WGU C213 Accounting for Decision Makers Questions and Verified Answers

Accounting steps. - 1. Prepare 2. Analyze 3. Gather 4. Make decisions 5. Implement 6. Observe. Managerial info is inside or outside the business? - Inside, Internal True or false, managerial accounting uses BOTH managerial and financial accounting? - True. Financial accounting is only outside. Managerial accounting can be inside AND outside. Financial is inside or outside the business? - Outside, External, includes lenders and investors The financial statement includes what 3 documents - Balance sheet, income statement, and statement of cash flows Point in time, Assets (resources) and liabilities (obligations) - Balance Sheet Period of time (usually 1 year), amount of profit made - Income Statement Period of time, where money came from, and where it went. Inflow and outflow of cash (Cash Flows). Change in money for the period. - Statement of Cash flows Assets= liabilities + equity - Balance sheet equation Net income=Revenue - Expenses - Revenue equation The statement of cash flows includes what three activities - Operating, investing, and financial activities The decision makers in the U.S. (accounting rules) - FASB: Financial accounting standards. Private, no government involvement. It is a public process, includes individuals experienced in business and accounting (7 members). Developed by accounting rule makers. No Legal authority. - GAAP: General accepted accounting principles We need accounting rules for... - comparability U.S. gov agency responsible for ensuring that investors, creditors, and other financial statement users are provided with reliable information. It watches behavior in financial markets. - SEC: Security and exchange commission. Located in Article 1, Sec 8, Clause 3 What forms do the SEC regulate? - Registration statements (prospectus), Form 10-K, Form 10-Q, and schedule 14A (proxy statement). These are all publicly viewable. What does the SEC do? - Oversees stock exchanges, can suspend a company, investigate and suspect violations of the SEC rules. Does the SEC have legal authority? - YES. The SEC has legal authority to establish accounting rules and disclosure requirements. Financial accounting rule per the US constitution - USA congress- >SEC->FASB The SEC created the - FASB: Financial accounting standards board FASB created - GAAP (has no legal authority) What sets auditory standards, continue education credits, CPA exam, and is the code of professional conduct? - AIPCA: American INSTITUTE of certified public accountants. Who is the only person who can sign audit reports? - Only CPA's: Certified public accountants. The Sarbanes-Oxley Act "SOX" created? - PCAOB: Public company accounting oversight board. PCAOB is under supervision of? - Under supervision of the SEC. Who appoints members, approves actions, gov standards, inspections, and investigations? It is a private group and OVERSEES. AUDITORS? - PCAOB: Public Company Accounting OVERSIGHT Board. IRS - U.S. Gov agency that collects and regulates income taxes. Their primary goal is to collect revenue. There are two sets of books. Tax Books and Financial accounting books. - Economic income and accounting income books. & Tax income, and cash flow books. IASB: Internatonal Accounting Standard Board - Similar to the FASB, but not 100% the same. It is international, everywhere but the U.S. Barriers to international convergence are? - Who enforces and national policies. Rules set centrally, but legally adopted and enforced locally? - Condorsement To increase government regulation, one would use: - The SEC, SOX, and PCAOB. Financial statements - Reduce uncertainty and allows lenders and investors to target their financing and investing to the level of risk they are willing to take. A financial statement that furthermore decreases uncertainty. - Adudit Provides accountants the best attempt at measuring the economic performance of a company. - Income Statement Mother of all financial statements. - Balance sheet Assets=liabilities+equity - Accounting equation Resources owned or controlled by a company that will provide probable future economic benefit. - Assets (resoures) Obligations that require the probable future sacrifice of economic benefits in the form of the transfer of assets or the providing of services. - Liabilities (obligations) Investment amount in the business PLUS how much profit they have left in the business. L-A=E - Equity Owners Equity - 1 paid in capital, 2 retained earnings, 3 treasure stock, 4 accumulated other comprehensive income. The amount originally paid in exchange for share of stock - PIC: Paid in capital CUMMULATIVE earnings that have been retained in the business - Retained earnings Company buys back its own shares of stock, shown as a subtraction from equity. - Treasury stock MARKET EVENTS that result in an increase or decrease in equity are: - AOCI: Accumulated