Assets arise from transactions and events
A firm issues a $12m check to an insurance
company for liability insurance over the next year.
A firm issues a check for $500K as a deposit on a custombuilt machine.
A firm buys stock in another firm for $325K
The income statement measures firm performance
regardless of when cash is exchanged.
end, two key principles are
Earnings process substantially complete
Cash collection reasonably assured
Examples of Product Costing
Electron, Inc. produces 10,000 calculators in one month.
Variable manufacturing costs are :
$6/unit for material,
$1/unit for direct labor, and
$1/unit for variable overhead.
Fixed manufacturing overhead is $50,000/month.
Statement of Cash Flows
For the year ended December 31, 1997
[To be revisited later in the course]
Sale of a service (4)
Payments for expenses (5)
Net cash from operating activities
(1,000) Investing activities:
Different cost drivers result in very different allocations
Number of potential cost drivers is large
Identification of cost driving activities leads to political
squabbles amongst managers and departmental heads.
Principles in Preparing Financial
Statements: Fiscal Period
Artificially divide the life of an organization into annual
periods for the purpose of financial reporting.
SEC requires quarterly reporting.
Internationally, trend toward quarterly reporting
Advantages of Income Statement
Forecasting future performance
Distinguish between core operating performance
(recurring items) versus transitory components (unusual and/or infrequent
Disclosure on Discontinued Operations
An example: Firm A has two
Non-current, non-physical assets of a business, the possession of
which provides uncertain future benefits to the owner
E.g., goodwill, trademarks, patents, copyrights, etc.
Is accounts receivable an intangible asset?
Not for accounting
The residual interest in the assets that
remain after deducting the liabilities.
A measure of the capital contributed to the
company by its owners.
Contribution can be through cash, noncash assets,
or valuable ser
(Direct materials, direct labor, manufacturing overhead)
Direct Materials: (materials integral to the product whose costs can be traced)
Raw Materials: the materials that go into the final product. Raw materials includes both
Selling Costs: costs that are incurred to secure customer orders and get the finished
product or service into the hands of the customer
These include all costs that are incurred to secure customer orders and get the
Cost Terms, Concepts & Classifications
Learn the language of cost accounting Understand the nature of costs
Financial Accounting Cost Classification
Direct Material Direct Labor
Materials that can be physically traced to a product
Chapter 8 deals with planning budgets aka master budgets budgets prepared before
the period begins. They are a static planning tool valid only for the planned level of
Chapter 9 deals with control budgets aka flexible budgets budgets prepared afte
Only those manufacturing costs that vary with output are treated as product costs.
Usually includes direct materials, direct labor, and the variable portion of
Fixed manufacturing overhead is not treated as a produ
Every company has a combination of fixed and variable costs. If you want to understand
how these costs affect business, you must understand cost structure.
Variable costs vary at a constant rate per unit; as volume increases, there will be a
Remember how we were using actual cost systems even though they sucked? Heres the
normal cost system.
How Costs Flow Through a Job-Order Costing System
Because with direct materials and labor we can trace whether its going to job a or b, we
As a cost center manager, all you have are fixed and variable costs. The distinction is, if
we shut this center down, will these fixed costs disappear? If yes, we have a traceable
fixed cost. If no, its a common fixed cost. We hold manager respons
Manufacturing overhead consists of many different items ranging from the grease used in
machines to the annual salary of the production manager. Because of the fixed costs in
manufacturing overhead, total manufacturing overhead costs tend to rem
Traditional income statements are prepared primarily for external reporting purposes.
This type of income statement organizes costs into two categoriescost of goods sold
and selling and administrative expenses. Sales minus cost of goods sold equals the gr
Cost behavior: refers to how a cost reacts to changes in the level of activity
A variable cost varies, in total, in direct proportion to changes in the level of activity.
Common examples of variable costs include cost of goods sold for a merchandising
Probable future economic benefits obtained or
controlled by a particular entity as a result of past transactions or events.
The specific types of assets a firm owns
depends on the
nature of its business - manufacturing (e.g.,
General Motors) vs. m