Finances

Question 1

what are the two broad categories of account?

Answer 1

basic accounting and project cost accounting

Question 2

explain basic accounting, helps make decisions about what?

Answer 2

• all businesses must do this
  keeps track of money flow, banking, taxes and auditing
• provides firm-wide statements about overall financial status of business so firm can make decisions to firm profitability and survival

Question 3

explain project cost accounting

Answer 3

• tracks revenue, expenses, and profit by individual projects
• vital for professional service businesses
• depends on knowing how much time spent on specific projects affects financial health of firm

Question 4

define accounts payable

Answer 4

amounts owed to supplied of goods or services (consultants or utilities) that have not been paid yet

aka money your firm owes others

Question 5

define accounts receivable

Answer 5

money that others owner the business through invoices for services

aka money that people owe your firm

Question 6

define assets

Answer 6

any type of tangible or intangible resources that can be measured in monetary terms

Question 7

define current assets

Answer 7

resources that are converted into cash within one year

Question 8

define fixed assets

Answer 8

resources that the firm uses and retains for long period of time, ie equipment and property

Question 9

define other assets

Answer 9

miscellaneous resources such as securities and copyrights

Question 10

define chart of accounts

Answer 10

list of the various accounts a business uses to keep track of money plus corresponding account number used for data processing

Question 11

define direct labor

Answer 11

all labor or technical staff, principals, and support staff that is directly chargeable to projects

Question 12

define direct personnel expense

Answer 12

expense of employee salaries plus cost of mandatory and discretionary expenses and benefits (ie payroll and health insurance)

Question 13

define discretionary distribution

Answer 13

voluntary distribution of profits to owners and nonowners, such as performance bonuses, profit sharing and incentives compensations

Question 14

gross revenue

Answer 14

all revenue generated by business during stated period of time

Question 15

indirect labor

Answer 15

labor not charged to a specific project or revenue producing account, ie admin, general office time, marketing

Question 16

liabilities

Answer 16

claims by people outside of the business against the total assets of the business

Question 17

net revenue

Answer 17

money that remains from building after deducting fees and expenses, reimbursable expenses, and non reimbursable expenses

Question 18

overhead

Answer 18

expenses to keep the business going, ie rent, software leases, etc

Question 19

cash accounting, explain, when is it used?

Answer 19

revenue and expenses recognized at time the business receives cash or pays bills
- better for tracking actual cash flow
- simple and often used by single person or small business

Question 20

accrual accounting, when is it better to use this?

Answer 20

revenue and expenses recognized at time they are earned, whether or not cash is on hand
- better picture of firms long term financial status and provides info thats important for financial management
- for IRS

Question 21

Modified Accrual Basis Method

Answer 21

• records fee revenue, expenses billed to client and bills invoiced to firm
• doesn’t include amounts of fees that have been earned but not yet billed to client

Question 22

Balance Sheet

Answer 22

• Summarizes all assets and liabilities
• shows financial position of a business of a specific date
• based on: solvency, liquidity, leverage, and return on equity

Question 23

Owner Equity

Answer 23

money invested in business by owners or stockholders

Question 24

Profit and Loss Statement (income statement)

Answer 24

• lists all income and expenses on a business for a certain period of time
• difference identified either profit or loss for that period

Question 25

cash flow statement, what counts, and determines ability to do what?

Answer 25

- show actual inflow and outflow of cash or cash equivalents - cash defines as money, checks or anything else accepted by bank - shows business' month to month financial health on being able to meet payroll/pay for bills

Question 26

in simple terms, whats the difference between balance sheet and a profit/loss statement? whats the forumula?