other comprehensive income.Market related gains and losses that are not included on the income statement. Breaking items down into current and long term results (current=with in one year) - Classified balance sheet small and large businesses - Entity Concept What allows property, plant, and equipment (PPE) to be reported at CURRENT APPRISED VALUE rather than historical cost? - International Property rules Are assets recorded at liquidity prices? - NO The income statement contains what three things? - Revenue, expenses, and net income. Revenue-Expenses=Net Income - Income statement equation Amount of assets created from the sale of goods or services. Also, REVENUE CAN BE GENERATED BY SATISFYING LIABILITIES. One SOURCE of an asset. - Revenue (gains) Amnt of ASSETS CONSUMED in generating revenues. Expenses are also used when liabilities are created in generating revenues. one USE of an asset. It is ONE way to create a liability. - Expenses (losses) Are Dividends located on the income statement? - NEVER. Divedends are not expenses. Overall measure of a companies economic performance during a period of time. - Net income Are revenues assets? - Never Are expenses liabilities? - Never Net income / outstanding number of share stock. - Earnings per share (EPS) Recognize revenue when value has been delivered to the customers. Not before or after. - Revenue recognition Statement of cash flows. Inflow of cash comes from what three activities. - Operating, investing, and financing activities Things that a business does every day hundreds of times - Operating activities NOT investing in stock or bonds. It is investing in the productive capacity of the business. Time to time things, not usually daily, Ex: buying, selling long term assets such as buildings, equipment, land. - Investing activities Obtaining the capital or financing that a business requires to buy needed resources. Time to time things, not every day. Ex: Borrowing, repaying, receiving cash invested by shareholders, and paying dividends. - Financing activities Notes to the financial statement: - Summary of significant accounting policies, additional info about summary totals, disclosure of info not recognized, and supplementary info. The external audit is enforced by what? - The SEC Public companies by law have to do what kind of audit? - External. But, private companies who want to provide assurance to a banker or new investor may do an external audit too. To become an external auditor you have to? - Become a CPA (certified public accountant), CE, CPA exam, and be completely INDEPENDENT to any company you audit. An audit certifies what two things? - General accepted accounting principles (GAAP), and General accured auditory standards (GAAS). Certifies that the companies information is not misleading. Does an audit ensure that a company is a good investment for a possible investor? - NO. An audit does NOT certify that a company is good or not good to invest in. It does certify that a company is following GAAP, and GAAS. Relevance Vs. Reliability - Relevance: FAST, but not precise/certain. Reliability: Can count on it. Slow, carefully verified, precise, historically in the past, this was used most often. Across time for the same company and across company at same point. Subcategory is consistency. - Comparability Telling bad news immediately, wait on good news till you are positive about it. Lenders encourage this. - Conservatism size of the thing that makes a difference and could impact decisions. Important to auditors. If an item is material, it equals or exceeds 2% of the sales, or 5% of owners equity, or 10% of net income. - Materiality Does materiality replace accounting judgment? - Never Details. All three financial statements are not isolated but rather an integrated set of reports on a companies financial status. - Articulation What contains detailed explanation of why the balance sheet cash amount changed form beginning to end of the year? - Statement of cash flows. This explains the change of retained earnings shown on the balance sheet. - Income statement, combined with amount of dividends declared during the year. cash from operations on the statement of cash flows is transformed into net income through? - The accounting adjustments applied to the raw cash flow date. Analysis of financial statement of numbers can be used to do what? - Diagnos existing problems and to foreceast how a company will perform it he future. This ratio is the relationships between two financial statement numbers and is often used in analyzing and describing a companies performance - Financial ratios This allows comparison of financial statements across years and between companies. They are prepared by dividing all financial staement numbers by the sales for the year. - Common size financial statement (subcategory of financial ratios) Decomposes return on equity into profitability, efficiency, and