Managerial and Financial Accounting Summary

Modular 1 Lesson 1 Accounting plays a vital role in the decision-making process. Which action is the first step in the decision-making process?  Identify the issue. The money that a company needs to buy its land, pay its employees, and buy its supplies is called capital. What are the potential sources of capital for a business?  Investors, creditors, and retained business earnings True or False: Accountants measure and communicate the results of business activities.  True Lesson 1 Summary  Accounting is designed to accumulate, measure, and communicate financial information about businesses and other organizations.  Accounting provides information for making informed decisions about how to best use available resources.  Accounting is often called the “language of business.” Lesson 2 Which primary area of accounting generates reports for internal users?  Management accounting Which group uses financial information to evaluate whether a company will be able to repay a loan?  Lenders Which of the primary financial statements reports the resources, obligations, and owner's equity of a company?  Balance sheet Lesson 2 Summary  Management accounting focuses on providing reports for internal use by management to assist in making operating decisions and in planning and controlling a company’s activities.  Financial accounting provides information to meet the needs of external users.  The three general-purpose financial statements are the balance sheet, the income statement, and the statement of cash flows.  The financial statements are used by interested external parties such as investors, creditors, competitors, and the government as well as internal parties such as management, suppliers and customers, and employees. Lesson 3 What is the role of the IASB in regulating accounting standards?  Establish international accounting standards What group of people make up the FASB?  People from a variety of business-related backgrounds What is the role of the GASB in setting accounting standards?  The GASB is a private-sector organization that establishes accounting and financial reporting standards for U.S. state and local governments. Lesson 3 Summary  The rules governing financial accounting are called generally accepted accounting principles (GAAP).  In the United States, GAAP is set by a private, nongovernmental group called the Financial Accounting Standards Board (FASB).  Worldwide GAAP is set by the International Accounting Standards Board (IASB) based in London.  Other U.S. organizations that are important to the practice of accounting are the SEC, the AICPA, and the IRS. Lesson 4 In what way do accountants have an economic incentive to conduct themselves ethically?  The value of the information produced by accountants is related to the confidence that users have in the reliability of that information. How is it possible for an accountant to intentionally deceive financial statement users and yet still technically be in compliance with generally accepted accounting principles (GAAP)?  There is flexibility inherent in the assumptions underlying the preparation of financial statements. Lesson 4 Summary  Because the practice of accounting requires professional judgment, accountants are frequently faced with ethical dilemmas.  Maintaining high ethical standards is important in accounting because accounting decisions often impact real-world economic decisions. Modular 1 Summary Accounting is the systematic collection of financial information that is compiled and presented in summary form. Those interested in a company’s performance can that information to make informed decisions about a company’s past performance and get a glimpse as to how the company will perform in the future. The primary users of financial accounting information are individuals and groups outside of a company. These parties use summary financial information to make investment and credit decisions and decisions relating to selling to a company or working for a company. Individuals inside of an organization use financial information to accumulate proprietary information available only to those inside a company. This information is called management accounting information and is used by management for such things as costing a product and performing break-even analysis. Other groups and individuals outside of a company can use financial information to make decisions about a company. Employees can assess the viability of a future employer, supplies can assess a company’s ability to repay, and so on. The rules associated with financial accounting information and the information provided to those outside of a company are produced through a public process that involves both government and private parties. The rules evolve slowly over time so as to ensure consistency in financial reporting. Finally, accountants are expected to behave ethically so that those using financial information can have confidence in its reliability. Modular 1 Quiz Your boss approaches you with a concerning letter from the IRS and asks you to explain the role of the IRS in regulating accounting standards. Based on the role of the IRS, what could be the problem detailed in the letter?  