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Complete Midterm Exam Notes - Lecture 1-11, & Text Chapters 14-17,20

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Jason Dean

BUS 121 MIDTERM EXAM STUDY FRAMEWORK Part A: 10 marks multiple choice 3 Accounting and 2 CVP, 5 Marketing Part B: 60 marks short answers 10 marks Accounting and CVP, 50 marks Marketing Part C: 30 marks problems 10 marks CVP, 20 marks Accounting combined problem merchandising corporation TOTAL 100 marks 3 hours ACCOUNTING (33% = 3 multiple choice, 10 short answers, 20 combined problem) financial vs. managerial accounting Two different Branches: - This is because a lot of people use accounting information and they fit into these two groups. They are making different decisions so they need different information. Each attempts to convey different types of information to different types of users Three differences: Difference Managerial Financial Who uses? people inside company (how IPeople outside and whether they run the company) want to deal with company (shareholders, investors etc.) Who prepares? Certified management Chartered Accountant accountant How? In whatever suitable form In terms of GAAP Why? done for speed cause they focus on precise info for people already trust info outside to trust info G.A.A.P. what, why, concepts What: - Generally Accepted Accounting Principles - guidelines prepared by the accounting profession (the Canadian Institute of Chartered Accountants) that all firms should follow in preparing their financial statements Why: - all about trusting and relying on the financial information - 1) Relevancy: it provides predictive and feedback value {the way the statements are laid out allows an outside person to get the information they need. EX: creditors use to predict if that company will pay them back. Or shareholder wants to know if the company has done something worthwhile with their investment and they need a feedback on the companys performance - 2) Reliability: that information is reliable through.. . Comparability (outsiders should be able to look at Company A and Company B and compare them..since both companies using gaap it is easier) Consistency (a company must choose one approach and must stick to it consistently so you can trust and rely on the information of the company) Representational faithfulness (numbers you see represent the true facts so people can trust info) Verifiability (requires that all numbers can be verified) Numbers are neutral (do not sway people one way or another, dont feel being mislead) - GAAP is being used for now, but starting 2011 public and crown companies will not be using it and instead international reporting financial standards (IRFS) will be in use. {New standards} Concept: - CONSERVATISM This is a rule thats going to effect our numbers. Must be conservative, thus do not overestimate use the lesser number (ex: selling inventory) - OBJECTIVITY This effects our numbers again and goes back to verifiability. If they are objective they are concrete can be backed up vs. subjective which is your opinion. When we look at assets we look at historic cost what you paid for it (this is objective as the market price + your opinion based on other buildings, area, etc is subjective) - MATCHING Expenses have to connect to the revenue that it earned. One of the ways we do this is through amortization. So if its a 300 000 building we spread the cost over the years it will help to earn revenue audit and auditors statement How do you know GAAPS been used: process whereby an independent third party examines the information prepared by a public companys internal accountants (look at financial statements and make sure they are following G.A.A.P.) - paid by the company (but shareholders have right to appoint/reappoint at company annual general meeting) since employed on behalf of shareholders to safeguard their interests - check that G.A.A.P. applied on consistent basis (dont check every transaction, just check certain amount to provide for statistical certainty) and info has been prepared in accordance with GAAPs - in Canada, all public corporations must have their books audited once yearly - only Chartered Accountants can conduct audits in the Province of Ontario - Auditors statement includes: 1) Scope [what we did, what we looked at, and at what time Heres the scope] 2) Opinion [Heres our opinion on them] - Auditors Statement opinions do not say statements are accurate [this suggests everything was checked though only checked by sampling and estimates must be made] - only says fair [fairly represented both relevant & reliable] and no material errors [no significant errors in all material aspects] nothing large enough to mislead 3) Qualifications [if the qualifications is put before the opinions that is a huge red flag because qualifications say except forwhich is saying what is wrong. Most companies do not have this paragraph, but an auditor would put this in if they had concerns. Before what I say, take a look at these. - section 404 of the Sarbanes-Oxley Act/Canadian Securities Administrators(CSA) in Canada says that CEOs and CFOs must certify the design and effectiveness of internal accounting controls. CFOS and CEOs are not necessarily doing the work but they are overseeing it + signing the papers so if anything goes wrong unethically they singed the paper to certify it thus they are going to jail bill was enacted as reaction to number of major corporate/accounting scandals (unethical accounting) balance sheet vs. income statement - balance sheet has cash on it, where as income statement shows revenue & profit -we can have sales revenue even though people havent paid us {money in accounts receivable} - expenses are still included on income statement {but accounts payable is shown on balance sheet} - amortization is not a cash item {we have to match it to revenue it earns} - owners equity is theoretical its not real cash, it is profit that has been reinvested along with owners investments manufacturing vs. merchandising company Manufacturing: - more complicated [two additional expenses & three types of inventory] - must account for three types of inventories: raw materials, work-in-process, and finished goods - this is due to taking raw inputs and changing their form [via processing procedure], adding value [via inputs of labour & overhead costs], and producing finished products [ready for sale] - must make three adjustments in the cost of goods sold section for each of the types of inventory [materials, goods in process and finished goods] - in transforming raw material inputs into finished goods there are conversion costs which take form of direct labour [people working directly on changing form of product to finished good] or manufacturing overhead costs [factory power, factory supplies, etc.] Merchandising: - components: revenues, cost of goods sold, operating expense, other income & expenses - does not manufacture anything, so no conversion costs - instead buys products from a large number of different manufacturer and arranges them in store, so inventory consists of finished products called merchandising inventory accounting equation ASSETS = EQUITIES { Assets is what business owns, Equities is what business owes} ASSETS = LIABILITIES + OWNERS EQUITY { there are two different types of equities} ASSETS LIABILITIES = OWNERS EQUITY - what the business owns always equals what the business owes because owners equity is always viewed as being a residual amount/an amount of money remaining when all of a firms liabilities have been paid - Ex: buy car for $15,000 with $5,000 down and bank loan of $10,000 & sell the car for $12,000 shortly after. Owe bank back $10,000 and left with $2,000. Thus, lose $3,000. {Owner takes the risks + rewards} Double Entry Accounting: If you were to sell $1 million of inventory for $1 million Cash (A=L+OE) - Asset (A) Cash increased $1million, Asset (A) Inventory decreased $1million [so its balanced] Buy $1 million Inventory on credit - Asset (A) Inventory increased $1 million, Liabilities (L) increased $1 million [so balanced] Sell $1 million Inventory for $1.5million Cash - Asset (A) Inventory decreased $1million, Asset (A) Cash increased $1.5 million, Owners equity (OE) increased by $0.5 million combined problem - Do income statement first,, but when reading transaction label as balance sheet or income statement - Problem Set 3 Lab Manual - process is important C-V-P ANALYSIS (12% = 2 multiple choice, 10 problems) fixed vs. variable costs, relevant range, margin of safety - Be able to separate fixed costs and variable costs - know the meaning of margin of safety and relevant range (application for margin of safety) breakeven approaches, uses application - 3 Approaches and when to use each contribution margin vs. contribution rate, uses application - On exam use contribution rate - When doing something new, deciding when to start, if something makes sense - Problem Set 4 - Read lab manual - CVP (there is a lot of stuff be sure you unde
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