Accounting Chapter 11, ACCT 5312 (Ch. 8-11) Exam 3

Another term for the price/earnings ratio is: Cost ratio Sales multiple Earnings multiple Profit ratio

Earnings multiple

Product Mix: Which Product to Emphasize?

Emphasize the product with the highest contribution margin per unit of constraint

A common size income statement: Uses the same dollar amount of revenues for each year Expresses items as a percentage of revenues Makes comparisons between years more difficult Is useful in estimating the impact of inflation

Expresses items as a percentage of revenues

Production Budget

Figure out how many units they need to produce Units Needed for Sales + Desired Ending Inventory = Total Units Needed - Units in Beginning Inventory = Units to Produce

Sales Margin

Focuses on profitability by showing how much operating income the division earns on every $1 of sales revenue Sales Margin = Operating Income / Sales

Manufacturing Overhead Budget

Highly dependent on cost behavior Some overhead costs, such as indirect materials, are variable

Sell As-Is or Process Further Considerations:

How much revenue is generated if we sell the product as is? How much revenue is generated if we sell the product after processing it further? How much will it cost to process the product further?

Sell As-Is or Process Further?

If extra revenue (from processing further) exceeds extra cost of processing further: process further If extra revenue (from processing further) is less than extra cost of processing further: sell as is

Discontinuing Products, Departments, or Stores

If lost revenues from discontinuing a product, department, or store exceed the cost savings from discontinuing: do not discontinue If total cost savings exceed the lost revenues from discontinuing a product, department, or store: discontinue

Pricing Decisions

If the company is a price-taker for the product: emphasize target costing approach If the company is a price-setter for the product: emphasize cost-plus pricing approach

Outsourcing: Should the Company Outsource?

If the incremental costs of making exceed the incremental costs of outsourcing: outsource If the incremental costs of making are less than the incremental costs of outsourcing: do not outsource

Effect of: Accrued interest on a note receivable on: Current Ratio

Increase

Effect of: Declared a cash dividend on: Dividend yeild

Increase

Effect of: Sold inventory on account On: Acid test ratio

Increase

Extending Credit pros

Increases the seller's revenues.

Calculating Interest equation

Interest (I) = Principal (P) × Interest Rate (R) × Time (T)

Participative Budgeting

Involves many levels of management Benefits: ownership in the budget; knowledge of the detail costs Disadvantages: managers may pad budget to achieve bonus goals

The price/earnings ratio: Is a measure of the relative expensiveness of a firm's common stock Does not usually change by more than 1.0 during the year Can be used to determine the cash dividend to be received during the year Is calculated by dividing the earnings multiple by net income

Is a measure of the relative expensiveness of a firm's common stock

The inventory turnover calculation: Is wrong unless is used in the numerators Is wrong unless sales is used in the numerators Is an alternative way of expressing the number of days' sales in inventory Requires knowledge of the inventory cost flow assumptions being used

Is an alternative way of expressing the number of days' sales in inventory

Book value per share of common stock of a manufacturing company: Is not a very useful measure most of the time Is calculated by dividing market value per share by earnings per share Reflects the fair value of the company's stock Is the same as the total balance sheet asset value per share of common stock

Is not a very useful measure most of the time

Responsibility Centers

Responsibility Center: part of an organization whose manager is accountable for planning and controlling activities Responsibility Accounting: system for evaluating performance of each responsibility center and its manager

An individual interested in making a judgement about the profitability of a company should: Review the trend of working capital for several years Calculate the company's ROI for the most recent year Review the trend of the company's ROI for several years Compare the company's ROI for the most recent year with the industry average ROI for the most recent year

Review the trend of the company's ROI for several years

An entity's current ratio will be influenced by: The inventory cost flow assumption used Writing off an overdue account receivable against the allowance for uncollectible accounts The deprecation method used Issuance of a stock dividend

The inventory cost flow assumption used

The dividend payout ratio describes: The proportion of earnings paid as dividends The relationship of dividends per share to market price per share The percentage change in dividends this compared to last year Dividends as a percentage of the price/earnings ratio

The proportion of earnings paid as dividends

Turnover Analysis

The receivables turnover ratio indicates how many times, on average, this process of selling and collecting is repeated during the period. The higher the ratio, the faster the collection of receivables.