The company has not filed its taxes in accordance with the law. Anika is considering investing in a tech company that is known for developing smart home appliances. Before investing, Anika first wants to ensure that the company’s past financial performance has been satisfactory and that the company manages its cash flows well. What type of accounting information would provide this evidence for Anika?  Financial reports Alliah Company just released its public accounting data for 20X9. Which user of accounting information will monitor this data to ensure that the company is providing sufficient information for investors?  Government agencies A new product line manager approaches the accounting department in order to understand the past performance of the product line he has been asked to manage in the future. Which role of accounting involves obtaining and using financial information to determine the financial health and performance of a business or product line?  Evaluation You read in the newspaper that a local company you are familiar with has been found guilty in court of publishing financial statements that are false and misleading to users of those financial statements. In this situation, what could the American Institute of Certified Public Accountants (AICPA) do in response to the accountants who were found guilty of unethical conduct in accounting practices?  Implement professional sanctions Modular 2 Lesson 5 What is the correct summary sequence in the accounting cycle?  Analyze, Record, Summarize, Prepare Business documents, such as a sales invoice, a purchase order, or a check stub, are an important part of the accounting process. From an accounting cycle standpoint, what is purpose of business documents?  To confirm that a transaction has occurred What is the purpose of the financial accounting cycle?  To turn transactions into financial statements and provide useful financial information for decision makers What is a transaction in accounting?  An interaction in which two parties exchange something of value Lesson 5 Summary  The purpose of the accounting cycle is to help you see how the accounting process eventually turns transactions into financial statements, thereby making financial data into useful information for decision-making by managers.  The four steps in the accounting cycle are as follows: o Analyze transactions. o Record the effects of transactions. o Summarize the effects of transactions. o Prepare reports. Lesson 6 In the context of the financial accounting cycle, what is the definition of an account?  A specific accounting record that provides an efficient way to categorize similar types of transactions What is an arm’s-length transaction?  An exchange between two independent parties Which event represents a transaction recorded as part of the financial accounting cycle?  The sale of a product for cash or on account A company sells a product to a customer on account. Which part(s) of the accounting equation does this particular transaction change?  Both assets and owners’ equity What is an example of an internal transaction?  An employee is transferred from one department to another. Lesson 6 Summary  The accounting equation is assets equal liabilities plus owners’ equity, or Assets = Liabilities + Owners’ Equity.  The accounting equation must always balance after a transaction has been accounted for.  Revenues increase owners’ equity, and expenses and dividends decrease owners’ equity. Modular 2 Summary The financial accounting cycle includes four steps: 1. Analyze transactions 2. Record the effects of transactions 3. Summarize the effects of transactions 4. Prepare reports In this process, an accountant records transactions such as sales, revenues, disbursements, and purchases. Only events that can be measured in monetary terms are recorded as transactions. When recording transactions, remember that the accounting equation must always balance. That is the foundation of all of accounting. Assets must equal liabilities plus owners’ equity. The result of a careful analysis of transactions is that the accounting equation can then be used to produce an income statement and a balance sheet—two of the primary financial statements that you will learn about in the next module. Modular 2 quiz Use the following scenario to answer questions 1–5. Oliver is an accountant for a restaurant supply business that sells dishes, table linens, and food preparation equipment to restaurants. In preparing the January financial statements for the company, Oliver must consider all of the financial events that occurred during the month, including purchases from vendors, sales to customers, and other transactions. What is the first step of the financial accounting cycle that Oliver will perform?  Analyze transactions Which item is a liability?  Mortgage Which of the items listed should Oliver record as an external transaction?  Purchases of inventory from suppliers After Oliver records each transaction, how should he ensure that the accounting equation remains in balance?  