company's balance sheet on that date? Cash will decrease $200,000, and loan payable will decrease $200,000. Cash will decrease $200,000, and paid-in-capital will decrease $200,000. Equipment will increase $200,000, and cash will decrease $200,000. Equipment will increase $200,000, and retained earnings will decrease $200,000. Equipment will increase $200,000, and cash will decrease $200,000. In January of year 1, a company began doing business as a corporation in order to sell technology-related accessories and services. During its first month of operations, the following events occurred: January 1 The corporation received $1,000,000 in cash in exchange for stock issued to stockholders. January 3 The corporation borrowed $250,000 from a bank. The loan is a four-year loan with an interest rate of 12 percent, payable each year on January 1 beginning in year 2. January 5 The corporation purchased equipment to be used in the business for $200,000 cash. January 8 The corporation purchased inventory costing $200,000 by paying $120,000 in cash. The remainder was put on credit accounts with suppliers. January 15 The corporation hired five employees. Each employee will be paid $1,000 at the end of each month. January 31 The corporation paid $6,000 cash for a one-year insurance policy. The policy period will begin on February 1, year 1. What will be the impact of the January 31 event on the company's balance sheet on that date? Cash will decrease $6,000, and accounts receivable will increase $6,000. Prepaid insurance will increase $6,000, and cash will decrease $6,000. Prepaid insurance will decrease $6,000, and accounts payable will decrease $6,000. Cash will decrease $6,000, and paid-in capital will decrease $6,000. Cash will decrease $6,000, and paid-in capital will decrease $6,000. Which two values affect the measurement of net income? Choose 2 answers: Stockholder contributions Dividends paid Operating expenses Ordinary gains and losses ?????????? Operating expenses Ordinary gains and losses Which two items' subtotals are included in a multi-step income statement? Choose 2 answers: Gross profit Income from operations Current liabilities Total assets ??? Income from operations Current liabilities multi-step income statement Income statement format that contains subtotals to highlight significant relationships. In addition to net income, it reports gross profit and operating income. it uses multiple subtractions in computing the NET INCOME shown on the bottom line. A furniture company using accrual accounting purchased 20 sofas in November 2011. In December 2011, 8 of the 20 sofas were sold to customers. The customers all signed contracts agreeing to pay half the amount owed in February 2012 and the remaining half in March 2012. At the time of sale, the company was reasonably sure the customers would pay the amount owed. The furniture company pays its salespeople a commission on each sofa sold, with commissions for December 2011 sales paid in January 2012. The furniture company paid $3,000 for advertising that ran in the local newspaper in November 2011. In which month should advertising costs be expensed? February 2012 January 2012 December 2011 November 2011 November 2011 27 On May 1, 2011, a company using accrual accounting purchased equipment costing $500,000. It expects the equipment to have a useful life of five years. At the time of purchase, the company also purchased a one-year insurance policy on this equipment, which cost $6,000. How much insurance expense should the company have recognized for the year ending in 2011? $3,000 $4,000 $6,000 $8,000 ??? $4,000 In January of year 1, a company began doing business as a corporation in order to sell technology-related accessories and services. During its first month of operations, it focused on obtaining the financing needed to start its operations. In February of year 1, the company sold inventory costing $25,000 for $75,000 cash. In February of year 1, the company provided technology-related services worth $10,000. Customers paid a total of $4,000 in cash for these services and promised to pay the remainder the following month. What will be the total impact of these services provided on the company's balance sheet other than an increase in cash of $4,000? Choose 2 answers Accounts receivable will decrease $6,000. Accounts receivable will increase $6,000. Retained earnings will decrease $2,000. Retained earnings will increase $6,000. Retained earnings will increase $10,000. ???Accounts receivable will increase $6,000, Retained earnings will increase $10,00 Order the steps in the decision cycle from first (1) to last (5) 1. Prep financial statements 2. Analyze financial statements 3. Gather information 4. Make decision 5. Implement decision What was the 2012 net profit amount if the 2013 pro-forma net profit of $187,000 was based on a 22% increase? $228,140 $182,975 $153,279 $145,860 $153,279 What is a common category in a statement of cash flows? Cash from production activities Cash from planning activities Cash from investing activities Cash from marketing activities ????? Cash from production activities Which cash flow category would include "cash received from investors"? Cash from investing activities Cash from financing activities Cash from charitable activities Cash from sponsoring activities Cash from financing activities Which item is an investing activity? Cash payments for purchase of plant assets Cash payments for dividends Cash receipts from dividend revenue Cash receipts from issuance of stock Cash payments for purchase of plant assets What impact does the sale of equipment have on the statement of cash flows? Increase in cash from investing activities Increase in cash from operating activities Increase in cash from financing activities Decrease in cash from operating activities ????Increase in cash from investing activities What is known about the direct and indirect methods of preparing statements of cash flow? Both methods have the same popularity among large U.S. companies The direct method is more popular among large U.S. companies The indirect method is more popular among large U.S. companies Neither method is very popular among large U.S. companies ** The indirect method is more popular among