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Flashcards in CMA Part 1 Formulas Deck (57):
1

Multi-Step Income Statement

multiple-step income statement format includes the following sections:
Sales or service revenues
− Cost of goods sold (COGS)
= Gross profit
− Selling, general, and administrative expenses
= Operating income
+ Interest and dividend income
− Interest expense
+/− Non-operating gains/(losses)
= Income from continuing operations before income tax
− Provision for income taxes on continuing operations
= Income from continuing operations
+/− Gain/(loss) from operations of discontinued Component X
including gain/(loss) on disposal of $XXXX
+/− Income tax benefit or (income tax expense) on discontinued Component X
Net Income

2

JE to record Discontinued Operations

Loss from operations of discontinued Component X
(including loss on disposal of $XXXX) XXXXX
Income tax benefit on loss from discontinued
Component X XXXX

3

Statement of Cash Flow Format

Name of Company
Statement of Cash Flows
For the Year Ended XXXX XX, 20XX
Cash flows from operating activities
…… $X
…… X
…… X
Net cash flows from operating activities $X
Cash flows from investing activities
…… $X
…… X
Net cash flows from investing activities $X
Cash flows from financing activities
…… $X
…… X
Net cash flows from financing activities $X
Net increase in cash and cash equivalents $X
Cash and cash equivalents at beginning of year $X
Cash and cash equivalents at end of year $X
Supplemental schedule of noncash investing and financing activities:
• XXXXX
• XXXXX

4

General Rule for Operating Activity Asset and Liability Accounts

Assets
• The amount of an increase in an asset account should be deducted from net income.
• The amount of a decrease in an asset account should be added to net income.
Liabilities
• The amount of an increase in a liability account should be added to net income.
• The amount of a decrease in a liability account should be deducted from net income.

5

Bond Discount

Bond discounts are decreases in the valuation of the bond on the balance sheet, whether they are
contra-assets (that is, to a bond carried as an investment asset) or contra-liabilities (that is, to a bond issued by the company as debt and carried as a liability). They are carried as negative balances. Regular amortization of the discount increases the valuation of the related asset or liability. Although discount amortization causes the balance in the contra account to decrease toward zero on an absolute basis, the amortization results in an increase to the net carrying value of the asset or liability.

6

Bond Premium

Bond premium increase the valuation of the bond on the balance sheet. As the premium is amortized, the amount in the valuation account decreases toward zero and the amortization results in a decrease to the net carrying value of the asset or liability.

7

Summary of the steps to prepare the operating activities

summary of the steps to prepare the operating activities section under the indirect method. They
are presented to show how all of the items discussed above fit together.
1) Add all depreciation and amortization expense back to net income.
2) Add all non-operating losses on the income statement back to net income.
Subtract all non-operating gains on the income statement from net income.
3) Add and subtract the changes in balance sheet accounts that are related to operating activities: net accounts receivable, accounts payable, inventory, other payables and receivables, bond discount or premium, and other assets and liabilities.
4) If purchases, sales, and maturities of trading securities are classified as operating activities, subtract
cash for purchasing trading securities and add cash received for trading securities that were sold or
that matured.
5) In addition to the above adjustments, the cash amounts for income taxes paid and interest paid
need to be disclosed in a supplemental schedule.

8

The T-account for that Allowance for Doubtful Debts account and the five elements in it are:

Allowance for Doubtful Debts
(1) Beginning balance CR
(2) Amount written off as bad debts for the year DR
(3) Collection of previously written-off bad debts CR
(4) Amount to be charged as bad debt expense CR
(5) Ending balance CR

9

Actually Writing Off a Receivable

Dr Allowance for Doubtful Debts (reduces allowance) .................. X
Cr Accounts Receivable – Company A (reduces A/R) ..................... X

10

Income Statement Approach-Allowance for Doubtful Accounts - % of Sales

Allowance for Doubtful Accounts - % of Sales
(2) Amount actually written off as bad debts for the
year DR
(1) Beginning balance CR
(3) Collection of previously written-off bad debts CR
(4) Amount to be charged as bad debt expense for CR
the period as calculated from the amount of credit
sales CR
(5) Ending balance (residual figure) CR

11

The T-account for the Percentage of Accounts Receivable Method is below. Allowance for Doubtful Accounts - Percentage of receivables

Allowance for Doubtful Accounts - Percentage of receivables
(2) Amount actually written off as bad debts for the
year DR
(1) Beginning balance CR
(3) Collection of previously written-off bad debts CR
(4) Amount to be charged as bad debt expense for
the period (residual figure) CR
(5) Ending balance calculated using ending A/R CR

12

Factoring of Receivables

Face value of the accounts receivable
− Factoring fee (a percentage of the face value of the receivables)
− Factor’s holdback for merchandise returns (a percentage of the face value of the receivables)
= Funds deposited to the seller’s account with factor
− Interest expense (Funds withdrawn × annual interest rate ÷ 360 days × the weighted average
number of days to maturity of the receivables sold)
= Cash available to the seller to withdraw

13

Ending inventory, the formula is:

Beginning inventory
+ Purchases
= Cost of goods available for sale
− Cost of goods sold
= Ending inventory

14

COGS, the formula is:

Beginning inventory
+ Purchases
= Cost of goods available for sale
− Ending inventory
= Cost of goods sold

15

Straight-line depreciation

Depreciable Amount / Estimated Useful Life

16

Double Declining Balance

Double declining rate × book value of the asset at the beginning of the year

The depreciable amount is cost – the salvage value.

