REVIEW FOR FINAL EXAM, ACCT-2302 (SAC)

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1 REVIEW FOR FINAL EXAM, ACCT-2302 (SAC) CHAPTER Corporate Organization: a. Application for incorporation. b. State grants Charter or Articles of Incorporation. c. By-laws: rules and procedures of the corporation. d. Organization costs - expenses of forming a corporation. 2. Minimum Legal Capital. a. Par or stated value of the shares issued. b. Does not establish stock worth or price. c. Amount that must be left invested in a corporation to protect it s creditors. 3. Classes of Stock. a. Common (basic corporate stock - required) (1) Par Value (2) No-Par Value (no stated minimum legal capital amount) b. Preferred (preference as to dividends) 4. Retained Earnings. a. Net operating results (net income and loses), less dividends, since inception. 5. Cash Dividends. a. Dependent on availability of cash and Retained Earnings, and requires official Board action. b. Dividend Dates: (1) Date of Declaration (2) Date of Record (3) Date of Payment c. Dividends are paid only on outstanding shares (issued shares less treasury shares). 6. Treasury Stock. a. Acquisition (recorded at cost) b. Not considered outstanding stock c. Contra-Equity account d. Not eligible for dividends 7. Stock Dividends. a. Distribution of a corporation s stock to its shareholders, without receipt of payment. b. No assets are transferred from the corporation to the shareholders. c. No affect on total stockholders equity. CHAPTER Characteristics of Bonds Payable. a. Bond Indenture - Contract with bond purchasers. b. Denominations - Normally issued in denominations of $1,000 or multiples of $1,000. c. Interest - Bond interest is usually paid semi-annually. 1

2 2. Bond Issuance. a. Issuance Price (the present value of both the principal and the semi-annual interest payments is used to determine the selling price of a bond issue. b. Issued at Par (Principal amount) c. Issued at a discount (increases interest expense of bond issue). d. Issued at a premium (decreases interest expense over the life of the bond issue). 3. Bond Issue Pricing. a. Sold at Par (Face Amount) (Page 554) - (Market Rate = Contract Rate) b. Sold at a Discount (Page 555) - (Market Rate > Contract Rate) c. Sold at a Premium (Page 558) - (Market Rate < Contract Rate) 4. Bond Interest Rates. a. Market (Effective) Rate (determines bond selling price through Present Value application) b. Contract (Coupon) Rate (used to determine periodic interest payments to bond holders) 5. Bond Redemption. a. Callable Bonds (option of the corporation to retire bonds early) b. Convertible Bonds (option of the bondholder to convert bonds to common stock) 6. Amortization of Premium/Discount. a. Straight-Line Method (interest expense = cash interest payment + discount amortization amount) or (interest expense = cash interest payment - premium amortization amount) b. Effective Interest Method (beginning of period carrying amount x market rate / 2) 1. Statement of Cash Flows. CHAPTER 16 a. Presents cash inflows and outflows in categories. Cash Inflows Cash Outflows (1) Operating Activities Sales/Revenues Merchandise Purchases Interest Income Salaries & Other Expenses Dividend Income Tax Payments (2) Investing Activities Sale of Plant Assets and Purchase of Plant Assets Investments Investments Sale of Marketable Securities Purchase of Securities Collection of Loans Making Loans (3) Financing Activities Sale of Stock Purchase of Treasury Stock Sale of Bonds Repayment of debt Borrowing from Financial Payment of Cash Dividends Institutions b. Non-Cash Investing and Financing Activities. (Page 635) a. Reported on a separate schedule. b. Example Acquisition of land and a building in exchange of common stock. 2