large U.S. companies ** Why is the indirect method is more popular among large U.S. companies? The indirect method is a little more difficult to understand. It essentially presents a reconciliation of accrual accounting net income to cash from operating activities. Accrual accounting records revenues and expenses when they occur regardless of when cash changes hands. For example, in accrual accounting, a company records a sale even if the customer has yet to pay his invoice. Under the indirect method, the company starts with net income as reported on the income statement and adjusts net income on an accrual basis rather than cash basis. For instance, since depreciation is a non-cash expense, the indirect method adds the amount to net income. An increase in accounts receivable is a use of cash because, essentially, the company is providing a good to a client on credit. Most companies opt to report the cash flow statement using the indirect method because accrual accounting provides a better measure of the ebbs and flows of business activity. A company's statement of cash flows includes the following cash transactions: Sales 1,250,000 Inventory Purchase -750,000 Property and Equipment Purchase -270,000 Interest Payment on Long-Term Debt -25,000 Payment of Wages -315,000 Payment of Rent -40,000 Borrowing Long-Term Debt 200,000 Payment of Cash Dividends -15,000 Repurchase of Treasury Stock -40,000 Total Cash Flows -5,000 Assuming the company uses US GAAP standards, what is the total cash flow from financing activities? $175,000 $160,000 $145,000 $120,000 ??????? Which two examples represent financial statement errors? Choose 2 answers: The outside auditor disagrees with the amount reported as an allowance for uncollectible accounts receivable An accounting employee overpays a supplier and receives a portion of the excess as a kickback The accountant unintentionally records amounts as revenue that were prepaid by customers but not yet earned The accounting department miscalculates the payroll tax due at year-end, resulting in an inaccurate liability The accountant unintentionally records amounts as revenue that were prepaid by customers but not yet earned The accounting department miscalculates the payroll tax due at year-end, resulting in an inaccurate liability Which internal control is intended to ensure that a company does not mistakenly pay a supplier for an invoice that includes more items than were actually received? The inventory department counts and inspects items as received and forwards the receiving record to accounts payable. The purchasing department authorizes the order of all items before they occur. The accounts payable department utilizes pre-numbered checks in the payment of supplier invoices. The company requires two signatures on each check in order for a payment to be sent. ??? The inventory department counts and inspects items as received and forwards the receiving record to accounts payable. What are two common reasons for managers to manipulate reported earnings? Choose 2 answers: They are preparing to qualify for a bank loan. They are feeling pressured to meet internal sales goals. They are feeling pressured to comply with an external auditor. They are preparing to meet Sarbanes-Oxley requirements. They are preparing to qualify for a bank loan. They are feeling pressured to meet internal sales goals. Which two requirements must accounting firms that audit public companies meet under the Sarbanes-Oxley Act? Choose 2 answers: Firms must report to and be retained by the audit committee rather than the CFO or other company management. Firms must help to develop and enforce a code of ethics on audit clients. Firms must not provide certain non-audit services to audit clients, such as management functions or legal services. Firms must not audit the same public company for more than five consecutive years. Firms must not provide certain non-audit services to audit clients, such as management functions or legal services. Firms must report to and be retained by the audit committee rather than the CFO or other company management. Which two requirements must management of public companies meet under the Sarbanes-Oxley Act? Choose 2 answers: They must authorize any loans to members of the board of directors. They must be rotated every five years. They must support a stronger board and audit committee. They must provide an assessment of the effectiveness of internal controls with each annual report. ????? They must support a stronger board and audit committee. They must provide an assessment of the effectiveness of internal controls with each annual report. Which two actions do internal auditors perform to assist in maintaining the integrity of financial statements? Choose 2 answers: They search for and investigate fraud. They issue opinions regarding whether financial statements align with Generally Accepted Accounting Principles (GAAP). They perform the initial accounting for various transactions. They review financial records and internal controls. ????? They search for and investigate fraud. They review financial records and internal controls. What is a significant role of the U.S. Securities and Exchange Commission (SEC) in financial reporting? They ensure that auditors have the resources and information necessary to provide valuable professional services. They ensure that financial statement users are provided with reliable information to use in decision making. They support company management and boards of directors in the effective discharge of their responsibilities. They provide representation and training to controllers of public companies. They ensure that financial statement users are provided with reliable information to use in decision making. What does management accounting provide? Choose 2 answers: The insight that management needs so the business can perform more effectively The detailed data that managers need to make decisions that will give the business a competitive edge The insight that outside stakeholders need to choose a company that has a competitive advantage over competitors The information needed by the IRS to decide if a company should have a tax audit performed The insight that management needs so the business can perform