3 activities
operating
investing
financing
operating activities
day to day profit making activities
- includes interest paid and received and dividends received
investing activities
buying or selling long-term assets
financing activities
generate capital or pay it back (debt or equity)
direct vs. indirect methods
only operating section differs
direct method
- calculate various items using income statement and balance sheet information
- recommended by FASB and IASB
- must present reconciliation using indirect method
indirect method
- operating activities starts with net income and adjusts to cash flow
- most companies use this method
Horizontal Analysis
- the difference between two years divided by a base year = % change
- percentage changes in comparative financial statements (year to year)
Vertical Analysis
- shows relationship of each item to a base amount (which is 100%) on financial statements
- analysis that converts items on a financial statement to percentages of a base
Decision making
- occurs during planing, directing, and controlling
- managers responsibilities
Planning
- setting goals and objectives and determining how to achieve them
- report: budget
Directing
- implementing plans and overseeing daily operations
- report: Daily sales report
Controlling
- evaluating actual results against the plan and making adjustments as necessary
- report: budget performance
Financial accounting puropse
- to help external users make investing and lending decisions
Managerial accounting purpose
- to help managers plan, direct, and control business operations and make decisions
Managerial accounting reports and frequency
- management determines content and format
- as needed (daily, weekly, monthly, quarterly, annually)
Financial accounting reports and frequency
- GAAP determines content and format
- Emphasis on annual report; quarterly reports also prepared
Direct cost
- can be traced directly to the cost object
- a main part of the object or someone working directly on it
- costs are traced
- ex. tires on a car
indirect cost
- costs that relates to the cost object but cannot be easily traced to it
- costs must be allocated
- ex. production supervisors salary or screw in a car
Inventoriable product costs
- used for external reporting
- all costs incurred to produce a product (both direct and indirect costs)
- product costing stops when the product is completely finished and transferred to finished goods inventory
- Direct materials, Direct Labor, Manufacturing overhead
Period costs
- expensed in period incurred
- all costs along the value chain except “production or purchases”
- often called operating costs, or general, selling, and administrative costs
manufacturing costs
direct materials
direct labor
manufacturing overhead
cost of goods manufactured
beginning WIP inventory + DM, DL, MOH - ending WIP inventory
cost of goods sold
beginning FG inventory + COGM - ending FG inventory
