ACC 310F Exam 2
Which of the following statements is true?
1. Lower level employees should not have direct input into the development of their performance measures. 2. Performance reports should include every cost that is related to the employee's job. -->NO because this choice mentions "every" cost related to an employee's job; however, some costs may be related to a particular job, but not something that employee could actually manage such as factory rent for a factory worker or possibly even a factory manager. ***3. Employees should be allowed to respond to every item on a performance report. 4. A performance report should include only bad performance results. ***3. Employees should be allowed to respond to every item on a performance report. ***
Depreciation
10/15 -physical and or functional loss of ability to provide usefulness -allocate cost over useful life to show the wear and tear STRAIGHT LINE METHOD 1. formula: [(cost - estimated residual value AKA what its worth at the end of its life ex trade value for a car)/ by estimated useful life] 2. then divide that number by 12 to get per month 3. then for R/E you can find that number by the calculated per month number x 12??
Plant Asset/ Fixed Asset
10/15 -tangible, used in normal operations and not offered up for sale -costs include purchase price, related fees (ex freight, assembly, installation) and taxes -generally referred to as either property and equipment or fixed assets -ALL plant assets EXCEPT land decline in service potential over their useful lives
Plant/Fixed Asset Expenditures
10/15 Expenditures = spending money but do NOT = an expense. ORDINARY REPAIRS: -things that maintain the regular efficiency and expected productive life -usually fairly small amounts that occur frequently !!!!-recorded as an EXPENSE CAPITAL EXPENDITURES: -doesnt just maintain but increases efficiency, capacity, or useful life -usually larger amounts that occur infrequently extraordinary repair that extends life !!!!-recorded as an ASSET, ex: (cash) and +Equiptment
Profitability Ratios (investment firm)
11/5 OVERALL: ability to generate profit ->Gross Profit Rate (higher=better, x100, all on income statement?) formula: gross profit/sales *gross profit= revenue-COGS ->Profit Margin (higher=better, x100?, all on income statement) takes out admin costs formula: Net Income/Sales ->Return on Assets (ROA) (higher=better, x100?, Net Income on income statement, total assets on balance sheet) an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company's management is at using its assets to generate earnings. Return on assets is displayed as a percentage. formula: Net Income/ total assets
Solvency Ratios (bank loan)
11/5 OVERALL: help us asses a company's ability to manage long-term debts ->Debt to Asset Ratio (all on balance sheet, lower=better, x100) what % of your assets are financed with debt formula: Total Liabilities/Total Assets x100 ->Times Interest Earned (all on income statement, higher=better) how many times over (the more the better) you can cover your long term liabilities formula: Net Income + Interest + Tax Expenses)/ Interest
If a company sells a gift card, the transaction used to record it would include: (gift card transaction)
None of the above The transaction would be +Cash and +Unearned Revenue and neither of those is listed as an answer choice.
cost centers, profit centers, and investment centers
Profit Center: led by sales manager, Sales; operating expenses, advertising, etc. RESPONSIBLE FOR: revenues and expenses Cost Center: led by production manager, production expenses, DM, DL, variable overhead, rent on equipment, etc. RESPONSIBLE FOR: expenses Investment Center: led by the division up in charge of whole thing like HQ, encompasses all of it including other expenses and income from operations. RESPONSIBLE FOR: revenues, expenses and assets Less other expenses is controlled by VP
Recently the Ritter Company has been having problems. As a result, its financial situation has deteriorated. Ritter approached the First National Bank for a badly needed loan, but the loan officer insisted that the current ratio (now 0.50) be improved to at least 0.80 before the bank would even consider granting the loan. Which of the following actions would do the most to improve the ratio in the short run? 1. Using some cash to pay off some current liabilities. 2. Collecting some of the current accounts receivable. 3. Paying off some long-term debt. 4. Selling some of the existing inventory at cost. 5. Purchasing additional inventory on account.