more effectively The detailed data that managers need to make decisions that will give the business a competitive edge How does management accounting differ from financial accounting? Management accounting is restricted to providing financial rather than non-financial data. Management accounting is used primarily for internal planning, control, and evaluation. Management accounting presents an unbiased view of a company's economic performance. Management accounting is not used to gain a competitive advantage in the marketplace. Management accounting is used primarily for internal planning, control, and evaluation. Which account is seen on the balance sheet of a manufacturing company but not on the balance sheet of a service-oriented company? Accounts receivable Equipment Cash Inventory Inventory What is a cost that will change in the future based upon the decision made? Sunk cost Out-of-pocket cost Opportunity cost Differential cost Opportunity cost Which two examples are period costs? Choose 2 answers: Selling expenses Direct labor Manufacturing overhead Administrative expenses Selling expenses Administrative expenses A company manufactures custom-built wooden bookshelves. Which two costs would the company classify as period costs? Choose 2 answers: Advertising cost Salary cost of the receptionist Salary cost of the craftsperson Wood cost Advertising cost Salary cost of the receptionist What role do ethical standards have in management accounting? To prevent all unethical behavior of anyone the management accountant may work with To provide the management accountant with the ability to work with only companies that follow strict ethical principles To provide the management accountant with the ability to know if a person will act ethically or not To guide the resolution to possible ethical dilemmas that the managerial accountant may encounter To guide the resolution to possible ethical dilemmas that the managerial accountant may encounter During its first month of operations, a manufacturer incurs the following costs in dollars related to activities within its factory: Direct materials costs $5,000 Indirect materials $2,000 Direct labor $15,000 Indirect labor $3,000 Factory rent $10,000 Depreciation on factory equipment $8,000 What are the manufacturer's total product costs for the month? $20,000 $25,000 $38,000 $43,000 ?????? During its first month of operations, a manufacturer incurs the following costs (in dollars) related to activities within its factory: Direct materials $15,000 Direct labor $30,000 Manufacturing overhead $40,000 What amount should be reported as cost of goods sold on the income statement if 5,000 units are produced and 4,000 are sold? $56,000 $68,000 $70,000 $85,000 $68,000 Which two costs are included when calculating inventory costs? Choose 2 answers: Legal Overhead Selling Direct labor ?????? Overhead Direct labor In which scenario would activity-based costing be more appropriate than traditional costing? A company produces five different products. The products are highly differentiated and have significantly different demands for their use of overhead costs. Direct labor and direct materials are the major costs associated with a company's two products. The small overhead cost is closely associated with the products' use of direct labor hours. A company produces one product line. All of the overhead is, therefore, allocated to that product line. A company produces several different products. The products have very similar requirements for their production and have minimal variation between them. A company produces five different products. The products are highly differentiated and have significantly different demands for their use of overhead costs. Which category of ABC activities are machine setup and material movement costs associated with? Batch-level activities Product line activities Facility support activities Unit-level activities *** Product line activities The director of a marathon race wants to assign the cost of having police officers along the race route to manage crowd control. Which consideration is an appropriate cost driver? The cost of liability insurance for the race The amount of hours the director spends on organizing the race The number of race participants and spectators The amount of the registration fee ???The number of race participants and spectators A manufacturer produces three products: A, B, and C. The company uses the following information to determine activity rates for each pool: Costs Cost Pool Total Activity What is the total amount of overhead applied to product A? $158,000 $265,000 $125,500 $150,000 $158,000 A running shoe manufacturer produces three types of shoes: traditional, minimalist, and spikes. The company uses the following information to determine activity rates for each pool: Data concerning the three shoe products appear below: What is the total amount of overhead applied to spikes shoes? $35,750 $265,000 $31,250 $100,250 Order of assets listed on the balance sheet Assets are listed in the order of liquidity. Liquidity is the amount of time it would usually take to covert an asset into cash. Obviously, cash would be listed first, followed by marketable investments (a company can quickly convert a short-term investment into cash). Accounts receivable would be listed next followed by inventory, and long-term investments, fixed assets, and intangibles. Current assets are listed before long-term assets. Current liabilities are listed before long-term liabilities, but there is no specific order they are listed in outside of current and long-term. There is also no specific order equity accounts are listed on the balance sheet; although, typically you will see paid-in-capital followed by retained earnings followed by accumulated other comprehensive income, and lastly, treasury stock. Difference between a manufacturing company and a service company. Period Costs Product Costs Service Co. Selling Costs Direct Labor Administrative Costs Service Overhead Manufacturing Co Selling Costs Direct Labor Administrative Costs Manufacturing Overhead Direct Materials (inventory The only difference is - a manufacturing company has direct materials (inventory). Evaluating a historical income statement to