Accounting 2 study guide PDF

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THIS A STUDY GUIDE FOR THE FIRST EXAM IN ACCOUNTING 2102...

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Chapter 1 1. Define Managerial Accounting and understand characteristics. Understand the benefits and characteristics of managerial accounting. ● Definition ○ Generation and analysis of relevant info to support manager’s strategic decisionmaking activities ● Characteristics ○ Internal focus NOT external focus → managers and decision makers ○ Lack of mandated rules ○ Focus on operating segments → divisions, locations, product lines ○ Focus on future ○ Emphasis on timeliness → done when needed 2. List and understand the responsibilities and four general activities of managerial accountants. Managerial accounting is designed to assist managers with four general activities: planning, controlling, evaluating, and decision making. PLANNING: What is it? Strategic: deciding on long-term direction of corporation Operational: deciding how to implement long-term strategy Who does it? Strategic: upper management Operational: upper and middle management When is it done? Strategic: annually, focusing on a 5- to 10-year period Operational: monthly, quarterly, or annually, focusing on no more than the next 12 months Examples: Preparing the annual operating budget that allocates resources CONTROLLING What is it? Monitoring day-to-day operations to ensure that processes operate as required Who does it? Managers and workers When is it done? In real time, hourly, daily—the sooner the better

Examples: Checking a sample of products to determine whether they are in compliance with customer specifications Making EVALUATING What is it? Comparing actual results to planned results for the period Who does it? Managers When is it done? Weekly, monthly, quarterly, annually Examples: Reviewing the regional sales history for the year during the regional sales manager's annual performance appraisal DECISION MAKING What is it? Choosing a course of action Who does it? Managers and workers When is it done? As needed Examples: Dropping a slow-selling product from the catalog 3. Understand objectives and methodology of just-in- time inventory management. Just-in-time inventory management (JIT) is an inventory strategy that focuses on reducing waste and inefficiency by ordering inventory items so that they arrive just when they are needed. Since goods are produced to customer order, not to anticipated demand, they are put into production as soon as the order arrives. As soon as they are completed, the products are shipped directly to the customer. This strategy greatly reduces warehousing costs. In a typical JIT system, products are completed in small batches in response to customer requests. To make these smaller production runs successful, companies must often rearrange the layout of equipment on the factory floor and work with employees to

develop more efficient setup procedures. A quality program is also a must because no safety stock is available in the event that several units are found to be defective. 4. Define the goals, steps and characteristics of the supply chain. A supply chain is a network of facilities that procure raw materials, transform them into intermediate goods and then into final products, and deliver the final products to customers through a distribution system. The supply chain's goal is to get the right product to the right location, in the right quantities, at the right time, and at the right cost. A simple supply chain may include as few as three trading partners—one supplier, one company, and one customer. A more complex supply chain might include hundreds of trading partners including multiple raw materials producers, manufacturers, service providers, distributors, retailers, and end users.

Chapter 2 5. Understand the definitions and applications of fixed, variable, mixed and step costs. Fixed Total cost remains constant with changes in volume Unit cost changes inversely with changes in volume Fixed relationship only holds over the relevant range Applications Rent Lease Gasoline Variable Cost per unit remains constant with changes in volume Total cost varies proportionately with changes in volume Applications Hotel chain Commercial airline Cereal manufacturer Automobile manufacturer Mixed Cost contains both fixed and variable components Total cost AND unit cost varies with changes in volume Applications Electric Bill A Fixed Cost (Base Price) + Variable (Usage)

Step Costs Cost remains fixed in total over small range of volume or activity These small ranges are smaller than the relevant range of fixed cost Applications A Graph 6. Given income statement information, calculate total variable costs.

High low method ○ Variable Costs ■ (highest cost - lowest cost) / (highest units - lowest units ) ○ Fixed Cost ■ (highest point cost) - (VARIABLE COST * highest point units) ○ Total Cost ■ Variable cost * x(number of units) + fixed cost Y = MX +B 7. Use the high-low method to calculate both variable, fixed costs and total costs.

This is an algebraic method to break out the fixed and variable components of a mixed cost Based on two extreme points during a period - the highest activity level and the lowest

activity level y = mx + b

Where: y is a total cost m is the variable cost per unit x is the level of activity (number of units) b is total fixed cost 8. Understand and calculate contribution margin and contribution margin ratio. Sales Revenue - Total Variable Expenses Contribution margin is the revenue remaining to cover fixed expenses and provide profit after variable expenses have been covered Contribution Margin Ratio = contribution margin/sales revenue 9. Understand and calculate contribution margin and operating income given sales, variable costs and fixed costs. Sales Revenue - Variable Expenses = Total Contribution Margin - Total Fixed Expenses = Operating Income 10. Define and identify fixed vs variable costs. FIXED COSTS •The total cost remains fixed, regardless of changes in the level of activity. •The cost per unit varies inversely with changes in the level of activity. A Fixed Cost would be Rent monthly Wages Utilities VARIABLE COSTS Variable costs have two main characteristics: •The total cost varies in proportion to changes in the level of activity. •The cost per unit remains constant, regardless of the level of activity. * An Example would be touch screens used in production 11. Understand and compute the total cost equation.