Add up the balances in all of the asset accounts and compare them to the sum of all the liability and owners’ equity accounts After determining the company’s financial position, Oliver recommends that the company borrow money from the bank for the next accounting period. What is the effect of borrowing money from the bank for the next accounting period on the company's books?  Cash (an asset) and a liability account both increase. Unit 2 Summary Financial information is used by many parties both inside and outside of a company. The information is used to evaluate the effects of past decisions and to make planning decisions related to current and future decisions. The information used for decision-making purposes is a summary of thousands or millions of transactions that occur within a business on a regular basis. That information is captured in the accounting system, which has as its foundation the accounting equation—assets equal liabilities plus owners’ equity—always. Unit 2 Test Which account is an example of a liability?  Accounts payable Which of the primary financial statements reports the amount of cash collected and paid out by a company?  Statement of cash flows What is the name for the authoritative set of accounting standards in the United States?  GAAP generally accepted accounting principles. Which statement is a correct description of the IASB?  It establishes international accounting standards. Which action is part of the financial accounting cycle?  Summarizing financial information in financial statements What is owners’ equity?  The remaining claim to the assets of a business after liabilities have been deducted Most businesses have a systematic method for analyzing transactions and collecting and recording transaction-related information. This transformation process is which part of accounting?  The accounting cycle Which event is an example of collecting, analyzing, and summarizing accounting information?  Gathering checkbook information Which accounting transaction should be recorded in the books and the records of a company?  Purchasing new equipment for the company Which event is a transaction?  Purchasing an item on the internet from an online store Modular 3 Lesson 7 What is the Securities and Exchange Commission (SEC)?  The U.S. government agency charged with regulating financial markets and ensuring the availability of reliable financial information Which resource or tool is used to identify unique companies in the SEC’s 10-K filing database?  Central Index Key (CIK) How often is the Form 10-Q filed?  Quarterly How often is the Form 10-K filed?  Annually Lesson 7 Summary  The three primary financial statements include the balance sheet, income statement, and statement of cash flows. The statement of retained earnings is not a primary financial statement but links the financial statements together.  Financial statements provide potential lenders and investors with a reliable basis for evaluating the past performance and future prospects of a company.  The SEC’s EDGAR search tool allows interested individuals access to financial information about many different companies. Now that you know how to access the website and how to find specific companies, with just a couple of clicks, you will be able to read historical financial statements whenever you have a need. Lesson 8 Why does the balance sheet not reflect the current value or worth of a company?  Many assets are recorded at cost, and some economic assets are not recorded at all. Which statement best characterizes the elements and purposes of a balance sheet?  A balance sheet portrays the financial condition of a company at a point in time. What is owners’ equity?  The residual amount representing the net assets available to another party after all obligations have been satisfied What information should be included on the balance sheet?  Assets and liabilities Lesson 8 Summary  Balance sheet—a summary of the financial position of a company at a particular date  Asset—economic resource owned or controlled by a company  Liability—economic obligation to deliver assets or provide a service  Equity—equal to total assets minus total liabilities; represents the book value of the owners’ assets after the liability obligations have been satisfied; stems from direct owner investment and past profits retained in the business  Accounting equation—Assets = Liabilities + Owners’ Equity  Format—in the balance sheet, assets and liabilities are typically separated into current and long-term items with data for both the current and the preceding year reported for comparison  Limitations—the balance sheet reflects assets acquired at their historical cost, thus frequently ignoring changes in value and gradual development of intangible assets Lesson 9 What is net income?  The amount by which revenues exceed expenses What is a gain?  Making money from an activity outside the normal activities of a business What is an income statement?  A report of the revenues and expenses of a company during a period Lesson 9 Summary  Income statement—a report of a company’s performance for a particular period of time  Revenue—an INCREASE in a company’s resources through a normal business transaction  Expense—a DECREASE in a company’s resources through a normal business transaction  Net income—equal to revenues minus expenses; represents the net amount of assets created through business operations during a particular period of time  Format—usually several years of income statement data are reported side by side for comparison Lesson 10 Which statement best characterizes the elements and purposes of a statement of retained earnings?  