project a future income statement. Projected growth for 2017 = 10% increase over 2016 sales. Step 1: Convert the income statement into a common-sized income statement. Step 2: Multiply 2016 sales by 1.10 (10% growth) to get the forecasted 2017 sales. Then multiply the projected 2017 sales by the percentages from step 1. Now, what would you do if you were given the 2017 sales figure and you need to calculate the 2016 sales figure based off the 10% growth for 2017? Calculation for 2016: 110,000 / 1.10 = 100,000 Image: Evaluating a historical income statement to project a future income statement. Projected growth for 2017 = 10% increase over 2016 sales. Step 1: Convert the income statement into a common-sized income statement. Step 2: Multiply 2016 sales by 1.10 (10% growth) to get the forecasted 2017 sales. Then multiply the projected 2017 sales by the percentages from step 1. Now, what would you do if you were given the 2017 sales figure and you need to calculate the 2016 sales figure based off the 10% growth for 2017? Role of the U. S. Securities and Exchange Commission (SEC) in financial reporting. Regulates the U.S. Stock exchanges. Seeks to create a fair information environment in which investors can buy and sell stocks. Congress created the first securities act in 1933 and the second securities act in 1934 in response to the stock market crash of 1929. The Securities Act of 1933 requires most companies planning to issue new debt or stock securities to the public to submit a registration statement to the public for approval. The Securities Act of 1934 requires a public company to file detailed periodic reports including audited financial statements (form 10-K is the annual report; Form 10-Q is the quarterly report). Granted the legal authority to establish accounting standards. Currently the SEC accepts the pronouncements set by FASB. The SEC can suspend trading of a company's stock, and if hearings show that the issue failed to comply with the securities laws, the SEC can de-list the security. Congress strengthened the SEC through the enactment of Sarbanes-Oxley (SOX), which was enacted after the massive frauds that occurred in the late 1990s and the early 2000s. Compare and Contrast Traditional Costing to Activity-Based Costing (ABC). ABC is a more accurate product costing system than traditional product costing systems. ABC requires more time and expense to administer than do traditional costing systems. Companies with diverse products involving substantially different production processes, an ABC system yields better cost data and better management decisions. Describe how basic cost behavior patterns change as sales volumes change. Fixed costs (FC) are fixed in total, but as sales volume increases, the per unit FC decreases. Variable costs (VC) are fixed per unit, but as sales volume increases, total VC increases. Stewart Manufacturing produces and sells die cast race cars. VC for each die cast car is $3 and total FC are $300,000 Per Unit Variable costs remains the same Total Fixed Costs remains the same Per Unit Fixed Costs decrease Image: Describe how basic cost behavior patterns change as sales volumes change. Analyze a statement of cash flows to identify operating, investing, and financing activities. Operating Activities: All categories that are on the income statement, and all current assets and liabilities. i.e. sales (cash received from customers); cost of goods sold (cash paid for inventory); operating expenses (cash paid for rent); Analyze a statement of cash flows to identify operating, investing, and financing activities. Investing Activities: Balance sheet accounts: Long-term assets. i.e. property, plant, and equipment; investments i.e. cash paid for equipment, cash paid for investments (stock, loans) Analyze a statement of cash flows to identify operating, investing, and financing activities. Financing Activities: Balance sheet accounts i.e. Long-term liabilities and equity accounts i.e. mortgage payable; common stock and additional-paid-in capital (cash received from stockholders); retained earnings (cash paid for dividends) Explain Accrual Accounting Revenue recognition: In order for revenue to be recognized in an accrual system, two criterial must be met: The promised work must be done before the revenue is recognized. Cash collection must be reasonable assured before revenue is recognized. Explain Accrual Accounting Expense recognition: Expenses are matched to the revenue that is generated from the expense. Direct matching, as with cost of goods sold (COGS) However, some expenses are extremely difficult to match with specific revenue, and are more aligned to a specific time period. Systematic allocation, as with deprecation Moreover, some expenses are difficult to match with specific revenue or specific time periods. Immediate recognition, as with advertising Variable Costs: A cost that changes directly with changes in the level of sales or production. Examples are direct materials costs and sales commission. Fixed Costs: A cost that doesn't change based on changes in the level of sales or production. Examples are building rent and executive salaries. Product Costs: A cost incurred as part of the production process. These costs are first reported as an asset (inventory) and then as an expense (cost of goods sold) when the product is sold. Period Costs: A cost incurred outside the factory or production facility. These costs are reported as an expense in the period in which they are incurred. Direct Materials: The cost of the primary raw materials used in production. In producing French fries, the direct materials cost is the cost of the potatoes. Indirect Materials: Materials that are necessary to a manufacturing or service business but are not directly included in or are not a significant part of the actual product. Direct Labor: The cost of the wages of the workers who are assembling the direct materials into the finished product. In producing an automobile, the direct labor cost is the compensation cost of the auto workers on the assembly line. Indirect Labor: Labor that is necessary to a manufacturing or service business but is not directly related to the actual production of the product. Manufacturing Overhead: All factory costs