Purchasing additional inventory on account. BECAUSE current ratio involves current assets / by current liabilities. If the denominator, CL is decreased by paying off some CL, it would result in a worse current ratio. BUT, purchasing inventory increases assets, the numerator, and would be a transaction of +Inventory and +A/P and result in a higher and better current ratio
The Rodarte-Quayle Company purchased some equipment on March 1st for $16,480 and expects that it will be useful for 6 years at which time it could be sold for $2,800. The company used the equipment for the rest of the current year and an additional two years after that; if the equipment were sold for $8,000 at that point what amount of gain or loss would the company report on the sale? (calculate deprecation)
Tip: Calculate the annual depreciation as (16,480 - 2,800)/6 which is equal to 2,280 per year. Since the company purchased the equipment on March 1, it will only depreciate 1,900 that first year (2,280/12 months * 10 months) then another 2,280 for the next two years for a total of 6,460. So, when it is sold, the transaction used to the sale would include +8,000 Cash, (16,480) Equipment and +6,460 A/D on the asset side of the accounting framework and when you sum those numbers, the gain (or loss) is the result that would be entered under the R/E column of the framework. In this case the sale would result in a Loss on Sale of 2,020 (8,000-16,480+6,460) which would be entered as (2,020) or as: -2020
Revenue Recognition Principle EX problem: A customer placed an order with the Huell Company on November 18th; the order was shipped on December 1st. The customer sent payment for the order on December 3rd which was received by Huell on December 5th and deposited in the company's bank account on December 8th. According to the revenue recognition principle when should Huell record the revenue associated with the order?
The revenue recognition principle says that revenue should be recorded when it has been earned, not received. December 1st bc revenue can be recorded as soon as the company's "work" is done which in this case is the product being shipped to the customer on December 1st. If it were a service company like a consulting firm, then revenue should be recorded as soon as the service has been provided.
The purchasing agent of the Leuwen Company acquired some raw materials at a bargain price, even though he knew that their quality was lower than that of the materials customarily used. This action resulted in a favorable materials "cost" variance and may also cause a(n)
Unfavorable materials "quantity" variance. Since the materials are of a lower quality it may take more of them to complete the production process as some may have to be discarded or more of them applied.
The Salamanca Company had budgeted sales of $52,000, sales related costs of $14,000 and production costs of $34,000. The company's actual results included sales of $45,000, sales related costs of $ 8,000 and production costs of $32,000. Overall, the company performed
above expectations Since the question relates to the entire company (i.e. not just sales or just production), its all the favorable variances, combined with all the unfavorable variances and overall, you get a favorable result.
Depreciation expense is necessary to
allocate the cost of an asset over its useful life
You recently obtained a loan to purchase a $250,000 home; the loan terms included annual payments for a 25-year term at an interest rate of 6 percent. How much is your annual loan payment?
#7 19,557 annuity amount (?) x PVa factor = PVa ? x 12.7834 = 250,000 250,000/12.7834= 19,557
The Vasquez Corporation obtained a loan with a term of three years at an interest rate of 8% to purchase some equipment and will make annual payments on the loan. If the company borrowed $16,000, what is the total amount of interest that the company will pay on the loan?
#7 first find annual payments (annuity): annuity amount (?) x PVa factor = PVa ? x 2.5771 = 16,000 ?=6,208.5 next: Total Loan Payments (6,208.5 x 3 years)--> 18,626 -Less Amount Borrowed-->16,000 = Total Interest Paid--> 2,626
The Beneke Corporation reported the following data: Sales Year 3 $39,500 Year 2 $36,000 Year 1 $32,400 Cost of Goods Sold 30,500 28,400 24,600 For a horizontal analysis, what is the percent change in sales for year 3? Convert your final answer to a percentage, round to one decimal place and enter without the "%" sign (e.g. a final answer of 0.105678 would be entered as 10.6).
(# of the year in question-previous year # for the same item)/ precious year # = relative change x 100 [(39,500 - 36,000) / 36,000] x 100 =9.7
Heisenberg Café sells a variety of sandwiches and snacks. In a recent cost variance report, there was an unfavorable price variance related to bread. Which of the following may help explain that variance?