Special Sales Orders

a customer requests a one-time order at a reduced sale price, often for a large quantity

Allowance for Doubtful accounts

contra-revenue account

Establishing a notes receivable journal

example: Notes Receivable Cash

Budgeted Balance Sheet

report that management uses to predict the levels of assets, liabilities, and equity based on the budget for the current accounting period Cash inflows and cash outflows

Effect of: Issued common stock for cash on: Total asset turnover

Decrease

Effect of: Sold Treasury Stock on: Return on Equity

Decrease

Effect of: Sold equipment at a loss on: Earnings per share

Decrease

Effect of: Split the common stock 2 for 1 on: Book value per share of common stock

Decrease

Target Cost Includes:

Development cost Design cost Production cost Marketing cost Delivery cost Service cost

Variance

Difference between actual and budget Favorable variance: causes operating income to be higher than budgeted Unfavorable variance: causes operating income to be lower than budgeted

The comparison of activity measures of different companies is complicated by the fact that: Different inventory cost flow assumptions may be used Dollar amounts of assets may be significantly different Only one of the companies may have preferred stock outstanding The number of shares of common stock issued may be significantly different

Different inventory cost flow assumptions may be used

When a corporation has both common stock and preferred stock outstanding: Dividends on preferred stock are paid only if the company has current earnings Dividends on preferred stock must be paid before dividends on common stock can be paid Preferred stockholders receive the same dividend per share as common stockholders Dividends on preferred stock are paid only if dividends are to be paid on common stock

Dividends on preferred stock must be paid before dividends on common stock can be paid

Decision Rule for Special Orders

Do we have excess capacity? Is the special reduced sales price high enough to cover the incremental costs of filling the order? (If revenues are greater than expected cost increase, accept the special order, if not, deny) Will the special order affect the regular sales in the long run? (If no to these questions, accept the order, if yes, deny) Is the special sales price high enough to cover the variable manufacturing costs? (If revenues are greater than variable cost, accept the order, if revenues are less than variable cost, deny)

When to Discontinue a Product

Does the product provide positive contribution margin? Will the total fixed costs continue to exist even if the product line is discontinued? Can any direct fixed costs of the product be avoided if the product line is discontinued?

Turnover Analysis Equation

Receivable Turnover = Net Sales Revenue Average Net Receivables Ratio

Direct Materials Budget

Quantity of DM Needed for Production + Desired DM Ending Inventory = Total Quantity of DM Needed - DM Beginning Inventory = Quantity of DM to Purchase

Extending Credit Disadvantages

1.Increased Wage costs. 2.Bad Debt Costs. 3. Delayed receipt of cash.

Allowance Method

1.Make an end-of-period adjustment to record the estimated bad debts in the period credit sales occur. 2.Remove ("write off") specific customer balances when they are known to be uncollectible.

Methods of Estimating bad debt

1.Percentage of credit sales method. 2.Aging of Accounts Receivable.

For the fiscal year ended March 31, 2014, a company reported earnings per share of $3.25 and cash dividends per share of $0.50. During fiscal 2015, the company had a 3-for-2 stock split. In the annual report for the fiscal year ended March 31, 2015, earnings per share and cash dividends for fiscal 2014 would be reported, respectively, as: 3.25 and 0.50 4.85 and 0.75 2.17 and 0.33 1.09 and 0.17

2.17 and 0.33

If a firm's debt ratio was 25%, its debt/equity ratio would be: 25% 50% 33.33% 75%

33.33%

Rolling Budget

A budget that is continuously updated so that the next 12 months of operations are always budgeted

Reporting Notes Recievable

A company reports Notes Receivable if it uses a promissory note to document its right to collect money from another party. notes receivable charge interest from the day they are created to the day they are due (their maturity date).