that are not direct materials or direct labor. Examples are factory supervisor salaries, factory building depreciation, and miscellaneous indirect materials such as glue or screws. Direct Costs: The costs that are created by a particular product or segment that is being analyzed. If a product or segment is dropped, the direct costs created by that product or segment will disappear. Indirect Costs: The costs that are assigned to a particular product or segment but that are not actually caused by that product or segment. If a product or segment is dropped, the indirect costs assigned to that product or segment will remain. Differential Costs: A future cost that can be changed by a decision made now. An example is monthly rent for an apartment. Sunk Costs: A past cost that cannot be changed by any decision made now. An example would be last month's paid rent. Out-of-Pocket Costs: Costs that involve the outlay of cash or the use of some other asset (like equipment). Opportunity Costs: The benefits not received because of actions NOT taken. For example, the opportunity cost of going to a basketball game is the increased points that you could have received on the next day's accounting exam if you had spent that time studying. Calculate the cost of a product Product costs = Direct labor + Direct Materials + Factory Overhead Factory overhead = Indirect labor + Indirect materials + “Factory expenses” Can you calculate the product costs for September? Factory overhead = 5,000 + 3,000 + 7,000 + 8,000 = 23,000 Total product costs = 20,000 + 25,000 + 23,000 = 68,000 Total non-product costs = 2,000 + 5,000 = 7,000 Image: Calculate the cost of a product Product costs = Direct labor + Direct Materials + Factory Overhead Factory overhead = Indirect labor + Indirect materials + "Factory expenses" Can you calculate the product costs for September? Identify overhead cost activities Image: Identify overhead cost activities Describe the purpose of accounting. Accounting is the recording of the day-to-day financial activities of a company and the organization of that information into summary reports used to evaluate the company's financial status. Bookkeeping is a part of accounting. Bookkeeping refers to the process of recording transactions into various accounts, which is the first step in accounting. The next step is to analyze the accounts and organize them into financial statements and other useful reports. Describe the three financial statements. The balance sheet reports a company's assets, liabilities, and owners' equity. It reports the financial position of a firm at a point in time. The income statement reports the amount of net income earned by a company during a period. Net income is the excess of a company's revenues over its expenses. It reports the financial performance of a firm over a period of time. The statement of cash flows reports the amount of cash collected and paid out by a company in the following three types of activities: operating, investing, and financing over a period of time. Lenders Banks use companies' financial statements in making decisions about commercial loans. The financial statements are useful because they help the lender predict the future ability of the borrower to repay the loan. Investors Investors want information to help them estimate how much cash they can expect to directly receive from the business in the future if they invest in it now. Company Management Managers use financial accounting data to formulate company goals, to compute bonuses for employees, and to illuminate company weaknesses. Suppliers and Customers Suppliers, customers, and employees use financial statements to tell them about the long-run prospects of a company. Employees Financial statement data, as mentioned earlier, are used in determining employee bonuses. In addition, financial accounting information can help an employee evaluate the employer's ability to fulfill its long-run promises, such as for pensions and retiree health care benefits. Financial statements are also important in contract negotiations between labor and management. Competitors Competitors use financial accounting information to reveal strategic opportunities within their industry. Government Agencies Government agencies use financial statement data to bolster political and regulatory positions for and against companies. Politicians Politicians use financial statement data to bolster political and regulatory positions for and against companies. The Press Reporters use financial accounting data as background information and to indicate which companies are undergoing significant changes in financial status. CPA Accreditation The American Institute of Certified Public Accountants (AICPA) is the professional organization of certified public accountants (CPAs) in the United States. A CPA is someone who has taken a minimum number of college-level accounting classes, has passed the CPA exam, and has met other requirements set by his or her state. A CPA firm is a company that provides freelance business advice, particularly in connection with accounting issues and executes the vast majority of external audits in the US. The AICPA sets ethical standards for CPAs, provides continuing education for them, writes and grades the CPA exam, lobbies for legislation favored by CPAs, and provides other support to CPAs. Its oversight of the CPA exam is its main role in accreditation. However, to be accredited as a CPA you must meet the requirements of the state in which you plan to practice. The requirements for each state are set by that state's legislature and overseen by that state's Board of Accountancy, which is a state agency. Public Company Accounting Oversight Board (PCAOB) The PCAOB determines who can audit public companies regardless of whether the audit firm is accredited by a state Board of Accountancy. Thus, they accredit firms that can audit public companies. Describe current trends that are causing changes in the field of accounting. Globalization - As more and more business do business globally, capital flows more freely across national boundaries. This means investors can choose to invest in firms all over the planet. To help them make investment decisions, the global accounting and regulatory