-More sandwiches were sold than originally planned. ***Bread was purchased from a different supplier than the one normally used.*** -Several packages of bread were accidentally allowed to spoil. -A crate of bread was stolen from the refrigerator. The only unit data that ever goes into those calculations is actual number of units produced so the first answer choice wouldn't impact it at all and the last two answer choices would impact quantity (i.e. usage) but not what was paid for the bread.
Which of the following statements is false?
-An annuity is a series of unequal payments. -If borrowed or invested, money grows in value over time. -Present value can be found if the interest rate, the number of periods and the future value are known. -Interest is the payment to the owner of an asset for its use by a borrower. -All of the above are true False: An annuity is a series of unequal payments.If borrowed or invested, money grows in value over time.Present value can be found if the interest rate, the number of periods and the future value are known.Interest is the payment to the owner of an asset for its use by a borrower.
**The Fring Company is considering a project that will cost $15,000 and has estimated that it will generate the following cash inflows: Year 1 $6,000 Year 2 3,000 Year 3 3,000 Year 4 4,000 Assuming an interest rate of 6%, what is the net present value of this project? Use time value of money factors with at least four decimal places and then round your final answer to the nearest whole dollar.
**Tip: take the present value of each cash inflow (i.e. year 1, year 2, etc.) and add them all together then don't forget to subtract the initial investment as a cash outflow. So using the Present Value of $1 table: $6,000 x PV of ONE year at 6%, not the PV of four. $3,000 x PV of TWO years at 6% (.8900) and so on. THEN, add them all together and do: sum-15,000 NOT 15,000-sum (= -982.4)
types of responsibility centers Which of the following would most likely have the least number of things to manage?
**cost center** profit center investment center Cost centers only manage costs; whereas, profit centers manage costs and revenues and investment center manage both of those plus the investment of assets.
The Weyland Corporation purchased some equipment on October 1st for $40,080 and expects that it will be useful for 12 years at which time it could be sold for $4,800. The company used the equipment for the rest of the current year and an additional three years after that; if the equipment were sold for $32,000 at that point, what amount of gain or loss would the company report on the sale? **(calculate depreciation)
10/15 practice chart color coded 1,475 First, calculate the amount of accumulated depreciation up to the date of the sale as:(40,800-4,800)/12yrs = 2,940 depreciation per year so Year 1 depreciation = 2,940 x 3/12 = 735 (bc it was purchased in October and only used for 3 months during the first year) plus three full years depreciation (2,940 x 3=8,820 + the 735 from Y1) = a total of 9,555. The transaction to record the sale would include:+32,000 Cash, -(40,080) Equipment, +9,555 A/D and all of those numbers combined = a positive 1,475 which would indicate a gain on sale.
Budgetary Control
10/20 "how do we asses performance relative to our goals and plans?" -develop budgets -record results -analyze difference between budget and actual -take corrective action -modify future plans
Adjustments
10/20 Accruals- type of adjustment where activity happens first then cash later A. revenues B. expenses A and B "when on account" or other terms Deferrals- cash first, activity later C. Supplies D. prepaid expenses (something you pay for upfront and use later, ex insurance) E. Depreciation F. Unearned Revenue (liability until earned, company gets money for something they haven't earned yet, ex gift card) C, D, and E are all considered assets until they are used up
Basis of Accounting
10/20 Determines when transactions and events are recognized in the accounting records. ACCRUAL BASIS -focused on activity and accuracy >revenues: recorded when a product or service is provided to a customer >expenses: recorded in the time period they helped generate a revenue -adjustment IS needed CASH BASIS >revenues: recorded when cash received >expenses: recorded when cash paid -adjustment is NOT needed
Types of Budgets
10/20 STATIC BUDGETS -volume is not considered, useful for sales and fixed costs which aren't affected by volume FLEXIBLE BUDGETS -volume is considered, useful for variable costs (VCs increase, volume increases or vise versa) -formula?: for each VC, multiply VCu by actual volume achieved for flexed budget
ROI (Return on Investment)
10/20 measures effectiveness of utilizing assets to generate net income. ROI formula: controllable net income/ invested assets *controllable net income: higher % the better *invested assets: not average assets like in textbook)
Which of the following transactions would be used to record the expiration of insurance in the accounting framework?