leverage components. - The Dupont Framework Frequently overlooked bc of traditional analysis models are based on the balance sheet and the income statement. - Cash flow ratios The examination of RELATIONSHIPS among financial statements numbers over time for the same company and compared to other companies in the same industry. External users use this for investing decisions. - Financial statement analysis Dividing all financial statement numbers by the total sales for the year. - Equation for common size financial statements ability of a company to pay it's debt in the short run - Liquidity Debt ratio, return on sales, return on equity, current ratio, asset turnover, and price earnings ratio - The 6 most widely used financial ratios What is market value of equity? - Amount to buy the company Total liabilities/total assets. It is a measure of leverage. - Debt ratio Current assets/current liabilities. Measure of liquidity. Calculated using the balance sheet. - Current ratio Net income/sales. A measure of the amount of profit per dollar of sales. PROFITABILITY. - Return on sales Sales/total assets. A measure of a companies efficiency. This number can be understated and can be misleading. IT is the number of dollars in sales generated by each dollar of asset. - Asset Turnover Net income/Stockholder equity. A measure of the amount of profit earned per dollar of investment. - Return on equity (ROE) ROE - Mother of all financial ratios. if you are an investor, you want to know the ROE, the number tells you as the investor how much money you will make per year. Market value of shares/net income. A measure of growth potential earnings stability, and management capabilities. - Price earning ratio Reflects market expectations of growth and earnings of the company in the future. Company with P/E ratio of 10-25 is normal. Netflix was 679 in 2012! - Price earnings ratio Solution to comparing two companies that are not the same size. DIVIDE ALL NUMBERS BY SALES FOR THE YEAR. - Common size financial statement Divide balance sheet items by either sales or assets. For EFFICENCY. - Common size balance sheet How efficiently are assets generating sales dollars. EFFICIENCY. Sales revenue. - Sale the proportion of assets in each asset category. - Assets mix Each item on the statement is expressed as a % of revenue - Common size income statement Dupont framework-used to examine financially statements of any company - Ratio Framework, 1st step. The number of dollars of assets acquired for each dollar invested by stockholders. LEVERAGE. Assets/equity - Assets-to-equity ratio 3 ways to improve low return on equity - Profitability, efficiency, and leverage Common size income statement - Profitability ratios Average collection period, days of sales inventory, fixed asset turnover are: - Efficiency ratios Debt ratios, debt to equity ratios times interest earned. - Leverage ratio Average number of days that elapse between the sale and cash collection. AVERAGE ACCOUNTS RECEIVABLE/ AVERAGE DAY OF SALES. Add all up and divide by 2. - Average collection period The average number of days of sales that can be made, using only the supply of inventory at hand - Number of days sale in inventory Number of dollars in sales generated by each dollar of assets. Sales/Avg fixed assets. Whole sale numbers. (Land, trucks, equipment, plant). - Fixed Asset Turnover The higher leverage increases return on equity through: more Money borrowing, more assets, more sales, more net income - Leverage ratios The % of total funds, both borrowed and invested, that a company acquires through borrowing. - Debt ratio Should you compare debt to debt ratio and debt to equity ratio? - No, they are two different things, they are not to be compared. The number of dollars of borrowing for each dollar of equity investment. Total liabilities/stockholders equity. - Debt to equity ratio indication of a companies ability to meet interest payments - Time interest earned reflects the extent to which accrual accounting assumptions and adjustments have been included in computing net income. Cash flow from operations/net income - Cash flow to net income Cashflow adequacy ratio - Indicates how well a companies cash flow from operations does at covering the company acquisition and fixed asset additions. Cash times interest earned - Indicates a companies ability to meet its interest payments and its cash flow from operations. Cash from from operations and cash paid for interest and taxes/ cash paid for interest and taxes. Lack of compatibility in accounting numbers make it... - Inapproproate to compare two companies A companys asset mix - The total of assets in each asset category and is largely determined by the industry in which the company operates. Financing Mix - the result of management decisions Current assets - Expected to be used, sold, or replaced with in one year. Ex: Cash, accounts