A leveraged buyout refers to: One more firm issues stock to take over another firm One firm trades its stock for the stock of another firm A firm goes heavily into debt in order to obtain the funds to purchase shares of the public stockholders and thus take the firm private One firm pays cash for the shares of a takeover firm's shares

A firm goes heavily into debt in order to obtain the funds to purchase shares of the public stockholders and thus take the firm private

Management's use of resources can best be evaluated by focusing on measures of: Liquidity Activity Leverage Book Value

Activity

A management that wanted to increase the financial leverage of its firm would: Raise additional capital capital by selling common stock Use excess cash to purchase preferred stock for the treasury Raise additional capital by selling fixed interest rate long-term bonds Try to increase its ROI by increasing asset turnover

Raise additional capital by selling fixed interest rate long-term bonds

Zero-based Budgeting

All managers begin with a budget of zero and must justify every dollar they put into the budget Time consuming and labor intensive Companies only use it from time to time in order to keep their expenses in check

Operating Expenses Budget

All research and development, design, marketing, distribution, and customer service costs will be shown on the operating expenses budget

Cash Payments Budget

Also about timing When will the company pay for its direct materials purchases, direct labor costs, manufacturing overhead costs, operating expenses, capital expenditures, and income taxes?

Record sales on account

Debit- Accounts receivable Credit- Sales Revenue.

Bad Debt Known

Debit- Allowance for doubtful accounts. Credit-Accounts Receivable.

Recording Bad debt

Debit- Bad Debt Expense Credit- Allowance for doubtful accounts.

If the P/E ratio of a company's common stock were 12, and its earnings were 2.50 per common share: The market value of the common stock would be 20.83 per share The market value of the common stock would 25.00 per share An increase in earnings of .20, with no change in multiple, would result in a market price increase of 2.40 per share An increase in earnings of .20, with no change in multiple, would result in a market price increase of 1.67 per share

An increase in earnings of .20, with no change in multiple, would result in a market price increase of 2.40 per share

Financial leverage: Arises because most borrowed funds have a fixed interest rate Arises because most borrowed funds have a variable interest rate Usually has no bearing on the risk associated with a company Is a concept that does not apply to individuals

Arises because most borrowed funds have a fixed interest rate

Write Off Method

Debit-Allowance for Doubtful accounts. Credit- Accounts Receivable.

How will you decide whether to sell, hold, or buy some more of the firm's stock? Based on the wish of the corporation Based on stock price performance Based on quantity of stock purchased

Based on stock price performance

Percentage of credit sales method Journal

Debit-Bad Debt Expense Credit-Allowance For Doubtful Accounts. While the percentage of credit sales method focuses on estimating Bad Debt Expense

If a firm's payment terms for sales made on account to its customers were 2/10, n30, the number of days' sales in accounts expected to be: Less than 10 Between 10 and 25 Between 25 and 40 Over 40

Between 10 and 25

Adjustments for Bad Debt Journal Method

Debt-Accounts recievable. Credit-Sales Revenue.

Which of the following is an example of a measure of leverage? Debt yield Debt payout ratio Preferred dividend coverage ratio Debt/equity ratio

Debt/equity ratio

Cash Collections Budget

COD Sales: cash sales All about timing

Effect of: Collected accounts receivable On: Number of days' sales in accounts recievable

Decrease

Effect of: Incurred operating expenses on: Margin

Decrease

Performance Report

Compares actual revenues and expenses to budgeted figures

Budgeted Income Statement

Looks just like a regular income statement, it just uses budgeted data Cost of Goods Sold: Number of Unit Sales x Manufacturing Cost per Unit = Cost of Goods Sold

Profit Center

Managers are accountable for both revenues and costs, and therefore profits ex. At PepsiCo, a manager may be responsible for the entire line of brand products, such as Mountain Dew or Aquafina Accountable for increasing sales revenue and controlling cost to achieve profit goals for the entire brand or product line

Cost Center

Managers are accountable for costs only ex. Frito-Lay Plant manager controls costs by using lean thinking to eliminate waste

Revenue Center

Managers are accountable primarily for revenues Typically sales territories, such as geographic areas within the country Managers may also be responsible for the costs of their own sales operations Revenue center performance reports compare actual revenues to budgeted revenues

Investment Center

Managers are responsible for (1) generating revenues, (2) controlling costs, and (3) efficiently managing the division's assets Generally large divisions of a corporation

Management by Exception

Managers will only investigate budget variances that are relatively large

Target Cost

Market Price - Desired Profit

Look forward to the day when you will have accumulated $5,000, and assume that you have decided to invest that hard-earned money in the common stock of a publicly owned corporation. What data about that company will you be most interested in out of: Location of the production plant Market price Earnings per share Cash dividends per share P/E ratio Salaries and wages paid to employees