3 2. Methods for Preparation - Operating Activities Section. a. Indirect Method. (1) Starts with net income and is adjusted for non-cash items. b. Direct Method. (1) Accounts are analyzed and adjusted to a cash basis. (2) More time consuming and expensive to use. Common Tools of Financial Analysis. 1. Horizontal Analysis. CHAPTER 17 a. Comparative Statements. (1) Involves side-by-side presentations of two or more accounting periods. (2) More complete presentations are shown for each item: (a) Absolute dollar amount of changes. (b) Percentage of changes. (c) Dollar and percentage changes are calculated using the earliest period as the base year. b. Trend Analysis. (1) A form of horizontal analysis. (2) Reveals patterns across successive time periods. (3) Reference Exhibits 17.3 and 17.4 for examples of trend analysis. 2. Vertical Analysis. a. Percentage analysis showing relationship of each item to a total within the statement. b. Common-Size Statements. (1) Income Statement Items -- expressed as a percent of net sales. (2) Balance Sheet Items -- expressed as a percent of total Assets. (3) Both dollar and percentage data is presented on these reports 3. Ratio Analysis. a. Liquidity and Efficiency Ratios b. Solvency Ratios c. Profitability Ratios d..market Prospects Ratios 1. Types of Cost Classification CHAPTER 18 a. By Behavior: (1) Variable Cost - constant per unit, changes proportionally with volume. (2) Fixed Cost - fixed in total over all levels of production (3) Mixed Cost - has both a component of variable and fixed cost. 3

4 b. By Traceability: (1) Direct - traceable to a cost object (2) Indirect - costs that cannot be traced to a single cost object. c. By Relevance: (1) Sunk Cost - a cost that has been incurred and cannot be avoided or changed. (2) Opportunity Cost - cost of a potential benefit lost or forgone. d. By Function: (1) Product - cost that become an integral part of a finished product. (2) Period - costs associated with a time period vs a product. 2. Elements of Manufacturing Costs. a. Direct Material (material that becomes part of the product) b. Direct Labor (applied to material to convert to a finished product) c. Factory Overhead (all manufacturing costs other than direct material and direct labor) 3. Manufacturing Costs. a. Product (direct material, direct labor, overhead) b. Conversion (direct labor and overhead) d. Period (other costs identified within a time period - not the product being produced). Includes Selling and Administrative costs. 4. Manufacturing Statement Report Format: Direct Materials... $ xx,xxx Direct Labor... xx,xxx Factory Overhead... xx,xxx Total manufacturing costs... $ xx,xxx Add: Beginning goods in process... xx,xxx Total goods in process... $ xx,xxx Less: Ending goods in process... (xx xxx) Cost of goods manufactured (*)... $ xx,xxx (*) (equivalent to Cost of Goods Purchases for a merchandising company) 5. Manufacturing Inventories. a. Raw Materials b. Goods-In-Process (GIP) (partially completed units) c. Finished Goods (completed units of product) 1. Cost Accounting Systems. a. Job Order Cost b. Process Cost 2. Job Costing Elements. a. Material b. Labor c. Factory Overhead CHAPTER 19 4

5 3. Job Costing. a. Job - Special order for a specific customer. b. Job Cost Sheet - Total costs of producing a job (includes direct material, direct labor, overhead) 4. Factory Overhead. a. Applied on an estimated basis through a predetermined rate (established prior to the beginning of a period). Estimated Annual Overhead Costs b. Formula = = % Estimated Annual Activity Base c. Overhead is applied using the computed rate and the activity base cost or units applied to each job. (Journal entry - Item #8, Page 787) d. Disposal of Overhead Balance. (1) Adjusting entries to dispose of the account balance. (a) Under-applied (debit balance) (b) Over-applied (credit balance) CHAPTER Process Cost Characteristics. a. Continuous process. b. All units processed in the same manner. c. Separate Goods-In-Process (GIP) is maintained for each department/process. d. Total costs are determined at the end of each period. 2. Equivalent Units. (Material & Conversion) a. Defined as the number of units that could have been completed if all effort had been applied. b. Have all or part of direct material added, and some labor and overhead applied. c. Used to assign operating costs for each period to the products worked on and/or completed. 3. Equivalent Unit Costs. a. Total material costs for the department are allocated equally to the equivalent finished units for material. Materials are usually added at the beginning of the production process, but occasionally may be added at various points in the production process. b. Conversion costs (labor and overhead) are allocated equally to the equivalent finished units for conversion. Labor and overhead are usually added uniformly throughout the production process. 4. End of Period Processes (Process Cost Summary Report): a. Determine physical units involved and costs charged to a department. b. Compute equivalent units of production. c. Compute equivalent unit costs. d. Assign costs, to completed and partially completed units, based on equivalent units and unit costs. e. Prepare cost of production report. 5

