Study Guide - University of Phoenix



Week 1 Study Guide: Introduction to Financial Reporting

Readings and Key Terms

• Ch. 1 of Accounting

o Accounting

o Annual report

o Assets

o Balance sheet

o Expenses

o Income statement

o Liabilities

o Net income or loss

o Retained earnings statement

o Revenue

o Sarbanes-Oxley Act

o Statement of cash flows

o Stockholders’ equity

• Ch. 2

o Classified balance sheet

o Using the financial statements

• U.S. Securities and Exchange Commission website What do we do

o Securities and Exchange Commission (SEC)

o Securities Act of 1933

o Securities Act of 1934

Content Overview

• Forms of business organizations

o Sole proprietorships

• Form of organization wherein one person owns and runs the business

• Benefits: Easy to set up, easy to manage, tax advantages, distribution of income is simple

• Challenges: Unlimited liability, limited capital, lack of synergy

o Partnerships

• Form of organization wherein two or more people own a company and agree to work as partners to finance and run the business

• Benefits: Leadership synergy, simple to set up and dissolve, more access to capital

• Challenges: Unlimited liability, each partner may be liable for decisions of others, cumbersome to transfer ownership

o Corporations

• Legal form of organization wherein one or more individuals register and organize under a state to operate as a separate legal entity; ownership often represented through the issuance of shares of stock

• Benefits: Unlimited capital, limited liability, diverse leadership and corporate governance, easy to transfer ownership

• Challenges: Dilution of ownership, double taxation of income if shared as dividends, larger organizations can be sluggish in responding to change

• Financial statements

o Income statement

• Purpose: Designed to show the results of operations in terms of net income or net loss for a specific time period, such as a fiscal year, quarter, or month

• Content: Two principle elements—revenues and expenses

o Revenues: Increase in assets from sale of a product or service in the normal course of business; example: sales revenue

o Expenses: Cost of assets consumed or services used in generating revenues; examples: cost of goods sold, purchases of merchandise, depreciation of assets, and selling expenses

o Primary users:

• Internal users: Owners, managers, board members, and employees

• External users: Investors, creditors, and government regulators

o Retained earnings statement

• Purpose: Shows the distribution of income to owners through dividends and calculates the ending balance in retained earnings at the end of a fiscal time period

• Content: Shows the beginning balance in retained earnings and itemizes all increases (primarily net income) and decreases (primarily dividends issued to owners and/or net losses)

• Primary users:

o Internal users: Owners, managers, board members, and employees

o External users: Investors, creditors, and government regulators

o Balance sheet

• Purpose: Reports the financial condition of a company at a point in time, usually the last day of a fiscal year, quarter, or month; essentially, it shows the accounting equation: (Assets = Liabilities + Owner’s Equity) in a balanced format.

• Content: Three principle elements—assets, liabilities, owner’s equity

o Assets: Resourses owned by a business, such as cash, inventory, and fixed assets

o Liabilities: Debts and obligations of a business, such as accounts payable

o Owner’s equity: Owner’s claims to assets after liabilities are all paid; also called residual equity

o Primary users

• Internal users: Owners, managers, board members, and employees

• External users: Investors, creditors, and government regulators

o Statement of cash flows

• Purpose: Provides financial information about cash receipts, cash payments, and cash obligations for a specific fiscal period

• Content: Three sections (cash flows from/for: operations, investing activities, and financing activities)

o Cash flows from and for operations: Shows cash sales and the expenses paid in cash

o Cash flows from and for investment activities: Shows cash put into investments such as stocks and bonds of other companies, government securities, and so forth; also shows cash received from interest, dividends, and liquidation of investments

o Cash flows from and for financing activities: Shows cash from public offerings of stock, issuance of bonds, and other borrowing; also shows cash spent on capital assets, such as buildings and equipment

o Primary users

• Internal users: Owners, managers, board members, and employees

• External users: Investors, creditors, and government regulators

• Major aspects of the regulatory environment

o The Securities and Exchange Commission (SEC)

• Described: The SEC is a government agency tasked to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Simply put, the SEC regulates corporations for the protection of investors, creditors, and other stakeholders.

