BTB110
Final Examination Information
The final exam contains 8 questions and covers the following topics:
a)Adjusting accounts to reflect accrual accounting principles
b)High-Low Method to split total costs into fixed and variable components
c)Cash flow statement
d)Bank reconciliation
e)Depreciation – and determining capital or revenue expenditures
f)Make or buy relevant costing
g)Break even analysis
h)‘what if’ situations that can change contribution margin and net income
Formulas that we have covered during the accounting portion of the course:
Income Statement : Net Income (Loss) = Revenue – Expenses
Retained Earnings Statement:
Beginning Retained Earnings + Net Income – Dividends Paid = Ending Retained Earnings
Balance Sheet Equation: Assets = Liabilities + Shareholders (Owners) Equity
Capital Stock Retained Earnings
Or Owner Investment (sole proprietors don’t
Have retained earnings as a
Separate account)
Cash Flow Statement is meant to prove the cash account balance: It looks at the sources and uses of cash on the bases of financing, investing in and operating a business
Adjustments are split into two classes – accruals and deferrals.
Accruals create an expense or a revenue that was previously not shown in the books. If we find an accrued revenue or an accrued expense, that information is entered in the income statement.
Deferrals are adjustments that split an amount into its asset and expense components (eg. Prepaid rent and rent expense, inventory used and inventory on hand etc) Or, it can convert an account that we had been carrying as a liability into a revenue (e.g., money that we receive before we have earned it is carried on the balance sheet as unearned revenue. At the point where we prepare financial statements, we can then convert the portion that we have earned into revenue.
Re: Reconciliation Statements---refer to the other documents that I have prepared and are posted on the website.
Depreciation - We looked at fixed assets and determined the costs that should be included in the value of an asset when it is purchased new. We also looked at how to handle expenditures made against the asset after we have owned it for a while. For the record, anything that is considered a betterment to the asset is a capital expenditure while the things that we would categorize as repairs and maintenance should be categorized as revenue expenditures (i.e., ordinary expenses)
As far as depreciation/ amortization )is concerned, we looked at 2 methods:
1)Straight line depreciation…the depreciation expense is the same every accounting period.
Depreciation Expense = Cost of Asset – Disposal Value
Life of Asset
2)Double Declining Balance Method – we use 2 times the straight line RATE as the depreciation rate against the NET BOOK VALUE (Cost – Accumulated Depreciation), and in our calculations, we ignore the disposal value, except to remember that we depreciate to that point.
Managerial Accounting:
We looked at a lot of terminology: product cost, period cost, direct material, direct labour, manufacturing overhead, fixed cost, variable cost, mixed cost, opportunity cost, sunk cost, relevant cost/differential cost…..
With respect to manufacturing costs, the two that spring to mind are the product cost
(DM +DL + Mfg O/H), and period costs. Costs associated with manufacturing or the plant are considered to be product costs, and costs that are associated with the office environment are considered to be period costs…these costs are constant, and we would expect them to be repeated from one accounting period to another.
In terms of cost behavior, we determined that costs are either fixed , variable, or mixed. We use the high-low method to split a total cost that contains a fixed component and a variable component..
There is a chapter on cost-volume profit analysis in which we learned that when we look at net income as the result of first deducting product cost and then the period costs, , the format is called the ‘contribution margin’ approach. For each unit, there is a direct relationship between the selling price, the variable cost and the contribution margin. We also learned that to break even means that there is no profit and that the selling price is exactly equal to the variable costs plus the fixed
costs.
There is a formula called the break-even formula that states:
Selling price/unit x units sold = var. cost/unit xunits sold +total fixed cost + 0 ( meaning that the profit is 0 when we break even.
SP = VC + FC + 0
The contribution approach income statement is set up as follows:
Selling price/unit x units sold
Less: Variable cost/unit x units sold
= Contribution margin
Less: Total fixed cost
= Net Income
Break-even (units) = Fixed costs
CM per unit
Break-even ($) = Fixed cost
CM as a % of selling price
Target sales = Fixed Cost + Target Profit
CM per unit
Changes to any of the selling price, volume of sales, either fixed or variable expenses, or both will lead to new net income. The point of the exercise is to see if net income will be improved, or will decline if the revised variables are put into place.
Lastly, we looked at Relevant Costing. Again we are dealing with a management accounting problem-solving approach for purposes of decision making. The key point to remember here is that we have two or more alternatives that must be compared one to the other. Some of the alternatives that can be analysed are make or buy decisions, lease or sell, keep or drop a product line, keep or eliminate a department…..
This decision making approach suggests that we compare one alternative to the other. The items that are included in the analysis are the items that are avoidable if one alternative is chosen over the other. In the make-or-buy problems that we looked at, we determined that fixed overhead (a cost that would be present whether we were making the product ourselves or purchasing from an outside source)is NOT relevant to the decision making process.