A statement of retained earnings portrays the accumulated profits or losses of a company at a point in time. Lesson 10 Summary  The statement of retained earnings identifies changes in accumulated investments by owners and earnings or profits since day one.  Retained earnings are the total earnings that have been retained in the company, equal to beginning retained earnings plus net income minus dividends. Retained earnings accumulate each year. Lesson 11 Which of these activities is an investing activity?  Buying buildings Which of these activities is an operating activity?  Selling goods What is a statement of cash flows?  A report of the operating, investing, and financing cash flows of a company over a period of time Lesson 11 Summary  Statement of cash flows—a report of a company’s cash inflows and outflows categorized into operating, investing, and financing activities  Operating activities—activities that are part of a company’s day-today business; examples include collecting cash from customers, paying employees, and purchasing inventory  Investing activities—activities involving the purchase and sale of long-term assets such as buildings, trucks, and equipment  Financing activities—activities surrounding acquiring the capital needed to purchase the company’s assets; examples include getting cash from loans, repaying loans, receiving invested cash from owners, and paying dividends  Format—usually several years of cash-flow data are reported side by side for comparison  Articulation—the three primary financial statements tie together as follows: o The income statement explains the change in the retained earnings balance in the balance sheet o The statement of cash flows explains the change in the cash balance in the balance sheet Lesson 12 Why do the notes to the financial statements contain additional information about summary totals?  Because one summary number in the financial statements represents literally thousands of individual items Why do the notes to the financial statements contain a summary of significant accounting policies?  Because accounting involves making assumptions, estimates, and judgments Information about accounting policies and practices, including assumptions, estimates, and judgments, are included in which element of the financial statements?  The notes to the financial statements Lesson 12 Summary The notes to the financial statements:  Contain additional information not included in the financial statements themselves  Explain the company’s accounting assumptions and practices  Provide details of financial statement summary numbers and additional disclosure about complex events  Report supplementary information required by the SEC or the FASB Modular 3 Summary The accounting process produces information that comes from the various (and numerous) transactions conducted by a company. That financial information is captured and summarized in three primary financial statements. Those financial statements are then used by individuals and groups both inside and outside a company. The three primary financial statements are the balance sheet, the income statement, and the statement of cash flows. The balance sheet provides a listing of a company’s assets and how those assets were financed at a moment in time. The income statement summarizes a company’s revenues and expenses over a period of time. The statement of cash flows summarizes a company’s cash inflows and cash outflows partitioned by activities—operating, investing, and financing—over a period of time. In addition, companies often include a statement of retained earnings with the three primary financial statements. Finally, to be able to rely on the information contained in the financial statements, it is important to understand the assumptions that were made in compiling those financial statements. The notes to the financial statements contain those assumptions as well as other information that is helpful in interpreting financial results. Modular 3 quiz What is the purpose of a classified balance sheet?  A classified balance sheet distinguishes between current and long-term assets. Which item would be classified in the owners’ equity section of the balance sheet?  Retained earnings Use the following data for questions 3–4. Kamila Company has asked a local bank for a business loan. In order to process the loan application, the bank is requiring that Kamila provide an income statement for the most recent year. Here are some data from Kamila Company’s financial statements. Cost of Goods Sold Cash Sales Operating Expenses Inventory Interest Expense Accounts Payable Income Tax Expense 600 70 1,500 250 300 50 100 200 Using the data above from Kamila’s financial statements, how would Kamila calculate gross profit?  Sales − cost of goods sold Using the data above from Kamila’s financial statements, how would Kamila calculate operating income?  Sales − cost of goods sold − operating expenses What is the purpose of the notes to the financial statements?  