communities are working to bring accounting standards around the world into agreement the IASB was one step in that direction, but nations still control the accounting standards used within their borders and so much of the standardization is being done through voluntary cooperation Technology - Information technology has speeded up the pace with which accounting data and reports are produced and dramatically increased the volume of accounting information that firms can provide to investors. Identify components of a balance sheet. The three main sections of the Balance Sheet are Assets, Liabilities, and Equity. Both assets and liabilities are further separated into current and long term based on whether the asset is expected to be consumed or the liability paid within a year. Assets expected to be consumed and liabilities expected to be paid within a year are current and those that will be consumed or paid after a year are long-term. Equity is separated into paid in capital (also referred to as capital stock) and retained earnings. Paid in capital is created when an owner buys stock from the firm. Retained earnings are the accumulated earnings of the firm (i.e., net income over time) that have not been paid back in dividends. Paid in capital also is referred to as contributed capital while retained earnings is earned capital. Identify components of the income statement. The Income Statement describes a company's financial performance for a period of time. A company's expenses are subtracted from its revenues and gains and losses are also factored in computing net income. Net income helps explain the change in retained earnings between two Balance Sheet dates, along with dividends and unrealized gains and losses. A single step income statement lumps all revenues together and subtracts all expenses to calculate net income. A multiple-step presents subtotals that highlight key performance measures. Its categories include: Sales or revenues - Cost of goods sold (COGS) (Product costs of items sold) = Gross profit - Selling and Administrative expenses (also called operating expenses) = Operating income or earnings before interest and taxes (EBIT) + Other income - other expenses + gains - losses = Earnings before taxes (EBT) - Taxes = Net Income (Profit) If the firm has experienced a discontinued operation or extraordinary item, the effects of these events are subtracted from all the income statement line items and the income statement will include another subtotal - income from continuing operations that will be followed by a single line item that presents to effects of the extraordinary item discontinued operations and then net income. Identify components of the cash flow statement. The Statement of Cash Flows details how a company obtained and spent cash during a certain period of time. Thus, the cash flow statement explains the change in the firm's cash account for a period of time. All of a company's cash transactions are categorized as either operating, investing, or financing activities. i) Operating cash flows are those associate with any activity on the income statement. The operating section of the cash flow statement is what the income statement would show if the income statement were prepared on a cash basis and not accrual basis. ii) Investing cash flow are those related to a firm investing in itself (purchasing and selling property, plant and equipment or other businesses) and investing in others (buying the stocks and bonds of another firm or lending another firm money). iii) Financing cash flows are those associated with someone investing in your firm, either stockholders (buying and selling your stock and paying dividends) and creditors (borrowing and paying back debt). Explain the purpose of notes to financial statements. There are four main areas that must be covered in the financial statement footnotes: A summary of significant accounting policies. GAAP frequently allows firms to make choices in preparing their financial statements and so GAAP requires that those choices be reported in the footnotes. For example, the firm must report the method they are using to calculation depreciation along with the average useful lives for major classes of depreciable assets. Additional information about the summary totals found in the statements. For example if a firm as a notes payable account in their long-term liabilities, they must list all the individual notes that make up the balance and present the life of the loan and its interest rate. Disclosure of important information not recognized in the statements. For example, if the firm is the defendant in a lawsuit but the outcome of the suit is unclear, the firm must report the existence of the suit in the footnotes. Since the outcome is uncertain, GAAP does not require the firm to accrue a liability for the possible loss thus the possible loss has not been recognized in the financial statements (i.e., no liability has been reported on the balance sheet). Supplementary information required by the Financial Accounting Standards Board (FASB) or the Securities and Exchange Commission (SEC). This is a broad category. One example is reporting summary financial data for different segments of the firm operates in different industries. Describe the purpose of an external audit. Audit conducted by external (independent) qualified accountant(s). These accountants are usually CPAs, but they may not be. Each state determines who can be a CPA in that state and states have slightly different requirements. The independent accounting firm conducts tests to determine whether the financial statements fairly reflect the financial status of the company issuing them and whether the financial statements were prepared using Generally Accepted Accounting Principles (GAAP). The tests include an examination of the original documents underlying key transactions, a spot check to verify that reported inventory actually does exist, and contact with a sample of customers and suppliers to confirm the sales and purchases reported by the company. The external auditor would also carefully review the system of procedures and controls within the company to determine whether the accounting records are maintained in a reliable fashion. Firms hire