receivable, inventory, prepaid expenses, investment securities. Accounts receivable - Credit arrangement, OLD sales technology. It is an asset. The amount collected. Prepaid expenses - Expenses paid in advance. NOT an expense, it IS an asset. investment securities - Stocks and bonds Intangible assets - Trademarks, brand names, copyrights, franchise, Good will (relationships). Recorded ONLY when purchased from another company. NOT recorded on balance sheet. Where do you get money to buy assets? - Borrow Money (called liability) OR the money can be invested by business owners in various ways (called equity) Examples of current liabilities - Accounts payable, accured liabilities, short term loans payable, current portion of long term debt, unearned revenue. Accrued liabilities - Wages, taxes, utilities, interest. Unearned revenue - OBLIGATION to deliver services for which customers have already paid for Stock holders equity - Common stock, preferred stock, retained earnings, treasury stock AOCI: Accumulated other comprehensive income - Market related gains and losses that are not included on the income statement Common and preferred stock - Total amount invested to acquire part ownership interest in a corperation Assets - Equipment, accounts recievable, prepaid expenses. NOT ACCOUNTS PAYABLE. Liabilities - Notes payable Liquidity - how close is something to cash. First thing listed on this document is cash. this document goes in order of liquidity - balance sheet An item can ONLY be reported on the balance sheet if... - If it satisfies the definition of an asset or a liability, and is measurable, reliable, and quantifiable Summarizes the complexity of an event in ONE single number. - Recognition Not included in the financial statment - Disclosure Price that would be received from selling an asset in an orderly transaction. - Fair value Asset mix is determined by - Dividing each asset item on the balance sheet by the total assets. A companies asset mix is highly influenced by: - the companies industry Financing mix measures - The degree to which a company finances assets using liabilities or owners equity The best measure of a companies sustainability - Income from continuing operations Primary categories of income statement items - Expenses (losses) and Revenues (gains) Revenue should be recognized when: - when value has been delivered to a customer, which is typically only after the required work has been performed and after the collection of cash is reasonably assured Financial capital maintenance - Increase in dollar amount of equity (excluding effects of new investments or investment withdraws). Ex: bought for 200,000, sold for 220,000-gain of 20,000. Physical capital maintenance - Increase in physical resources, productive capacity (excluding effects of new investments or investment withdrawals). The previous example, that 20,000 had to be used to buy the next house, so therefore, no income. Practical measure of income - Gross profit, operating income, income from continuing operations, net income, comprehensive income. Gross Profit (where the income statement starts) - Sales-Cost of goods sold=GP Operating income - Gross profit-operating expenses/all expenses EXCEPT interest/income tax=operating income Operating income - It is the "pie" eaten by lenders (interest), Government (income tax), and owners (net income). Income from continuing operations - Operating EBIT income (interest expenses +/- miscellaneous revenues, expenses, gains, losses (income tax expenses). Revenues - The value of the goods or services provided TO CUSTOMERS as part of normal business operations. *The amnt generated through normal operations. SALES, SERVICES, INTEREST, and other revenues. Expenses - Value of resources consumed in generating revenues. The amount of assets consumed through normal operations Assets - PROBABLE future economic benefit Expenses - POSSIBLE future economic benefit Sell on credit to increase sales, cost of selling on credit is not paying. - Bad debt expense Income tax expenses - Keeps 3 books. 1. Financial reporting, 2. income tax reporting, 3. Internal managerial accounting system. Impairment losses - Decrease in the recorded amount of an asset bc it has declined in value. Restructuring charge - Impairment losses and estimated severance costs. Below the line items - "the line" is income from continuing operations. Reported "net of taxes" OIC: Other comprehensive income - Market related gains and losses that are NOT included on the income statement EPS: Earnings per share - Always at the bottom of the income statement. Net income/outstanding number of shares of stock Net income/shares outstanding - EPS Basic Net income/actual and potential shares - EPS Diluted Format of income statement - Single Step=All revenue-All expenses=net income Gross profit - Cost of goods sold Multiple step format - Highlights important measures, same net outcome. below