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Flashcards in Practice Management - Financial Management Deck (93)
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1

What are 2 broad categories of accounting?

1. General Ledger Accounting
2. Project Cost Accounting

2

General Ledger Accounting

Provides firm-wide statements about the overall financial status of the business so that firm owners can make decisions crucial to the firm's profitability and survival.
- Aka basic accounting
- All businesses must do this

3

Project Cost Accounting

Tracks revenue, expenses, and profit by individual projects.
- Vital for professional service businesses that depend on knowing how the amount of time spent on specific projects affects the financial health of the firm.
- Important in differentiating between projects that are making money vs losing money.
- Reports help managers decide how to allocate resources, manage projects, and develop accurate proposals for new work.

4

Accounts payable

Basic financial management term.

Amounts owed to the suppliers of goods or service (ex. consultants, utilities) that have not yet been paid.

5

Accounts receivable

Basic financial management term.

Money that others owe to the business through invoices for services.

6

Assets

Basic financial management term.

Any type of tangible or intangible resources that can be measured in monetary terms, including assets, fixed assets, and current assets.

Assets = liability + owner's equity

7

Current asset

Basic financial management term.

Cash or an asset expected to be converted into cash within 1 year.

Ex. cash, accounts receivable

8

Fixed asset

Basic financial management term.

Resources that a firm uses and retains for a long period of time, such as equipment and property

9

Chart of accounts - what is it? For what reports is it developed? For what does provide a foundational format?

Basic financial management term.

List of various accounts that a business uses to track money, along with corresponding account numbers used for data processing. Account numbers are often listed as the last 4 digits of the full account number.

It is developed for the profit-loss statement and balance sheet, and provides a foundational format for the annual budget.

10

Direct labor

Basic financial management term.

AHPP: Same as direct salary. Represents time charged to projects, whether invoiced or not (by everyone, including principals).

Ballast: All labor of technical staff, principals, and support staff that is directly chargeable to projects.

11

What is direct expense? What is direct personnel expense (DPE)? What is direct salary expense (DSE)?

Basic financial management term.

Direct expense: project-related expenses for a firm and its outside consultants that are not reimbursable, plus project-related expenses included in all lump sum fee contracts.

Direct personnel expense = (expense of employee salaries) + (cost of mandatory and discretionary expenses and benefits like payroll taxes and health insurance)

Direct salary expense: Direct salaries of all the architect's personnel engaged on the project, excluding the cost of fringe benefits (payroll burden).

*Direct personnel expense and direct salary expense is included in direct expenses, but not all direct expenses are direct personnel expenses.

12

Discretionary distrubution

Basic financial management term.

Voluntary distribution of profits to owners and non owners, such as performance bonuses, profit sharing and incentive compensation.
- viewed by some architectural firms as a necessary expense to attract qualified personnel, and by others as a profit-related item

13

Gross revenue
Gross profit (from projects)

Basic financial management term.

Gross revenue: All the revenue generated by a business during a stated period of time.

Gross profit: revenue remaining after direct (project) expenses are subtracted from project revenues.

14

Net operating revenue (or net revenue)

Basic financial management term.

AHHP: Represents the net dollars remaining after deducting the invoiced consultant's fees and expenses, and all reimbursable and non-reimbursable project-related expenses.

Ballast: The money that remains from billing after deducting consultant fees and expenses, reimbursable expenses, and non-reimbursable expense.

15

What is indirect labor?
Indirect expenses?

Basic financial management term.

AHHP:
- Indirect labor: Same as indirect salary. Time charged to non-project-related activities (by everyone, including principals).
*Note: Indirect labor is included in the calculation of total indirect expenses.
- Indirect expense: General and administrative non-project-related operation expenses (includes indirect labor).

Ballast: All labor not charged to a specific project or revenue-producing account
- ex. administration, general office time, marketing

16

Liabilities

Current Liabilities

Long-Term Liabilities

Contingent Liability

Basic financial management term.

AHPP: Debts or obligations of the firm owed to others. They may be subdivided as current liabilities (due within one year) and long-term liabilities (due beyond one year).

Contingent liability = Liability that is not absolute and fixed but dependent on the occurrence of some uncertain future event or the existence of an uncertain specified condition.

Ballast: Claims by people outside the business and claim by the owners of the business against the total assets of the business.
- ex. money owned on a loan, mortgage, etc.

17

Other assets (besides fixed and current)

Basic financial management term.

Miscellaneous resources such as securities and copyrights.

18

Overhead / Indirect Expense / G&A (general and administrative)

Basic financial management term.