The Total Cost equation is the Fixed Cost Plus Total Variable Cost 12. Understand the relationship between sales price, sales volume, contribution margin and operating profit. 13. Given points on a scattergraph, calculate variable cost per unit. Get points on the scatter graph and use the two points on the line. Then take the two points and use y2-y1/x2-x1 to get the variable costs. 14. Understand the differences between discretionary and committed fixed costs. A discretionary fixed cost is an expenditure for a period-specific cost or a fixed asset, which can be eliminated or reduced without having an immediate impact on the reported profitability of a business. There are not many discretionary fixed costs, but they can be quite large, and so are worth considerable review by management. A committed cost is an investment that a business entity has already made and cannot recover by any means, as well as obligations already made that the business cannot get out of. You should be aware of which costs are committed costs when you are reviewing company expenditures for possible cutbacks or asset sales. i. 10 year factory lease COMMITED ii. 6 month advertising DISCRECIONARY 15. Understand what happens to total and unit costs when activity level changes.

Chapter 3 16. Understand and calculate margin of safety in units and dollars. A company's margin of safety is the difference between current sales and breakeven sales. It represents the volume of sales that can be lost before the company begins to lose money and can be measured in units or sales dollars. Margin Of Safety is Current Sales - Breakeven Sales = Margin of Safety 17. Understand concept of breakeven point and calculate in both dollars and units.

Total fixed expenses/contribution margin unit = breakeven points in units Total fixed expense/contribution margin ratio = breakeven in sales dollars 18. Calculate selling price per unit using break-even analysis. The calculation of break-even analysis may be performed using two formulas. First, the total fixed costs are divided the unit contribution margin. In the example above, assume total company fixed costs are $20,000. With a contribution margin of $40, the break-even point is 500 units ($20,000 divided by $40). Upon the sale of 500 units, all fixed costs will be paid for, and the company will report a net profit or loss of $0. Alternatively, the break-even point in sales dollars is calculated by dividing total fixed costs by the contribution margin ratio. The contribution margin ratio is the contribution margin per unit divided by the sale price. Using the example above, the contribution margin ratio is 40% ($40 contribution margin per unit divided by $100 sale price per unit). Therefore, the break-even point in sales dollars is $50,000 ($20,000 total fixed costs divided by 40%). This figured may be confirmed as the break-even in units (500) multiplied by the sale price ($100) equals $50,000. 19. Given selling price, fixed and variable costs, calculate how many units must be sold to reach a certain level of operating income and net income (after-tax income). SC (X) - VC (X) - FC = OPERATING INCOME NET INCOME / CONTRIBUTION MARGIN RATIO = OPERATING INCOME 20. Understand and calculate markups using cost-plus pricing.

21. Calculate how many units/how much revenue must be sold to reach break-even point and target operating income. 22. Using Cost-Volume-Profit analysis, calculate new total cost, contribution margin and operating income. 23. Understand impact of increases in selling price, variable cost and fixed on contribution margin, breakeven point and operating income. 24. Understand components of breakeven graph.

Chapter 12 25. Calculate common-size percentages for both balance sheet and income statement accounts and understand usefulness of these financial statements. Common Size Percentage is Every line item on the financial percentage of a major statement Balance Sheet Divide by Total Assets Income Statement Net Statements 1. Balance Sheet a. Account Balance/Total Assets b. Cash i. 7,752/1,870,787= .42% c. Notice that the Total Assets and total Liabilities and Stockholders' equity lines must be 100% 2. Income Statement a. Account Balance/Net Sales (Total Revenue) i. Sales-Discounts 26. Calculate and understand price/earnings ratio. a. Market Price per Share/Earning per Share i. Measure what multiple of current earnings investors are willing to pay for a share of stock ii. Industry Classification 1. Standard Industrial Classification cocde iii. North American Industrial Classification System Code

27. Understand and calculate inventory turnover and average days to sell inventory. i. Inventory Turnover Calculation 1. Costs of Goods Sold/Average Inventory Take the Answer of the Inventory Turnover Calculation and divide by 365 28. Calculate debt-to-equity ratio. (net income- dividends on preferred stock)/ average outstanding shares 29. Calculate average collection period. a. Debt to Equity Ratio i. Total Liabilites/Total Stockholders Equity ii. Says for every dollar in debt you have a dollar in equity iii. Used by lenders to see if they want to lend a company a loan iv. More debt you have more risk there is to not pay the debt back v. High levels of debt can mean more risk vi. Advantage to financing assets by debt rather than equity vii. When a company borrows money they don't have to pay tax on the interest viii. If the company is returning the dividends its doesn't get a tax break. ix. If a company is managing a debt there are some advantages x. The higher the debt the greater the risk assumed by creditors 30. Understand times interest earned ratio. I. WORKING CAPITAL: a. CURRENT ASSETS- CURRENT LIABILITIES 31. Calculate acid test ratio. i. Debt Ratio Calculation 1. Total Liabilities/Total Assets...