10/20 color coded in pink and purple (Prepaid expenses) and (Insurance expense)
Standard costs
10/27 "how much should it cost to produce one unit" (ie what's the budget to build a single product) -Direct Materials -Direct Labor -Overhead are all required to build a product Standard Cost Variances -variance: the difference between what is expected and what actually happened -price: AKA cost, cost of input (DL or DM) is higher or lower than planned -quantity: amount of input (DM or DL) used is higher or lower than planned
Capital Investment Analysis Methods
11/12 Cash Payback: "how long till i get my money back?" (shorter=better) time needed to recover the cost of the capital investment; for simplicity, it ignores profitability as well as time value of money and is usually used as an initial screen of many projects Net Present Value (NVP): Considers both profitability and the time value of money so its more informative than cash payback and is used to make the final evaluation among projects.
For a capital investment analysis using the net present value approach, how many of the following cash flows should be included in the decision making process?
11/12 Initial investment (cost to build/buy) Repairs and maintenance (outflows for operating costs) Cash from customers (how many times a year will we use this product like a cruise ship) Salvage value of investment (at end of its useful life)
Time Value of Money (TVM) calculations
11/17 FV of $1: PV x FV factor =FV PV of $1: FV x PV factor=PV FVa of $1: annuity amount x PVa factor=PVa PVa of $1: annuity amount x FVa factor= Fva
Interest Rate Considerations
11/19 -risk: general risk of project default -time frame: longer the periods of time the higher the rate -inflation: purchasing power of $1 -compounding: ()annual percentage rate (APR) interest compounds on itself, accumulating every year, month, day, etc. EX: credit card 18% per yr ()effective annual rate (EAR) when it compounds really quickly. EX: 20% per year when compounded daily
Liquidity ratios (manager of produce supply)
11/3 OVERALL: helps us measure a company's ability to convert current assets to cash to pay current liabilities. Paying your bills. ->Current Ratio (larger=better, all on balance sheet) anything that can be converted to cash within the year formula: Current Assets/Current Liabilities *current assets: cash, accounts receivable, inventory, prepaid expenses (not revenue or property/land and equipment) *current liabilities: accounts payable, other current liabilities (not long-term liabilities like notes payable) ->Days in Inventory (lower=better, COGS on income statement, average inventory on balance sheet) ASAP how long does it take you to sell inventory formula: 365/ (COGS/Average Inventory) *To calculate the average inventory, take the current period inventory balance and add it to the prior period inventory balance. Divide the total by two to get the average inventory amount. ->Average Collection Period (lower=better, Sales on Income Statement, Average Accounts Receivable on Balance Sheet) ASAP how long it takes you to collect money from customers formula: 365/ (Sales AKA revenue/ Average Accounts Receivable) *accounts receivable is calculated by: (A/R for yr in question + previous year A/R) / by 2
Horizontal Analysis (restaurant industry analyst assessing relative performance of two companies)
11/3 measures relative change over time, ex. GPA's over semesters x100 because a percentage formula: (# of the year in question-previous year # for the same item)/ precious year # = relative change can be done on every single line item on every single financial statement
The Hicks Company has a current ratio of 1.20 which it is trying to improve in order to increase its chances of obtaining short-term credit from a supplier. How many of the following actions would immediately improve its current ratio? Providing services to customers on account Buying equipment Obtaining a long-term bank loan Buying supplies
2 First, you can assume some numbers that would result in a current ratio of 1.20 (e.g. current assets of 1,200 and current liabilities of 1,000); the first answer choice (+A/R and +Revenue) would cause the numerator to increase, say by 50, but have no impact on the denominator of the calculation such that the result would be 1,250/1,000 or a current ratio of 1.25 which is better. Buying equipment (-Cash and +Equipment) would cause the numerator to decrease (since equipment is not a current asset) and have no impact on the denominator of the calculation which would result in a lower current ratio. Obtaining a long-term bank loan (+Cash and +N/P) would cause the numerator to increase and have no impact on the denominator of the calculation (since N/P is not a current liability) which would result in a higher current ratio. Buying supplies (-Cash and +Supplies) would have no impact on the ratio since the numerator of the calculation would increase and decrease by the same amount for this transaction and it would have no impact on the denominator of the calculation.