• Principal legislation

o The Securities Act of 1933: Regulations and law for initial public offerings of corporate stock

o The Securities Act of 1934: Regulations and law for trading of stock on secondary markets, such as the New York Stock Exchange; also prescribes financial reporting requirements and auditing requirements for corporations

o Sarbanes-Oxley Act (SOX): Regulations passed by Congress in 2002 in response to a series of massive corporate frauds (i.e., Enron, WorldCom); intent is to provide greater protections to investors, creditors, and other stakeholders by reducing unethical corporate behavior

Week 2 Study Guide: Financial Statement Analysis

Readings and Key Terms

• Ch. 13 of Accounting

o Comparative analysis

o Ratio analysis

Content Overview

• Comparative analysis

o Overview: In assessing the financial condition and performance of a company, you can compare data within the individual financial statements.

o Horizontal analysis is an important tool that can be used for simple but important analysis of quantitative data. It is simply a matter of comparing the same data for two different time periods—sales revenue for two different years—to see how you did. Horizontal analysis is often called trend analysis.

o Vertical analysis is another important and simple tool. It is comparing the individual components of financial statements to the whole—as a percentage of the total. For example, if cash equals $15,000 and total assets equal $100,000 then cash equals 15% of total assets. Vertical analysis is also called common-size analysis.

• Ratio analysis

o Overview: Ratio analysis is the most powerful method of using financial statement information to assess the financial well-being and performance of a company. Ratio analysis is used to compare certain data within the financial statements to assess liquidity, solvency, profitability.

o Liquidity ratios: Measures the ability of a company to pay its debts (liabilities) in the short-term and its ability to generate cash when needed during the current fiscal year. Creditors and suppliers are especially interested in the liquidity of the company. Examples of liquidity ratio analysis include:

• Working capital ratio

• Current ratio

• Quick ratio

• Inventory turnover ratio

o Solvency ratios: Measures the ability of a company to pay long-term liabilities and to survive over a long-term period. Investors and employees are most interested in solvency indicators. Examples of solvency ratios include:

• Debt to total assets ratio

• Cash debt coverage ratio

• Times interest earned ratio

• Free cash flow ratio

o Profitability ratios: Measures the income and operational success of a company. These are especially important to investors because income is usually the most important driver of stock price gains. Examples of profitability ratios include:

• Earnings per share

• Price-earnings ratio

• Gross profit

Week 3 Study Guide: Product Costing

Readings and Key Terms

• Ch. 15 of Accounting

o Cost accounting

o Job cost sheet

o Job order cost system

o Process cost system

o Hybrid cost system

• Ch. 16

o Process costing

o Conversion costs

o Equivalent units

o Cost reconciliation sheet

o Weighted average and FIFO methods

• Ch. 17

o Activity

o Cost pool

o Cost driver

o Just-in-time processing

Content Overview

• Cost accounting systems

o Companies must know the cost of their products to ensure they are pricing their product appropriately to cover costs and be profitable. Product costs have three elements: direct materials, direct labor, and manufacturing overhead. In contrast, companies will have other costs that do not relate to production but to sales and administration. These costs are called period costs because they relate more to the fiscal year than to the products. Period costs are fully expensed in a fiscal year while product costs may be capitalized as inventory. To be profitable in the long-run, a company must cover all its costs—both product and period costs.

• Job order costing

o This is used by companies that make products or provide services that are individually unique, such as a custom print order, an accounting job, or custom furniture. A job order costing system will accumulate product costs—direct materials, direct labor, and manufacturing overhead—by individual job using a job cost sheet.

• Process costing

o This is used by companies that manufacture homogenous products such as petroleum, milk, and mass production automobiles. A process costing system will accumulated product costs—direct materials, direct labor, and manufacturing overhead—by process or by department.

• Hybrid costing

o Hybrid costing also called operations costing is a combination of job order and process costing used by companies that make products that have some customized and individualized features.

• Activity-based costing

o Activity-based costing is a modern method of accounting for product costs. It uses technology to more accurately allocate manufacturing overhead to products. In doing so, it can help a company increase profits.

• Cost accounting systems

o Cost accounting systems are designed to accurately compute the costs of products and services so company managers can make informed decisions as to pricing, production, and cost management.

Week 4 Study Guide: Cost-Volume-Profit Analysis

Readings and Key Terms

• Ch. 18 of Accounting

o Cost-volume-profit

o Break-even point

o Contribution margin

o Target income

• Ch. 19

o Absorption costing

o Sales mix

o Variable costing

Content Overview

• Cost behavior analysis

o Every type of cost has a nature as to how it behaves in relationship to production and time. Some costs, such as direct materials, are variable in nature meaning that the more products you produce the more of those materials (and costs) you will incur. In manufacturing automobiles, for example, the number of tires used would vary based on the number of cars you make (4 tires per car). In contrast, some costs, such as factory rent and supervisor salaries, would tend to be fixed and remain constant regardless of how many products you produce. Other costs, such as utilities, will tend to have both fixed and variable elements and are often called mixed or semivariable.

