Accounting Exam Notes | Course Paper

WEEK 1 – CHAPTER 1

CHAPTER 1 NOTES – August 31

1. Financial Accounting

a. Users – External users of Information

b. US GAAP – Compliance with GAAP

c. Past vs. Future – Uses historical data in evaluating the performance of the firms and its

managers by outsiders

d. Reporting requirements – regulations often determine how much information is enough

2. The objective of financial accounting –

a. To present fairly, in all material respects, the statement of financial position, the results of

operations,…,and statement of cash flows in conformity with the accounting principles

Generally accepted in the US (US GAAP)

b. Analyze, record, accumulate, consolidate, report – reporting cycle

c. Focus on actuals, historical costs

3. Managerial Accounting

a. Users – Internal users of information

b. US GAAP – Need not comply with GAAP

c. Past vs. Future – Uses estimates of the future for decision making and historical data for

internal performance evaluation

d. Reporting requirements – Internal cost/benefit studies determine how much information

is enough

4. Aside from company management, who are the end-users of financial accounting

information

a. Creditors

i. Banks

ii. Suppliers

b. Investors

i. Holders of publicly-traded shares

ii. Other investors (private investors, venture capital, equity firms)

c. Board of directors

d. Government

i. SEC

ii. IRS

5. Basic accounting equation: income statement

a. Rev – Expenses = Net income

i. Revenues are earned by selling goods or services to customers over a period of

time

ii. Expenses are all costs of doing business that are necessary to earn revenues over

a period of time

iii. Net income is calculated as revenues minus expenses

6. Basic accounting equation: Statement of Retained Earnings (R/E)

a. Beginning R/E + Net Income – Dividends = Ending R/E

7. Basic Accounting equation: Balance Sheet

a. Assets = Liabilities + Owner’s Equity

b. Current assets + Fixed Assets + Other Long-term assets = Current liabilities + long-

term liabilities + beginning retained earnings + YTD earnings – dividends

i. Assets are resources owned by a company at a point in time

ii. Liabilities are resources owed to creditors at a point in time

iii. STCk Equity are resources owed to stockholders at a point in time

8. Assets are economic resources that are controlled by the company

a. Measurable value

b. Expected to benefit the company by producing cash inflows

c. Examples of assets:

i. Cash

ii. A/R

iii. Inventory

iv. Property, plant & equipment

9. Liabilities are measurable amounts that the company owes to creditors (and other parties)

a. Examples of liabilities:

i. Accounts payable

ii. Notes payable

iii. Income taxes payable

iv. Dividends payable

v. Accrued salaries

10. Stockholders’ equity represents the owners’ claims on the business

a. Examples of stockholder’s equity

i. Common stock – claim that owners have on amounts they contributed directly to

the company in exchange for its stock

ii. Retained earnings – claim that owners have on amounts the company has earned

through profitable business operations

11. Basic accounting equation: Statement of cash flows

a. Beginning cash + cash inflows – cash outflows = ending cash

b. Where cash flows (in and out) are divided into three types of activities:

i. Operating activities are related to the normal, day-to–day activities with

customers, suppliers, and employees (ex. Cash collected from customers,

receiving dividends, receiving interest, purchasing services and goods for resale,

paying salaries and wages, paying income taxes, paying interest)

ii. Investing activities are related to the buying and selling of long-term assets and

investments in securities

iii. Financing activities are related to any borrowings from banks, repaying bank

loans, receiving cash from stockholders for company stock, or paying dividends

to stockholders

12. Internal business functions

a. Producing organizations

i. R&D

ii. Engineering design

iii. Manufacturing

1. Fabrication

2. Assembly

3. Paint line

iv. Quality assurance/quality control

v. Distribution/logistics

b. Selling organizations

i. Sales

ii. Marketing

c. Support organizations (General & Administrative)

i. HR

ii. IT

iii. Investor relations/corporate communications

iv. Purchasing

v. Accounting

1. Financial reporting

2. Taxation

3. Internal audit

4. Inventory costings/COGS

5. Financial planning & Analysis

13. Three main components in the accumulation of product cost

a. Raw materials

i. Includes the initial purchase price, transportation costs (in-freight_ to get the

factory

b. Direct labor

i. Raw hourly wage, O/T premium, fringe benefits (eg. life insurance, medical

insurance, dental insurance, ADD, S&T, L&T disability, employer portion of the

payroll tax, employer match to 401(k) savings plans)

c. Manufacturing overhead

i. Supervisory labor and related fringe benefits

ii. Maintenance costs

iii. Lease expense for the factory

iv. Utilities (eg. telephone, gas, electricity, water)

v. Machinery depreciation

vi. Factory supplies (eg. gloves for D/L, boxes)

14. Why is product costing important?

a. Helps a firm establish a market price

i. Especially true if you are first to market

b. Plan for profitability

c. Valuing inventory

d. Controlling costs

i. Establish standards and measure performance against it

e. Making business decisions

i. Make vs. buy

ii. Product introductions

iii. Adding/dropping parts of operations

iv. Inventory management decisions

15. Capitalize – to record an expenditure as an asset

16. Relieve – to remove or release an asset or a liability

17. Why pursue JIT inventory?

a. Reduces $ tied up in working capital

i. Good relations with suppliers

1. Preferred status

2. Pricing – long-term purchase contract

ii. Assumes you have a reliable re-ordering system

b. Assess the need to carry more than just safety stock on hand when

i. Disruption in supply is possible

ii. No alternative or substitute material

18. Corporate governance – is the system of principles and processes by which a corporation is

managed that defines the relationships among the board, shareholders, management, and other

stakeholders in a manner designed to promote long-term growth in share price.

19. Consequences of Ineffective Corporate Governance

a. Fraud

i. Motive

ii. Opportunity

iii. Ability to rationalize the fraud

b. Examples of fraud

i. Financial misrepresentation

1. Manufacturer in Knoxville, TN inflated inventory totaling $3M on sales

of $90M

ii. Theft

1. Check fraud in rolling plant in Indiana

c. To emphasize ethics:

i. Companies have a code of business ethics

ii. Professional organizations publish a code of conduct

20. Pro

Chapter 2 – Cost Behavior, Operating Leverage, and Profitability Analysis

1. Cost behavior – How a cost changes (increase, decrease, remain constant) relative to changes in