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Virtual Business Accounting – Analyzing Financial Statements Managerial Accounting 1 Managerial Accounting 2

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cost of sales
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also referred to as cost of goods sold, the direct cost attributable to the production of the goods sold by a company. This includes both the materials and the direct labor costs used to produce the good. It excludes indirect expenses such as distribution and sales force costs. Cost of sales appears on the income statement and can be deducted from revenue to calculate a company’s gross marging
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EBIT
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Earnings before interest and taxes—an indicator of a company’s profitability, calculated as revenue minus expenses, excluding tax and interest. EBIT is also referred to as “operating earnings,” “operating profit,” and “operating income.”
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financing activities
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A category in a company’s cash flow statement that accounts for external activities that enable a firm to raise capital and repay investors, such as issuing cash dividends, adding or changing loans, or issuing stock. Cash flow from financing activities shows investors the company’s financial strength. A company that frequently turns to new debt or equity for cash, for example, could have problems if the capital markets become less liquid.
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gross margin:
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A company’s revenue minus its cost of goods sold. Gross margin is a company’s residual profit after selling a product or service and deducting the cost associated with its production and sale. Also called “gross profit” or “gross income.”
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investing activities
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An item on the cash flow statement that reports the aggregate change in a company’s cash position resulting from any gains (or losses) from investments in the financial markets and operating subsidiaries and changes resulting from money spent on investments in capital assets such as buildings and equipment
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net income
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A company’s total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes, and other expenses. This number is found on a company’s income statement and is an important measure of how profitable the company is over time.
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net loss
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When expenses exceed income or total revenue produced for a given period of time.
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operating activities
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An accounting item indicating the money a company brings in from ongoing, regular business activities, such as manufacturing and selling goods or providing a service.
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job cost sheet
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A document used to record manufacturing costs; it is prepared by companies that use job-order costing systems to compute and allocate costs to products and services.
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direct labor
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When a businesses manufactures goods, direct labor is the labor of the production crew, such as machine operators, assembly line operators, and painters. When a business provides services, direct labor is the labor of those who provide services directly to customers, such as consultants or lawyers.
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cost driver
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Anything that triggers a significant change in the cost of an activity or good. The concept is most commonly used to assign overhead costs to a number of produced units.
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direct materials
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The traceable matter used in manufacturing a product. The direct materials for a manufacturer of dessert products, for example, might include flour, sugar, eggs, and milk.
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job order costing
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A system for assigning manufacturing costs to individual products or batches of products. Generally, the job-order costing system is used only when the products manufactured are sufficiently different from each other.
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indirect labor
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The cost of any labor that supports the production process but is not directly involved in converting materials into finished products.
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time sheet
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A method for recording the amount of a worker’s time spent on each job.
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materials requisition form
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A document used to request materials for manufacturing or for providing services.
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overhead
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All ongoing business expenses not including or related to direct labor, direct materials, or third-party expenses billed directly to customers. Overhead is paid for on an ongoing basis whether a company does a high or low volume of business. It is important not just for budgeting purposes but also for determining how much a company must charge to make a profit.
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board of directors (BOD)
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A group of individuals elected as (or elected to act as) representatives of the stockholders to establish corporate policies and make decisions on major company issues, including hiring and firing executives, setting dividend policies, and deciding on executive compensation. Every public company must have a board of directors.
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capital gain
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An increase in the value of a capital asset (investment or real estate). The gain is not realized until the asset is sold. A capital gain may be short term (one year or less) or long term (more than one year) and must be claimed on income taxes. A capital loss is incurred when there is a decrease in a capital asset’s value.
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chief executive officer (CEO)
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The highest-ranking executive in a company. A CEO’s responsibilities include developing and implementing high-level strategies, making major corporate decisions, managing the overall operations and resources of a company, and acting as the main point of communication between the board of directors and the corporate operations.
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commission
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A form of compensation that rewards salespeople based on amount of products sold.
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common stock
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A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company’s assets only after bondholders, preferred shareholders, and other debt holders have been paid in full.
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preferred stock
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A class of ownership in a corporation that has a higher claim on assets and earnings than common stock. Preferred stock generally has a dividend that is paid out before dividends are paid to common stockholders, and preferred shares usually do not have voting rights.