Market price Earnings per share Cash dividends per share P/E ratio

What information about the company will you want on a weekly basis, quarterly basis, and annual basis? Market price Earnings trends Dividend trends

Market price - weekly Earnings trends - both quarterly and annually Dividend trends - both quarterly and annually

Return on Investment (ROI)

Measures the amount of income an investment center earns relative to the size of its assets ROI = Operating Income / Total Assets

Combined Cash Budget

Merges the budgeted cash collections and cash payments to protect the company's ending cash position Budgeted cash collections for the month are added to the beginning cash balance to determine the total cash available Budget cash payments are then subtracted to determine the ending cash balance before financing Based on the ending cash balance before financing, the company knows whether it needs to borrow money or whether it has excess funds with which to repay debt or invest

Effect of: Wrote off an uncollectible account On: Accounts receivable turnover

None

Segment Margin

Operating income generated by a profit or investment center before subtracting common fixed costs that have been allocated to the center

Cost-Plus Pricing

Opposite of target-pricing approach Starts with the company's full costs Adds the desired profit to determine a cost-plus price

Sales Budget

Plan for sales revenues in future periods Number of units to be sold x Sales price per unit = Total Sales Revenue

A potential creditor's judgment about granting credit would be most influenced by the potential customer's: Current ratio at the end of the prior fiscal year Most recent acid-test ratio Trend of acid-test ratio over the past three years Practice with respect to taking cash discounts offered by current suppliers

Practice with respect to taking cash discounts offered by current suppliers

Accruing Interest and Journal

Principal (P) × Interest Rate (R) × Time (T) = Interest (I) Example:Interest Receivable Interest Revenue

Price-Setter

Product is more unique Less Competition Pricing approach emphasizes cost-plus pricing

Price-Taker

Product lacks uniqueness Heavy competition Pricing approach emphasizes target costing

Which of the following is not a category of financial statement ratios? Financial leverage Liquidity Profitability Prospectus

Prospectus

Performance Evaluation Systems

Provide upper management with feedback To Be Effective... - Clearly communicate expectations - Provide benchmarks that promote goal congruence and coordination between segments - Motivate segment managers

When a firm has financial leverage: ROI will be greater than ROE ROI will usually be less than it would be without leverage Risk is greater than if there wasn't any leverage The firm will always have a higher ROE than it would without leverage

Risk is greater than if there wasn't any leverage

Asset turnover calculations: Are made by dividing the average asset balance during the year by the sales for the year Are made by dividing sales for the year by the asset balance at the end of the year Communicate information about how promptly the entity pays its bills Should be evaluated by observing the turnover trend over a period of time

Should be evaluated by observing the turnover trend over a period of time

Capital Expenditure Budget

Shows the company's plans to invest in new property, plant, or equipment (capital investments)

Decentralization Company & Its Advantages/Disadvantages

Splitting operations into different operating segments Advantages - Frees top management's time - Use of expert knowledge - Improves customer relations - Provides training - Improves motivation and retention Disadvantages - Duplication of costs - Potential problems achieving goal congruence

Look forward to the day when you will have accumulated $5,000, and assume that you have decided to invest that hard-earned money in the common stock of a publicly owned corporation. How will you arrange those data so they are most meaningful to you? Chart and graphic format Tabular and chart format Tabular and graphic format

Tabular and graphic format

The Master Budget

The aggregation of all lower-level budgets produced by a company's various functional areas, and also includes budgeted financial statements, a cash forecast, and a financing plan

Aging of Accounts Recievable

The aging method gets its name because it is based on the "age" of each amount in Accounts Receivable at the end of the period. Debit-Bad Debt Expense Credit-Allowance for Doubtful Accounts.

A higher P/E ratio means that: The stock is more reasonably priced The stock is relatively expensive Investors are wary of the stock Earnings are expected to decrease

The stock is relatively expensive

Write off method

This method is not acceptable for GAAP.

Direct Labor Budget

Units to Be Produced x DL Hours per Unit = Total DL Hours Required x DL Cost per Hour = Total Direct Labor Cost