Answer 26

- balance sheet- shows what business owns and owners at specific point of time, assets = liabilities + owner equity... aka how much is the firm worth rn - profit and loss statement - shows performance of a business over a period of time, formula revenue - expenses = profit or loss, aka is the business making money rn

Question 27

Project Progress Report

Answer 27

- one of most important reports - shows hours and labor costs for each phase of a project, both current reporting period to total date and compare numbers with to date - shows direct costs, overhead, and reimbursable

Question 28

Office Earning Report

Answer 28

- summarizes firms project in terms of amount of revenue, expenses incurred, unbilled services, percentage of completion, profit loss to date - helps find if project is hurting overall profitability - check on on projects

Question 29

aged accounts receivable

Answer 29

shows status of all invoices for all projects, whether or not they've been paid and age of each invoice

Question 30

what is the average collection period? how much time does someone have to owe a bill for it to be considered a "loan?"

Answer 30

- average collection - 60-75 days - loan w/out interest- unpaid invoice more that 90 days

Question 31

time analysis report

Answer 31

- lists each employee along with the number of hours he/she has spent on direct labor, indirect labor, vacation time, sick leave and holiday

Question 32

what is utilization rate? what is the break even/minimum point? what is the expected percentage for professional staff? what is it not a measure of?

Answer 32

- percentage of time spent on direct and indirect labor - breakeven/bare minimum 65% - professional and technical staff 75-85% - not a measure of productivity

Question 33

utilization rate formiula

Answer 33

- direct labor hours/ total labor hours X 100

Question 34

Current Ratio formula

Answer 34

total assets/total current liabilities

Question 35

What does the current ratio measure? what does 1.0 and 1.5 mean?

Answer 35

- firm's ability to meet current obligations - higher the ratio, the better - 1.0 is min, 1.5 or more is healthy

Question 36

Overhead Rate

Answer 36

- measures cost operations not directly attributed to projects

Question 37

overhead rate formula? what should it be?

Answer 37

total indirect expenses/total direct labor - 1.3-1.5

Question 38

quick ratio

Answer 38

refinement of current ratio

Question 39

quick ratio formula?

Answer 39

cash + accounts receivable + revenue earned but not billed/total current assets

Question 40

define revenue per technical staff

Answer 40

- amount of net revenue produced per technical staff member, aka staff that charges direct time

Question 41

revenue per total staff

Answer 41

- amount of net revenue produced per staff member per year - includes principals and part time employees

Question 42

fixed assets

Answer 42

- item that is used long term, ie printer

Question 43

setting fees- what's the most common method? what determines billing rates?

Answer 43

- hourly aka billing rate, may vary with position and experience - billing rates determined by employee salary + fringe benefits + office overhead + allowance per profit

Question 44

net multiplier

Answer 44

ratio of net revenue to total direct labor

Question 45

net multiplier formula?

Answer 45

net revenue/cost of direct labor

Question 46

break-even rate? what should it be? how does this relate to minimum hourly fee

Answer 46

- total cost of operations / total money spent on direct labor - 2.3-2.5 - employee's base salary is multiplied by break even rate to determine minimum hourly fee that must be charged to client to break even

Question 47

what are 4 steps to collecting amounts receivable?

Answer 47

- put terms of fee collection collection in contract - submit invoices promptly - make each invoice complete - regular procedures for tracking accounts

Question 48

how do you control overhead? why would you want to do this?

Answer 48

- overhead is necessary for office to function, but doesn't produce revenue - need to keep at minimum to increase profits - ways to minimize: carefully control time reporting (timecards), significant non-labor indirect expenses should be reported (ie prints, computer expenses)

Question 49

explain solvency (from balance sheet), equation?

Answer 49

measures ability to pay current debt = total current assets/total liabilities

Question 50

explain liquidity (from balance sheet), equation?

Answer 50

measures firm's ability to convert assets to cash, aka quick ration = cash + receivable + revenue earned/total current labilities

Question 51

explain leverage (from balance sheet), equation?

Answer 51

ability to manage debt - total liabilities/total equity

Question 52

explain return on equity, equation?

Answer 52

measures accumulated amount of money returned on stockholder's investment total net operating revenue - total expenses / total equity x 100