the line items - Income from discontinued operations and extraordinary items Revenue is recognized at the: - point of sale Pro Forma - Sales forecast What is the most difficult part of creating a pro forma? - generating a realistic and reliable sales forecast What is the first step in developing a cash budget? - Forecasting cash receipts What is the benefit of a cash budget for a company - Allows a company to anticipate financing needs O.I.F. - Operating. Investing. Financing. Statement of cash flows - Provides info that is not apparent by looking at the balance sheet or income statement Operating cash flow is particularly useful when - When net income does not give an accurate reflection of a companies performance Purpose of statement of cash flows - Reports cash inflow and outflow during the period with an emphasis on the amount of cash GENERATED BY OPERATIONS More revenue= - More retained earnings More expenses= - Less retained earnings More dividends= - Less retained earnings Expenses - The amount of assets consumed or liabilities created through doing business. Expenses = decrease $ Revenues - Amount of cash generated or liabilities satisfied through doing business. Revenues = increase $ By definition, anything that is an expense is... - an operating cost. Ex: Collection on account, paid for investors, paid investor on debt, paid miscellaneous expense, paid income tax...these are operating, NOT financial as one would assume Deductive reasoning is a how many step process? what are the steps? - Six steps. 1. Compute change in cash balance. 2. Convert income statement form accrual to cash. 3. Analyze changes in long term assets, INVESTING. 4. Analyze phage in debt and equity, FINANCING. 5. Reconcile to the computed change cash, then prepare a Formal statement of cash flows. 6. Disclose non cash items. If you deduct $(500.00) due to depreciation of an item o the income statement, do you add that $500.00 back? - Yes, because it is a non cash item Decrease in accounts receivable=increase or decrease in cash? - Increase in cash Decrease in investing= increase or decrease in cash? - Increase in cash decrease in accounts payable= increase or decrease in cash - Decrease in cash Increase in interest payable=increase or decrease in cash - Increase in cash, because you kept your cash, you didn't pay your interest. Increase in income tax payable=decrease or increase in cash? - Increase in cash, bc you didn't pay, you kept your cash Cash flow indirect method= - Start with net income and show the adjustments Cash flow direct method= - Show the line by line cash flows If current assets are up you - SUBTRACT (uses cash) If current assets are down you - ADD (preserves cash) If current liabilities are up you - ADD if current liabilities are down you - Subtract If inventory goes up... - You subtract, this uses cash If accounts payable goes up... - You add, saves cash What causes retained earnings to change - Increase in net income and decrease in dividends Retained earnings equation - Beginning retained earnings + net income - dividends= ending retained earnings What requires a disclosure? - Cash paid for interest and cash paid for interest in taxes What are the two types of fraud? - Misappropriation of assets (stealing) and fraudulent financial reporting (lying) Inaccurate financial reports can result from: - Unintentional error, disagreement in judgment and or fraud The sarbane-oxley act created? What did this do? - PCAOB, it increased auditor rules, made senior executives take personal responsibility and sign reports, enhance financial disclosures, increase penalty for white collar crime. Earnings management: - The strategic choice of accounting estimates and judgments in orders to meet pre determined financial statement targets Managers manage earnings to - To meet internal targets, meet external expectations, income smoothing, and window dressing for an initial public offering (IPO) or a loan Required filings for when auditors audit - Registration statment, form 10-k, 10-Q, and 8k Financial accounting - Summary data, outside company for ppl who are making occasional decisions Management accounting - Detailed, for inside company, making daily decisions, it is a COMPETITIVE Tool. 1. Plan. 2. Control. 3. Evaluate. Long run planning - Proprietary (secret), strategic and capital budgeting Short run planning - Production and process prioritizing, operational budget (profit planning) Controlling - Measuring ACTUAL performance. Assess importance of VARIANCE (differences ) Evaluating - Analyze results, provide feedback, reward performance, identify problems Determining the best use of financial resources is: - Capital budgeting Capital Budgeting - Aspects of management accounting that deal with issues as what additional major resources (PPE) are needed to meet a companies long run goals Short run planning involves: - Preparing operational budgets