17

Sum-of-the-Years’-Digits

Sum-of-the-Years’-Digits = n(n + 1) / 2

The depreciable base is calculated as the cost less the salvage value.

18

The warranty liability on the balance sheet is calculated as:

The warranty liability on the balance sheet is calculated as:
Total warranty expenses recognized in the past on warranties that are still open
− All payments that have been made on warranty claims on those warranties
= Warranty liability on the balance sheet

19

The tax due based on book income is the amount that a company wants to pay in taxes because it is
calculated on the “correct” amount of income -meaning the income the company defines as taxable

Dr Income tax expense (want to pay) ........................... 90
Dr Prepaid taxes (or deferred tax asset) ....................... 10
Cr Cash (have to pay) ............................................... 100

20

The “has to pay” amount is $90 but the “want to pay” amount is $100, the company has not paid all of the tax due according to book income and the company has a tax payable, which is recorded on the balance sheet as a liability:

Dr Income tax expense (want to pay) ........................... 100
Cr Cash (have to pay) ....................................................... 90
Cr Taxes payable (or deferred tax liability) ................. 10

21

Creating Value

This value created is the difference between the utility (U) that the customer gets from the product
and the company’s costs (C) to produce it.

U − C = Created Value

22

Consumer Surplus

The difference between the customer’s utility and the price charged is called consumer surplus by
economists.

U − P = Consumer Surplus

23

PEST analysis

Political,
Economic,
Social, and
Technological factors

24

Predetermined level of activity to calculate a standard
overhead rate.

Budgeted Factory Overhead Costs / Predetermined Activity Level
= Standard Overhead Rate Per Unit of the Activity

25

The major steps in the control loop

The major steps in the control loop are:
1) Establish the budget or standards of performance.
2) Measure the actual performance.
3) Analyze and compare actual results with the budgeted results (this is the budget report).
4) Investigate unexpected variances.
5) Devise and implement any necessary corrective actions.
6) Review and revise the budget or standards if necessary.

26

Calculate the number of units that a
company needs to produce or purchase within a given time period (usually a month) in order
to meet the demand for that period and the opening beginning inventory required for the next
month.

Units needed for use in the current period
+ Units needed for the next month’s beginning inventory (ending inventory)
= Total Units needed this period
− Units on hand at the start of this period (beginning inventory)
= Units needed to be produced or purchased this period

27

Basic Inventory Formula

Beginning Inventory
+ Inventory Added
– Inventory Removed
= Ending Inventory

28

Finished Goods Inventory Costs Formula

Cost of Beginning Inventory
+ Net Cost of Purchases (for a reseller) or Cost of Goods Manufactured (for a manufacturer)
– Cost of Goods Sold
= Cost of Ending Inventory

29

Finished Goods Inventory in units, the formula

Units in Beginning Inventory
+ Net Units Purchased or Manufactured
– Units Sold
= Units in Ending Inventory

30

Direct Materials Inventory costs, the formula

Cost of Beginning Inventory
+ Net Cost of Purchases
– Cost of Materials Used in Production
= Cost of Ending Inventory

31

Direct Materials Inventory in units, the formula

Units in Beginning Inventory
+ Net Units Purchased
– Units Used in Production
= Units in Ending Inventory

32

The equation of a linear regression line is:

The equation of a linear regression line is:
ŷ = ax + b
Where:
ŷ = the predicted value of y on the regression line corresponding to each value of x
a = the slope of the line
b = the y-intercept, or the value of y when x is zero (0)
x = the value of x on the x-axis that corresponds to the value of y on the regression line

33

Calculate the estimated total time required for production

Method 1: Calculate the estimated total time required for production, then use the estimated total time to
calculate the estimated cumulative average time per unit:
Estimated total time required
for all units produced
= Time required for the first unit × (2 × LC)n
Where: LC = Learning curve percentage (in decimal format)
N = Number of doublings of units produced to date

34

The estimated cumulative average time per unit can be calculated by dividing the estimated total time by the total number of units produced, as follows:

Estimated cumulative average time per unit
required for all units produced
= Estimated total time required for all units produced
Total number of units produced

35

Calculate the estimated cumulative average time per unit for all units produced

Method 2: Calculate the estimated cumulative average time per unit for all units produced, then
use the estimated cumulative average time per unit to calculate the estimated total time required
for all units produced:
Estimated cumulative average time per unit for all units produced
= Time required for the first unit × LCn
Where:
LC = Learning curve percentage (in decimal format) n = Number of doublings of all units produced