The notes present the assumptions needed to help explain financial statements. Modular 4 Lesson 13 What is the definition of financial statement analysis?  Examining both the relationships among financial statement numbers and the trends in those numbers over time How is a common-size income statement created?  By dividing all income statement amounts for a given year by sales for that year What is the purpose of performing horizontal analysis of financial statements?  To highlight trends that may be occurring in the company over time Lesson 13 Summary  A common-size income statement is generated by dividing all financial statement amounts for a given year by sales for that year.  For the balance sheet, common-size financial statements are generated by dividing each balance sheet item by total assets for that year.  A common-size income statement reveals the number of pennies of each expense for each dollar of sales.  Examining trends across time (horizontal analysis) allows us to determine how expenses are changing relative to sales on the income statement. Lesson 14 What is the definition of vertical analysis of financial statements?  Displaying each line item as a percentage of another for comparison to other companies in the industry How does vertical financial statement analysis inform your understanding of a company’s performance?  It tells you what questions you need to be asking about a company’s performance. Which types of companies can be compared using vertical analysis?  Companies that provide the same types of goods or services Vertical analysis allows an accountant to determine how expenses are changing relative to which line item on the income statement?  Total sales Lesson 14 Summary  Comparing the performance of two companies in similar industries at the same point in time requires the use of use common-size financial statements so that you can compare companies of different sizes. This is called vertical analysis.  Comparing the financial statements of different companies allows you to see where expenses might be different across the companies and allows you to target where further investigation or analysis might be warranted. Modular 4 Summary In analyzing a company’s income statements, merely dividing all numbers on the income statement by sales (or revenues) reveals interesting relationships that can be compared across time and across companies at the same point in time. Most pieces of information are meaningful only when they can be compared with some benchmark. For example, a benchmark in the retail industry could be that cost of sales as a percentage of sales generally averages around 50%. So, if you are analyzing a retailer whose cost of sales varies significantly either way above or below 50%, you would wonder why and further investigate why that retailer’s cost of sales is more or less than other retailers in the same industry. Horizontal analysis involves comparing financial statement numbers, as a percentage of sales, across time for the same company. This allows you to see if the gross profit percentage is increasing or decreasing over time, for example. Vertical analysis compares financial statement numbers at the same point in time across companies in the same industry. Companies in similar industries should have similar financial statements and financial statement relationships, and if they do not, you would want to question why. In short, the usefulness of financial statement analysis is greatly enhanced when the results are compared with past values and with values for other firms in the same industry. Unit 3 Summary One of the major points in the accounting cycle is to produce financial statements that can be used to evaluate a company’s performance. The financial statements of large, publicly traded companies are available on the SEC’s website. These financial statements are used by many interested parties to evaluate and analyze a company’s financial performance. The primary financial statements that are produced by the accounting system are the balance sheet, the income statement, and the statement of cash flows. Each of these financial statements tells users different things about a company. The balance sheet lists a company’s resources and claims on those resources. An income statement informs a user as to how well a company does in its day-to-day operations. A statement of cash flows details where cash comes from and where it goes and breaks these cash flows down into three major activities—operating, investing, and financing. Analyzing financial statements involves many different techniques. Two of the most common are horizontal and vertical analysis. These types of analysis allow financial statements to be compared across time for the same company and across companies at the same point in time. Unit 3 test How is each amount calculated in a common-size income statement?  Each amount is expressed as a percentage of sales for the year. Correct! In a common-size income statement, each amount is expressed as a percentage of sales for the year. Which item listed below is an asset?  Accounts receivable Correct! Accounts receivable is the amount owed to a company that sold goods or services to a customer on credit. What is a liability?  