Financial Accounting
This financial statement reports a company’s revenues, expenses, and net income over a period of time.
Income Statement
This account represents the cumulative amount of income a company has kept in the business after paying dividends to its owners.
Retained Earnings
These are costs that can be traced directly to a product, such as the wood used to make a table or the wages of workers assembling it.
Product Costs
(DM, DL, DMOH)
Fixed expenses are $4,000 and contribution margin per unit is $20. How many units must be sold to break even?
200 units
Fixed Total/CM per unit
$4,000 / $20 = 200
This financial statement reports what a company owns, owes, and its owners' equity at a specific point in time.
The Balance Sheet
This accounting equation shows the relationship between what a company owns, what it owes, and what the owners have invested/earned.
Assets = Liabilities + Equity
A company pays $3,000 in dividends to its owners. Does this transaction increase an expense, decrease retained earnings, or increase net income?
decreases retained earnings by $3,000
This type of cost changes in total as the level of activity changes, while its cost per unit remains constant.
Variable Cost
A product sells for $80/unit with $32/unit variable costs, and fixed expenses are $6,000. What is the break-even point in sales dollars?
$10,000
CM Ratio = CM/Rev = $48/$80 = .60
BE = Fixed Total/CM Ratio = $6,000 / .60 = $10,000
A company pays $8,000/month in rent regardless of how many units it produces. This cost stays the same in total but decreases per unit as production increases. What type of cost is this?
Fixed cost
A company provides $2,000 of services to a customer who will pay next month. What happens to the accounting equation?
Assets increase $2,000
Equity increases $2,000
A company has $10,000 of beginning retained earnings, earns $6,000 of net income, and pays $2,000 in dividends. What is ending retained earnings?
$14,000
Beg Equity+NI-Div
$10,000 + $6,000 − $2,000 = $14,000
A company sells a product for $50 per unit and has a variable cost of $30 per unit. The company sells 125 units. What is the contribution margin total?
$20
$50 − $30 = $20
$20*125= $2,500
A product sells for $60/unit with $35/unit variable costs. Fixed expenses are $2,500. How many units must be sold to earn a target income of $1,500?
160 units
Target Income (units) = (Fixed Cost+Target Income)/CM per unit =
($2,500 + $1,500) / $25
A company has $30,000 in assets and $18,000 in liabilities. What is the amount of stockholders' equity?
$12,000
Assets = Liabilities + Equity
$30,000 − $18,000 = $1,2000
The SEC gives this organization authority to establish U.S. accounting standards, and this organization develops the standards that make up GAAP.
FASB (Financial Accounting Standards Board)
A company provides $5,000 of services on account. Later, the customer pays the $5,000 owed. What happens to the company's total assets after both transactions?
Accounts Receivable ↑ $5,000, and Service Revenue ↑ $5,000
then Cash ↑ $5,000 and A/R ↓ $5,000
Total assets remain $5,000 higher than before the service was provided.
A product sells for $75 and has a variable cost of $45. What is the contribution margin ratio?
40%
Contribution Margin = $75 − $45 = $30
CM Ratio = $30 ÷ $75 = 40%
A company has break-even sales of $120,000 and actual sales of $180,000. What is the Margin of Safety in dollars and as a percentage?
$60,000 in dollars
33.3% ($60,000 / $180,000)
A product sells for $90/unit with $54/unit in variable costs. What is the Contribution Margin Ratio?
40%
CM/unit = $36
$36 ÷ $90 = .40
A company has $24,000 in assets and $17,000 in liabilities. During the year, it earns $8,000 of revenue and incurs $3,000 of expenses. Assuming no other changes to equity, what is ending equity?
$12,000
Beginning Equity= Asset-Liabilities = $24,000 − $17,000 = $7,000
Net Income = Revenue-Expenses = $8,000 − $3,000 = $5,000
Ending Equity = Beg Equity+Net Income-Dividends = $7,000+$5,000-$0 = $12,000
A company reports $20,000 of revenue and $12,000 of expenses. It begins the year with $15,000 of retained earnings and pays $3,000 in dividends. What amount of retained earnings appears on the ending Statement of Stockholders' Equity?
$20,000
Net Income = $20,000 − $12,000 = $8,000
Beginning RE + Net Income − Dividends = Ending RE
$15,000 + $8,000 − $3,000 = $20,000
A company is deciding between two alternatives. Option A costs $100,000 and Option B costs $130,000. Choosing Option B would also require giving up $20,000 of benefits from Option A. What is the total relevant cost of choosing Option B over Option A?
$50,000
Differential Cost = $130,000 − $100,000 = $30,000
Opportunity Cost = $20,000
Total relevant cost = $50,000
A company currently sells 800 units at $75/unit, with variable costs of $45/unit and fixed expenses of $20,000. Management is considering spending an extra $5,000 on advertising, which is expected to increase unit sales to 900. Should they do it? Show the net operating income before and after, and state the dollar change.
Before: Sales $60,000 − VE $36,000 = CM $24,000 − FE $20,000 = NOI $4,000
After: Sales $67,500 − VE $40,500 = CM $27,000 − FE $25,000 = NOI $2,000
NOI decreases by $2,000 → No, don't do it.
A company's Income Statement shows Sales of $250,000, Variable Expenses of $150,000, and Fixed Expenses of $70,000. If the company wants to report Net Operating Income of $50,000 next period (with the same cost structure), what sales revenue is needed?
$300,000
CM Ratio = ($250,000 − $150,000) ÷ $250,000 = .40
Target Sales = ($70,000 + $50,000) ÷ .40 = $300,000