36

Estimated cumulative average time per unit is known

Estimated cumulative average time per unit for all units produced
× Total number of units produced
= Estimated total time required for all units produced

37

Flexible Budget Variance

Actual Results
– Flexible Budget Amount
= Flexible Budget Variance

38

Sales Volume Variance

Flexible Budget Amount
– Static Budget Amount
= Sales Volume Variance

39

The Quantity Variance

The quantity variance (also called the efficiency or usage variance) is calculated as:

(Actual Quantity − Standard Quantity for Actual Output) × Standard Price
or
(AQ – SQ) × SP

40

The price variance is calculated as:

The price variance is calculated as:
(Actual Price − Standard Price) × Actual Quantity
or
(AP – SP) × AQ

41

The Direct Labor Rate Variance

The direct labor rate variance is calculated in the same manner as the direct materials price variance:
(Actual Rate – Standard Rate) × Actual Hours
or
(AP – SP) × AQ

42

The Direct Labor Efficiency Variance

The direct labor efficiency variance is calculated the same manner as the direct materials quantity variance:
(Actual Hours − Standard Hours for Actual Output) × Standard Rate
or
(AQ – SQ) × SP

43

The Mix Variance is calculated

The mix variance is calculated as follows:
Weighted Average Standard Price of the Actual Mix −
Weighted Average Standard Price of the Standard Mix
(both calculated using the Standard Price)
x
Actual Quantity of all
material or labor inputs
or
(waspAM – waspSM)47 × AQ

44

Weighted Average Standard Price of the Standard Mix, or waspSM.

The yield variance is calculated as follows:
Actual Total Quantity of All Inputs –
Standard Total Quantity of All Inputs
×
Weighted Average Standard Price
of Standard Mix of All Inputs
or
(AQ – SQ) × waspSM

45

Total Manufacturing Overhead Variances

Actual total variable and fixed overhead incurred (money actually spent on these items)
– Total variable and fixed overhead applied to production using predetermined rates
= Total Overhead Variance

46

Variable overhead spending variance

Variable overhead spending variance
+ Variable overhead efficiency variance
= Total variable overhead variance

47

Fixed overhead spending variance

Fixed overhead spending variance
+ Fixed overhead production volume variance
= Total fixed overhead variance

48

Total Variable Overhead Variance (or Variable Overhead Flexible Budget Variance)

Actual total variable overhead incurred (money spent on these items) (AP x AQ)
– Variable overhead applied to production using predetermined rate (SP x SQ)
= Total variable overhead variance

49

Variable Overhead Spending Variance

Actual total variable overhead incurred (money actually spent) (AP x AQ)
– Budgeted variable overhead based on inputs actually used (SP x AQ)
= Variable overhead spending variance
The interpretation of the Variable Overhead Spending

50

The Variable Overhead Spending Variance

The variable overhead spending variance can also be calculated as follows:

Actual VOH Cost Per Unit of Allocation Base
Actually Used – Standard VOH Cost Per Unit of
Allocation Base [i.e., Standard Application Rate]

× Actual Quantity of VOH Allocation Base
Used for Actual Output
or
(AP − SP) × AQ

51

Variable Overhead Efficiency Variance

Budgeted variable overhead based on inputs actually used (AQ x SP)
− Standard variable overhead allowed for production/applied to production (SQ x SP)
= Variable overhead efficiency variance

52

The variable overhead efficiency variance

The variable overhead efficiency variance is also calculated as follows:

Actual Quantity of VOH Allocation Base Used for
Actual Output – Standard Quantity of VOH Allocation
Base Allowed for Actual Output
× Standard Application Rate
or
(AQ − SQ) × SP

53

Total Fixed Overhead Variance

Actual fixed overhead incurred (money actually spent)
– Standard fixed overhead applied (standard rate × standard usage for actual output)54
= Total fixed overhead variance

54

Fixed Overhead Spending (Flexible Budget) Variance

Actual Fixed Overhead Incurred
– Budgeted Fixed Overheads (the flexible budget OR the static budget amount)
= Fixed Overhead Spending/Flexible Budget Variance

55

The Fixed Overhead Production-Volume Variance

The fixed overhead production-volume variance is calculated as follows:
Budgeted Fixed Overheads (the flexible budget OR the static budget amount)
– Standard fixed overhead applied (standard rate × standard input for actual output)
= Fixed Overhead Production-Volume Variance

56

The total overhead flexible budget variance

The total overhead flexible budget variance is
Actual total variable and fixed overhead incurred (money spent on these items)
– Total flexible budget variable and fixed overhead amounts for the actual output
= Total Overhead Flexible Budget Variance

57

The transfer price

VC + OC ≤ Transfer Price ≤ Market Price

1) higher than the variable costs (VC) plus the opportunity cost (OC) of forgone production and
sales for the seller (lost contribution margin) per unit. This is the minimum price that the selling department needs to receive, and
2) lower than the market price of the product per unit. This is the maximum amount that the buying department would be willing to pay.