• Cost-volume-profit analysis

o Cost-volume-profit (CVP) analysis is a powerful tool that helps managers make informed decisions. Contribution margin (Sales revenue minus variable costs) is a key component of CVP analysis. Managers can use CVP analysis to determine a break-even point for production and sales and to determine production and sales levels necessary to produce a target amount of profits.

• Absorption and variable costing

o Accountants must use traditional (absorption) costing in preparing financial statements under generally accepted accounting principles (GAAP) and as prescribed by the Securities and Exchange Commission (SEC). However, for internal purposes and decision making, management may direct accountants to reformat the income statement and the balance sheet using variable costing wherein variable costs are isolated for greater control. While the absorption financial statements can be used both for external and internal reporting, variable financial statements can only be used for internal purposes.

Week 5 Study Guide: Budgetary Planning and Control

Readings and Key Terms

• Ch. 20 of Accounting

o What is a budget

o Operating budgets

o Financial budgets

• Ch. 21

o Static budgets

o Flexible budgets

o Responsibility accounting

• Ch. 22

o Standard costs

o Variances

o Balanced scoreboard

Content Overview

• Budgeting basics

o Budgeting is essential to the success of any organization and business. A budget is a formal, written statement in financial terms as to management’s plans for a specific time period, usually a fiscal year. A budget can project both estimated revenues and estimated expenses for that time period.

o Budgeting relies on accounting to provide the financial data. In turn, the budget provides targets or estimates as to future performance. This helps accountants and managers assess performance and detect problems in a timely manner.

o There are many benefits of budgeting. The budget process requires managers to think ahead and be strategic in decision making. It provides definite objectives and tends to bring the entire organization together in terms of goal congruence and organizational objectives. It also provides an early warning system when things do not go according to plan.

o There are essentially two systems of budgets: operating budgets and financial budgets.

• Operating budgets project sales revenue and the costs (expenses) associated with those revenues. Operating budgets include the sales budget, the production budget, the direct materials budget, the direct labor budget, the manufacturing overhead budget, and the selling and administrative expense budget. It culminates with a pro forma income statement.

• Financial budgets project how the company and its operations will be funded for the fiscal period. It consists primarily of a cash budget and culminates with a pro forma balance sheet.

• Static budgets: A static budget is a traditional budget that is based on one assumed level of production and sales.

• Flexible budgets: A flexible budget is a series of budgets based on different assumptions as to levels of production and sales. It allows for improved management control as to costs and detection of variances.

• Standard costing and variance analysis

o Standard costing provides standard or should-be costs of sales and production. These standards can then be compared against actual results to detect problems—variances from expectations.

o Variances can occur in both revenues and costs; for example, sales may be higher or lower than anticipated. In addition, product costs—direct materials, direct labor, and manufacturing overhead—may be off-target for several reasons. Variance analysis can be used to detect and quantify the differences and to determine the cause.

• Responsibility accounting for decision making: Decision making is best accomplished when individual managers are given both responsibility and authority. This is often accomplished through responsibility centers wherein individual managers are held accountable for costs (cost centers), revenues (revenue centers), both costs and revenues (investment centers) and costs, revenues, and capital investments (profit centers).

Week 6 Study Guide: Decision Making

Readings and Key Terms

• Ch. 23 of Accounting

o Incremental analysis

o Differential analysis

o Incremental revenues

o Incremental costs

Content Overview

• Management’s decision-making process

o To be effective, the decision-making process should be systematic and based on timely and relevant information.

o The decision-making process includes the following four steps, each of which depends on timely information from accountants:

• Identify the problem and assign responsibility for resolution.

• Determine and evaluate possible courses of action.

• Make a decision (Note. A nondecision is a decision to do nothing – status quo.)

• Review results of the decision.

• Incremental analysis

o Incremental analysis is a time-saving tool for decision making. It leads to timelier and often better decisions. The incremental analysis approach isolates relevant information—costs and revenues that are impacted by the decision—and uses this information to compare alternatives and make the most profitable decisions.

o Examples of decisions best made through incremental analysis include:

• Accept an order at special price decisions.

• Make-or-buy decisions.

• Sell or process further decisions.

• Retain or replace equipment decisions.

• Eliminate an unprofitable segment decision.

• Allocate limited resources decisions.

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