An obligation to pay cash, transfer other assets, or provide services to someone else Correct! This is the definition of a liability. What is the definition of revenue?  The amount of assets created through the sale of goods and services Correct! This is the definition of revenue. Which item below is an expense item?  Cost of goods sold Correct! Cost of goods sold represents the amount of inventory (an asset) consumed through business operations—giving the inventory to the customer in a sales transaction. What type of activities are reported as operating activities?  Those activities that are part of the day-to-day business of a company Correct! Operating activities are those activities that are part of the day-to-day business of a company. Which statement below best characterizes the purpose of the balance sheet?  A balance sheet is a report of the assets, liabilities, and equity of a company as of a point in time. Correct! The balance sheet reports the resources of a company (assets), the company’s obligations (liabilities), and the difference between what is owned (assets) and what is owed (liabilities), called owners’ equity. Which statement below best characterizes the purpose of the statement of cash flows?  A statement of cash flows portrays the operating, financing, and investing cash flows of a company over a period of time. Correct! A statement of cash flows portrays the operating, financing, and investing cash flows of a company over a period of time. How should management react given the results for 20X2 and 20X1?  Management should be concerned about the increase in cost of goods sold from 20X1 to 20X2. The growth in COGS exceeded the growth in sales. This is a dramatic increase, and management must figure out what is going on.    Management should from 20X1 to 20X2. Management should to 20X2. Management should are significantly less be concerned because interest expense increased be happy because net sales increased from 20X1 be happy because the taxes owed in year 20X2 than in 20X1. Which action would help Janelle Company have a positive net income in 20X2?   Keep the percentage of sales for income tax constant from 20X1. Keep the percentage of sales for selling and general expenses constant from 20X1. This means that the percentage of sales represented by selling and general expenses would increases, so the net loss in 20X2 would also increase.  Keep the percentage of sales for cost of goods sold constant from 20X1. Reducing the cost of goods sold from 71.67% to 53.57% will reduce costs enough to make the net income positive.  Keep the percentage of sales for interest expense constant from 20X1 Lesson 15 Summary A company can use past patterns of cash collections and cash disbursements to create a forecast, or budget, for expected future cash inflows and outflows. With this budget, the company is able to determine if it will have excess cash or if it will need to arrange to borrow additional cash. A simple cash flow analysis results in a powerful tool that management can use to determine future cash flow needs. Modular 5 Lesson 15 quiz What factors below contribute to a company’s pattern of cash collections?  Industry, firm size, and the firm’s credit policies Correct! The collection pattern for receivables is a function of such factors as industry, firm size, and the firm’s credit policies. In what way does a cash budget allow a manager to take action now?  It allows the manager to identify cash shortages in advance. Correct! Through identifying cash shortages in advance, a cash budget allows a manager to take action now—actions such as making advance arrangement for loans. According to a company’s cash budget, when can management plan to repay the company’s loans?  When excess cash is available Correct! By knowing when cash deficits and surpluses are likely to occur, management can plan to borrow cash when needed and repay these loans when excess cash is available. What are the principal sources of a company’s cash inflows?  Cash sales and the collection of cash from prior credit sales Correct! Cash sales and the collection of cash from current and past sales made on credit are the principal sources of cash inflows. Lesson 16 summary  Excel can be used to create charts to analyze cash budgeting and provide a basis for adjusting business operations.  Column charts compare a limited number of categories or time series, pie charts compare parts of a category to a whole, and line charts compare values of a particular category over time.  You learned how to create column charts, edit labels, and change axis titles. Lesson 16 quiz For what purpose are column charts used?  To compare different categories of items or the same category over time Correct! Column charts are useful for comparing different categories of items or the same category over timeFrom this window, what is the correct way to add labels to each column in a chart?  