If all else were equal, which of the following interest rates would result in the largest present value? Group of answer choices: 10% 4% 8% 2%
2%! This may be a bit counter intuitive, but if you look at the present value of a dollar table, the lower the interest rate, the higher the time value of money factor. That's because a lower rate would require a higher starting (i.e. present) value to reach the future amount.
The Goodman Corporation completed the following transactions for the month: 1 Owners begin company by investing $50,000 4 Purchased $5,000 of office equipment 6 Purchased $20,000 of inventory on account 9 Sold $17,000 of the inventory to customers for $25,000 15 Paid for 25% of the inventory purchased on the 6th 20 Purchased another $10,000 of inventory on account 24 Sold $5,000 of the inventory to customers on account for $12,000 Based on the transactions above, what is the company's accounts payable balance at the end of the month?
25,000 Tip: Use an accounting framework to consider each transaction. After carefully reviewing them, the only transactions that impact accounts payable are those on the 6th, the 15th and the 20th.
How many of the following could appear on a balance sheet? Prepaid expenses Unearned revenue Revenue Retained earnings
3 Prepaid expenses Unearned revenue Retained earnings ?
The Ripley Company recently purchased a new forklift; the equipment had a listed sales price of $80,000, but the company got a negotiated discounted sales price of $75,000. The company also had to pay an additional $4,000 in related taxes and $500 for delivery fees. When the company records the purchase, what total dollar amount should it use in the transaction? Enter as a positive number.
79,500 Tip: capital expenditures are recorded at their purchase cost plus any related fees (e.g. freight, assembly, installation) and taxes.
External Users
Investors, bankers, suppliers, regulatory and tax authorities
The accounting records of the Schader Company showed the following: Beginning prepaid expenses account balance $2,000 Amount of insurance purchased during the year $5,000 Ending prepaid expenses account balance $1,000 What was the amount of prepaid expense (e.g. insurance) that expired during the year?
Beginning prepaid expenses account balance $2,000 + Amount of insurance purchased during the year $5,000 - Ending prepaid expenses account balance $1,000 = prepaid expense that expired during the year $6,000
The White Company purchased $400 of supplies during the month, had supplies on hand of $200 at the beginning of the month and had $100 worth of supplies on hand at the end of the month. The income statement for that month would report supplies expense of? Enter as a positive number.
Supplies expense=Beginning supplies balance+Supplies purchased-Ending supplies balance =200+400-100 which is equal to =$500
In a tabular analysis, which of the following steps would happen first?
data for each row would be entered
Which of the following costs related to a computer would be considered a capital expenditure? replacement power cord cleaning fluid for screen external hard drive all of the above none of the above
external hard drive To be a capital expenditure, it must make the asset last longer or work better and an external hard drive would allow for more data storage; whereas, the other answer choices are more routine in nature and would not really improve the computer's performance or useful life.
The Pinkman Company borrowed $20,000 at an interest rate of 8% to purchase some equipment and will make annual payments on the loan. If the term of the loan is 4 years, what is the total amount of interest that the company will pay on the loan?
find annuity (annuity amount ? x factor = Pva) find interest paid over the life of the loan total loan payments (? x yrs) -less amt borrowed =total interest paid (#7 on worksheet) answer 4,154
Internal Users
store managers, marketing team, finance managers, etc.
Right now you are 20 years old and you have decided that you want to have $2,000,000 in the bank when you turn 65 years old. How much must you deposit each year to reach your goal if your account pays interest of 4 percent? Use time value of money factors with at least four decimal places and then round your final answer to the nearest whole dollar.
that annuity relates to an event that has not yet happened, so the calculation will involve a future value of an annuity. You know the "result" of the annuity (i.e. $2,000,000) so you can divide that amount by the FVa factor to calculate the annuity amount. ? x FVa factor = FVa ? x 121.0294 = 2,000,000 ? = 16,523