independent external auditors for a variety of reasons. In some cases, laws and regulations mandate that they do so. Aside for regulations, firms benefit when raising funds through stock sales or by borrowing by being able to show the potential investor or creditor that their financial statements have been audited because that increases the credibility of those financial statements. Comparability Information that becomes much more useful when it can be related to a benchmark or standard. Also, other firm's results or the firm's own history. Conservatism A pervasive factor in accounting that can be summarized as follows: when doubt exists concerning two or more reporting alternatives, users should select the alternative with the least favorable impact on reported income, assets, and liabilities. Materiality The question of whether an item is large enough to make any difference to anyone. Articulation In an accounting context, articulation means that the three primary financial statements are not isolated lists of numbers but are an integrated set of reports on a company's financial status. The statement of cash flows contains the detailed explanation for why the balance sheet cash amount changed from beginning of year to end of year. The income statement, combined with the amount of dividends declared during the year, explains the change in retained earnings shown on the balance sheet. Cash from operations on the statement of cash flows is transformed into net income through the accounting adjustments applied to the raw cash flow data. Identify the order of assets, liabilities, and stockholders’ equity accounts on a balance sheet. The three main sections of the Balance Sheet are Assets, Liabilities, and Equity. Both assets and liabilities are further separated into current and long term based on whether the asset is expected to be consumed or the liability paid within a year. Assets expected to be consumed and liabilities expected to be paid within a year are current and those that will be consumed or paid after a year are long-term. Equity is separated into paid in capital (also referred to as capital stock) and retained earnings. Paid in capital is created when an owner buys stock from the firm. Retained earnings are the accumulated earnings of the firm (i.e., net income over time) that have not been paid back in dividends. Paid in capital also is referred to as contributed capital while retained earnings is earned capital. The Balance Sheet equation - Assets = Liabilities + Equity. Whenever any transaction is recorded in the firm's accounting records, the recording must always maintain this balance. However, some transactions only affect one side of the equal sign with two offsetting entries. For example, selling an asset for cash would only affect the asset side of the equation but would create a net zero effect on Assets since one asset is being converted to another. Liquidity or the speed with which it can be turned into cash. Current assets come before long term assets because they are expected to be liquidated in one year. Within current assets, cash comes first because it is already cash. Accounts receivable usually comes next because all the firm has to do is collect the receivable to receive the cash. Inventory usually follows accounts receivable because it has to be sold and then the money has to be collected to convert it into cash. Describe the purpose of net income on an income statement. The accountant's attempt to summarize in one number the overall economic performance of a company for a given period. Describe the purpose of the statement of cash flows. The statement of cash flows explains how a company's cash was generated during the period and how that cash was used. Explains change in cash account between two balance sheet dates. Operating cash flows cash flows are those associate with any activity on the income statement. The operating section of the cash flow statement is what the income statement would show if the income statement were prepared on a cash basis and not accrual basis. In addition, since current assets and current liabilities tend to be linked to revenues and expenses on the income statement, any cash flows associated with current assets and liabilities tend to be operating cash flow. Investing cash flows are those related to a firm investing in itself (purchasing and selling property, plant and equipment or other businesses) and investing in others (buying the stocks and bonds of another firm or lending another firm money). However, any revenues earned (i.e., interest and dividend income) from investments in other firms is income on the income statement and, therefore, are operating cash flow. Financing cash flows are those associated with someone investing in your firm, either stockholders (buying and selling your stock and paying dividends) and creditors (borrowing and paying back debt). However, any interest expense on loan payments is an expense and therefore an operating cash flows. Dividends are not an expense but a transfer of retained earnings back to the owners and is not an operating but a financing cash flow. Describe the differences between the direct and indirect methods of the cash flow statement. The direct and indirect method only apply to the operating section of the cash flow statement. The investing and financing are always prepared using a direct method. The operating activities section of a statement of cash flows prepared using the direct method is, in effect, a cash-basis income statement. Unlike the indirect method, the direct method does not start with net income. Instead, this method reports directly the major classes of operating cash receipts and payments of an entity during a period. The direct method is favored by many users of financial statements because it is easy to understand. The indirect method begins with net income as reported in the income statement and then details the adjustments needed to arrive at cash flow from operations. The indirect method is favored and used by most companies because it is relatively easy to construct from existing balance sheet and income statement data. In addition, the indirect method highlights the reasons for the difference between net income and cash from