Click the Edit button under “Horizontal Axis Labels” and reference the appropriate cells. Correct. In order to insert horizontal axis labels to show what each column represents, click the Edit button under Horizontal Axis Labels and then reference the appropriate cells to use as labels. Modular 5 summary Cash budgeting is a simple exercise that provides management with powerful insights regarding their cash flow prospects for the near future. With a few simple assumptions, a company can forecast its expected cash inflows and cash outflows to determine potential financing needs, especially in situations where cash outflows are projected to be greater than cash inflows in the future for a period of time. Excel is a wonderful tool that assists in automating the cash budgeting process. Using past experience relating to cash inflows and outflows, a spreadsheet can forecast future cash flows and identify in advance when cash deficiencies or cash surpluses might occur. This knowledge then allows the company to plan accordingly. It is important to keep in mind that Excel is automating what can be done by hand. Excel has the advantage of avoiding mathematical errors. But the spreadsheet is only as good as the inputs, and the inputs come from experience. A company is preparing a cash flow budget, forecasting its cash inflows and cash outflows in the future. The results of this cash flow budget are being reviewed by company management. According to the company’s cash budget, when can company management plan to repay the company’s loans?  When excess cash is available Correct! By knowing when cash deficits and surpluses are likely to occur, management can plan to borrow cash when needed and repay these loans when excess cash is available. What are the principal sources of a company’s cash inflows?  Cash sales and the collection of cash from prior credit sales Correct! Cash sales and the collection of cash from current and past sales made on credit are the principal sources of cash inflows. In what way does a cash budget allow a manager to take action now? It is November 1 of Year 1. Sales for Earl Company for November and December (of Year 1) and January (of Year 2) are forecasted to be as follows: November, 400,000; December, 500,000; January, 200,000 100% of sales are credit sales. Of these credit sales, 10% are collected during the month of sale, 20% in the following month, and 65% in the second following month; 5% are never collected. Total sales for September and October of Year 1 were 100,000 and 150,000, respectively. What is the forecasted amount of total cash collections in January (of Year 2)?     $200,000 $400,000 $500,000 $380,000 Cash collections from: September October Cash sales November December January 0 0 0 Credit sales, same month 40,000 50,000 20,000 Credit sales, month following 30,000 80,000 100,000 Credit sales, second month following 65,000 97,500 260,000 135,000 227,500 380,000 Total cash collected It is January 1 of Year 2. Sales for Mac Company for January, February, and March are forecasted to be as follows: January, 200,000; February 400,000; March, 500,000 80% of sales are credit sales; the remaining 20% of sales are cash sales. Of these credit sales, 10% are collected during the month of sale, 30% in the following month, and 60% in the second following month. Total sales for November and December of Year 1 were 200,000 and 400,000, respectively. What is the forecasted amount of total cash collections in March of Year 2?     $276,000 $288,000 $294,000 $332,000 Cash sales (20%) Nov Dec Jan Feb Mar 40,000 80,000 40,000 80,000 100,000 Credit sales (80%) 10% in month of sale 16,000 32,000 16,000 32,000 40,000 30% in month following xxx 48,000 96,000 48,000 96,000 60% in second month xxx xxx 96,000 192,000 96,000 -------- -------- -------- -------- -------- xxx xxx 248,000 352,000 332,000 ===== ===== Total receipts ====== ====== ====== It is January 1 of Year 2. Purchases for Yosef Company for January, February, and March of Year 2 are forecasted to be as follows: January, 200,000; February 400,000; March, 500,000 20% of purchases are for cash. Of the credit purchases, 30% are paid during the month of the purchase, 50% in the month following the purchase, and 20% in the second month following the purchase. Total purchases for November and December of Year 1 were 200,000 and 400,000, respectively. What is the forecasted amount of total cash payments for purchases in January of Year 2? (Note: This is the sum of immediate payments from cash purchases, same-month cash payments of credit purchases, and cash payments for credit purchases made in prior months.)     $270,000 $260,000 $250,000 $280,000 Nov Dec Jan 40,000 80,000 40,000 -------- -------- -------- 30% in month of purchase 48,000 96,000 48,000 Cash purchases Credit purchases: 50% in month following xxx 80,000 160,000 20% in second month xxx xxx 32,000 -------- -------- -------- xxx xxx 280,000 ===== ===== Total cash payments ====== Han Company is preparing its financial records to get ready to apply for an important bank loan. In the past when Han has applied for bank loans, the bank loan officer has asked Han to provide a forecast of the amount of cash payments the company will have to make to its suppliers for inventory purchases. The bank loan officer needs this information in order to assess Han’s ability to repay any bank loans. Han was embarrassed in the past because he did not have that cash payment forecast. This time he will be prepared. It is January 1 of Year 2. Purchases for Han Company for January, February, and March are forecasted to be as follows: January, $200,000; February $400,000; March, $500,000 20% of purchases are for cash. Of the credit purchases, 30% are paid during the month of the purchase, 50% in the month following the purchase, and 20% in the second month following the purchases. Total purchases for November and December of Year 1 were $200,000 and $400,000, respectively. What is the forecasted amount of total cash payments for purchases in March of Year 2? (Note: This is the sum of immediate payments from cash purchases, same-month cash payments of credit purchases, and cash payments for credit purchases made in prior months.)     $434,000 $412,000 $348,000 $374,000 Cash purchases Nov Dec Jan Feb Mar 40,000 80,000 40,000 80,000 100,000 -------- -------- -------- -------- -------- Credit purchases: 30% in month of purchase 48,000 96,000 48,000 96,000 120,000 50% in month following xxx 80,000 160,000 80,000 160,000 20% in second month xxx xxx 32,000 64,000 32,000 -------- -------- -------- -------- -------- xxx xxx 280,000 320,000 412,000 ===== ===== Total cash payments ====== ====== ====== Lesson 17  The budgeting process starts with the sales budget. Getting an accurate sales budget can be difficult because the level of sales is based on both internal and external variables. A good sales budget gives the manager an informed idea of the resources that will be needed to run the business during the budgeted period.  The sales budget leads to more detailed budgets, such as the production budget. The process of creating good budgets gives the manager a good understanding of the business, the cost flows, the potential bottlenecks, and the solutions to problems.  The budgeting process can also allow a manager to identify mistakes and impractical plans before they are ever implemented. Solving problems in advance is much less costly than trying to patch them over after the fact. Lesson 17 quiz The master budgeting process begins with which forecast?  A forecast of sales Correct! The master budget begins with a forecast of sales. The sales and administrative expense budget includes which expenses?  All expenses besides production-related expenses Correct! The sales and administrative expense budget includes all expenses except those that are production-related The manufacturing overhead cost budget includes which manufacturing costs?  Both fixed and variable manufacturing overhead costs Correct! The manufacturing overhead budget includes all production costs other than direct materials and direct labor. The production budget supplies the information required for which other budget in the master budgeting process?  Direct materials budget Correct! The production budget supplies information for the direct materials budget, direct labor budget, and manufacturing overhead budget. Lesson 18 summary  An important concept in management accounting is responsibility accounting. This idea is that a manager should only be evaluated based on factors that she or he can control. A manager who can’t control sales efforts, pricing strategy, and product selection should not be evaluated on the amount of revenue generated. A local manager should not be evaluated based on costs that are created at company headquarters, costs that can only be controlled by people two or three levels higher in the company’s organizational chart.  A cost center is an organizational unit in which the manager has control only over the costs incurred.  A profit center is an organizational unit in which the manager has control over both costs and revenues. Lesson 18 quiz Segment managers should be evaluated on which items included in a budget?  Only the items they can control or influence Correct! Segment managers should be evaluated on only the items they can control or influence. What is the segment margin?  The difference between segment revenue and direct segment costs Correct! Segment margin is the difference between segment revenue and direct segment costs. Which items does a manager have control over in a cost center?  Costs only Correct! A cost center manager has control over costs only. Which items does a manager have control over in a profit center?  Costs and revenues Correct! A profit center manager has control over costs and revenues. What is the concept behind responsibility accounting in management accounting?  A manager should be evaluated only on factors he or she can directly control. Correct! Responsibility accounting holds that a manager should only be responsible for the factors that he or she can control. Modular 6 summary Effective managers make the time to plan. Within a business, part of that planning process is the construction of budgets—the more detailed, the better. A good sales forecast allows for production planning, workforce planning, and the identification and resolution of problems in advance. When a period is completed, profit and cost reports should be constructed to determine what went well, what went poorly, and what needs to be changed. Because these profit and cost reports are often used to evaluate the performance of managers, those reports should be based only on factors over which the managers have control.