Expenses incurred to keep a business operating whether or not any revenue is being generated; expenses not directly related to any projects.
- ex. fringe and discretionary benefits, indirect labor/salaries, rent, software leases, fees for power/telephone services

19

What is one of the highest percentages of overhead?

Indirect labor

20

What are 2 basic accounting methods?

1. Cash accounting
2. Accrual accounting

21

What is cash-basis accounting?

1 of 2 basic accounting methods where:

AHPP: Income received and all salaries and expenses paid (a checkbook approach). This is the basis most commonly used for filing and paying quarterly and year-end taxes.

Ballast:
- Revenue and expenses are recognized at the time the business receives the cash or pays the bill.
- Revenue and expenses are grouped into individual accounts for purposes of auditing, review, tax preparation, management, and analysis (ex. separate accounts for wages, rent, supplies, etc) = this is also done in accrual accounting method.

Advantages:
- Better at tracking actual cash flow
- Fairly simple

Often used by sole-proprietors and other small businesses.

22

What is accrual accounting? What are its advantages? What type of business usually uses this method?

1 of 2 basic methods of accounting in which:

- Revenue and expenses are recognized at the time they are earned or incurred, whether or not cash exchanges hands.
- Uses double-entry booking
- Revenue and expenses are grouped into individual accounts for purposes of auditing, review, tax preparation, management, and analysis (ex. separate expense accounts for wages, rent, supplies, etc) = this is also done in the cash accounting method

Advantages:
- Gives a better picture of a business's long-term financial status
- Provides information that is important for active financial management

- Required by the IRS to be used by businesses above a certain size.

23

Double-entry booking

AHHP: A system of keeping books of an accounting which there are always two entries, a debit and a credit, for every transaction.

Ballast: A type of booking used in the accrual accounting method where all transactions are:
1. listed chronologically in a journal
2. posted to a ledger where transactions are grouped into individual accounts

24

What is modified accrual basis?

A slight variation of the accrual method typically used by architecture firms that:
- records fee revenue, expenses billed to client, and invoices to the firm by outside clients
- does not include amounts of fees that have been earned but not yet billed to the client
- This means revenue is based only in invoiced fee and expense amounts sent and/or received.
Most firms use this modified accrual-basis for their profit-loss statement and balance sheet development.

25

Balance sheet:
what is it? what is its core formula? what 4 key financial indicators does it provide?

An accounting report or statement that summarizes all assets and liabilities and shows the current financial position of the business.
- all listed assets must equal listed liabilities, aka:
(total assets) = (total liabilities) + (net worth or owner's equity)

Includes these 4 key financial indicators to calculate from each month's financial report:
1. Solvency or Current ratio:
Measures a firms ability to pay current debt.
Formula: total current assets / total current liabilities
Target ratio: min 1.5 to 1.0

2. Liquidity or Quick ratio:
Measures a firm's ability to convert assets to cash.
Formula: (cash + accounts receivable + revenue earned, but not billed) / total current liabilities
Target ratio: min 1.0 to 1.0

3. Leverage or Debt-to-Equity ratio:
Measures a firm's ability to manage debt effectively as a %.
Formula: total liabilities / total equity x 100 (as a percentage)
Target: < 35% or <2

4. Return on equity:
Measures the accumulated amount of money returned on a stockholder's investment for their risk and efforts.
Formula: (total net operating revenue -- total expenses) / total equity x 100 (as a %)
Target: = or > than the anticipated net profit in the annual profit plan, typically 20% or greater

26

What is the mathematical structure of a balance sheet? What is a very important part of the balance sheet?

(total assets) = (total liabilities) + (net worth or owner's equity)

The net worth of the business or owner's equity is very important to balance sheets since total assets must equal the total liabilities plus the net worth or owner's equity.

27

Net worth

Total assets less the total liabilities (aka mathematical structure of balance sheets)

aka what is owned minus what is owed

28

Owner's Equity

Money invested in the business by owner's or stockholders.

29

Profit and loss statement (or income statement):
what is it? what 7 key financial indicators does it provide?

An accounting report or statement that lists all the income and expenses of a business for a certain period of time.
- The difference between all income and all expenses yields either a profit or loss for that period
- reflects the results of a firm's operations in terms of its revenue, direct labor, indirect labor, indirect expenses, and net profit for a given accounting period (typ current month and year to date)

Includes these 7 key financial indicators to calculate from each month's financial report:
- Utilization rate
- Overhead ratio
- Break-even rate
- Net multiplier
- Profit-to-earnings ratio
- Net revenue per employee
- Aged accounts receivable

30

What is a Cash flow statement? Why is it important?

An accounting report or statement that shows actual inflows and outflows of cash or cash equivalents.

It is important because a business's month-to-month financial health depends on being able to meet payroll and pay bills.