6 5. Equivalent Unit Cost Methods. a. FIFO (First-In, First-Out) b. Average Cost CHAPTER Departmental Accounting a. Levels of Responsibility. (1) Cost Center - Accountable for costs (expenses)only. (2) Profit Center - Control over revenues and costs. b. Cost Classifications. (1) Direct costs - traceable to a specific department. (2) Indirect costs - all expenses other than direct costs, not traceable to a single department. c. Allocation of Indirect Costs. (1) Service department costs are allocated to production responsibility centers. (2) An allocation base (cost driver), appropriate for the service provided, is used to distribute the service department costs. 2. Activity-Based Costing. a. Cost Allocation Process: (1) Identify specific activities consuming costs. (2) Determine activity cost pools. (3) Identify cost driver (factor that causes costs to go up and down). (4) Compute predetermined overhead cost rate for each cost pool. (5) Assign costs to jobs based on cost pool rates. CHAPTER Cost Behavior Classifications. a. Fixed Costs (total remains constant over all levels of production) b. Variable Costs (unit cost is constant, total variable cost changes in proportion to changes in production) c. Mixed Costs (has an element of fixed and variable cost) 2. High-Low Method of Cost Separation. a. A cost estimation technique used to divide a mixed cost into its fixed and variable components. b. Four-step process to determine fixed costs. 3. Break-Even Analysis. a. Contribution Margin: Formula: CM = SP - VC b. Contribution Ratio: Formula: CR = CM SP 6

7 4. Break-Even Points. Fixed Costs FC a. Units = = = BEP(U) Contribution Margin CM Fixed Costs FC b. Dollars = = = BEP($) Contribution Rate CR 4. Target Net Income. a. Determines the level of sales and units required to achieve a specific level of net income. b. Dollars of Sales Formula: FC + Target Profit CR c. Units Formula: FC + Target Profit CM 1. Budget Process. a. Establish specific goals b. Execute plans to achieve goals c. Compare actual results to goals CHAPTER Master Budget. a. Operating Budgets. (1) Sales budget (starting point for budgeting process - data used for remaining budgets) (2) Production budget (Merchandise purchases budget for a merchandising firm) (3) Selling expense budget (4) General and administrative expense budget b. Capital Expenditures Budget. c. Financial Budgets. (1) Cash budget (2) Budgeted income statement (3) Budgeted balance sheet 1. Types of Standards: a. Ideal b. Normal CHAPTER Budget Performance Reports. Provides periodic comparisions between planned objectives (standards) and actual performance. 7

8 3. General Model - Variance Analysis: Materials Labor a. Price Variance... AQ(AP-SP) AH(AR-SR) b. Quantity Variance... SP(AQ-SQ) SR(AH-SH) 4. Benefits of Standards. a. Aids in setting selling prices. b. Useful in preparing budgets. c. Used to evaluate performance. d. Used to control operations. CHAPTER Relevant Costs. a. Future costs that differ between the alternatives. b. In analysis, use only relevant costs, not total costs or complete income statement approach. (1) Differential Revenue (2) Incremental Cost c. Opportunity Costs - Economic benefit forgone as a result of pursuing a particular course of action (alternative). d. Sunk Costs - A cost that arises from a past decision and cannot be avoided or changed. 2. Capital Investment Analysis/Budgeting. a. Process by which management plans, evaluates, and controls long-term investment decisions. 3. Evaluation Methods/Indicators. a. Cash Payback b. Average Rate of Return c. Net Present Value d. Internal Rate of Return 8

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