operations. In addition, GAAP required this reconciliation and so if a firm uses the direct method, they must present the indirect method in the footnotes anyway, thus having to do the calculations twice. Errors Result when unintentional mistakes are made in recording transactions, posting transactions, summarizing accounts, and so forth. Errors are not intentional and when detected are immediately corrected. Errors can result from sloppy accounting, bad assumptions, misinformation, miscalculations, and other factors. Disagreement Result when different people arrive at different conclusions based on the same set of facts. Because accounting involves judgment and estimates, opportunities for honest disagreements in judgment abound. These disagreements often come about because of the different incentives that motivate those involved with producing the financial statements. For example, there might be differing views about what percentage of reported receivables will be collected or how long equipment and other assets will last. Frauds Result from intentional errors. Fraudulent financial reporting occurs when management chooses to intentionally manipulate the financial statements to serve their own purposes, such as meeting Wall Street's earnings forecasts as was the case with WorldCom. Identify motivations and common techniques used to manage earnings. Earnings management occurs when management attempts to manipulate the impression the financial statements present to users. They can change the timing of transactions, use aggressive accounting procedures, and alter transactions to achieve these goals. Earnings management, exclusive of using fraud to management earnings, is a gray area where there are no clear ethical rules to determine when it is ethical or not. Managers manage earnings to: Meet internal targets - sometimes people that can influence the financial results are also given bonuses based on those results, which gives those employees an incentive to manage earnings. Meet external expectations - Most publicly traded firms are followed and stock analysts who make predictions about future performance for their clients. Firms try to guide these analysts' expectations to prevent surprises that might lower the firm's stock price. Income smoothing - Investors like predictable earnings because they make determining the firm's future performance easier to predict. Managers many manage earnings to smooth out fluctuations that make future earnings harder to predict. Window dressing for an IPO or a loan - If a firm plans to raise outside capital by selling stock or borrowing money, the firm's management has an incentive to make the financial statement results more attractive to those outside creditors and investors. External auditors are independent accountants (usually but not always CPAs) who are retained by organizations to perform audits of financial statements to determine if they are prepared and presented in accordance with GAAP and are free from material misstatement. Internal auditors are company employees whose role in the organization is structure to keep them as independent as possible from management. They are a group of experts (in controls, accounting, and operations) who monitor operating results and financial records, evaluate internal controls, assist with increasing the efficiency and effectiveness of operations, and detect fraud. Internal auditors are not sufficiently independent to express opinions on the firm's financial statements, but their role is much broader than external auditors in that they are the firm's front link defense against fraud and they can engage in operational audits that analyze a firm' operating efficiency and effectiveness and external auditors don't do these types audits. Describe the purpose of management accounting. main purpose is to provide a firm's management with information they can use to run the business more efficiently and effectively. However, managers also use financial accounting reports to accomplish these goals as well. Differentiate between management and financial accounting. Image: Differentiate between management and financial accounting. Merchandising companies buy finished goods and resell them to customers. This category includes wholesalers and retailers. Service companies do not produce products but provide services. These companies do not tend to have inventories since inventories are limited to products for resale and they don't produce products. Manufacturing company produce products for resale. Describe the role of key ethical standards in the field of management accounting. The main professional association for management accountants is the Institute of Management Accounting (IMA). It has established a code of conduct to help guide management accountants when they fact ethical dilemmas. Their members are ethically required to: -Be competent in their profession -Not disclose confidential information -Act with both actual and apparent integrity in all situations -Maintain objectivity when communicating information to decision maker Traditional Costing Method applies overhead costs to products based on a predetermined overhead rate. The rate is usually based on a general cost driver like direct labor hours. In short, the traditional method allocates over to products based on a single cost driver. That is, it treats overhead costs as a single pool of overhead costs and only uses one cost driver. ABC Method More accurate because it does a better job of identifying activities that actually drive overhead costs and how different product's production methods drive those costs. While ABC is more complex and costly to implement, it is more accurate. The process of developing an ABC system can also help the firm identify problem areas in their production process. Using ABC tends to be worth the extra cost when a firm produces multiple products that are produced in very different ways (i.e., have fairly complex production processes). If the firm only has one produce or if their products are very similar in how they are produced, then ABC. Describe cost-volume-profit analysis. a technique for determining how changes in revenues, costs, and level of activity affect the profitability of an organization.