ACCT 5315 Test 1

structural cost drivers

choices about size and scope of resources needed in delivering products (made infrequently)

organizational cost drivers

choices concerning the organization of activities and the involvement of persons

step costs

constant over a narrow range of cost driver activity but increase in steps as activity increases

Step cost: Y = a(i)

constant over a narrow range of cost driver activity but increase in steps as activity increases.

mixed costs

contain fixed and variable cost elements. They increase, but not in direct proportion to increases in activity cost drivers

variable costs

increase in proportion to increases in activity cost drivers

strategic cost management

making decisions concerning specific cost drivers within a business strategy

internal control systems

policies that ensure a company's objectives are met with regard to: 1. efficiency of operations, 2. reliability of financial reports, and 3. compliance with law.

relevant range

portion of the range associated with the fixed cost of the current or expected capacity.

Discretionary fixed costs (managed fixed costs)

set at a fixed amount each period at the discretion of management.

activity cost driver

specific activities performed to serve customer needs

cost driver analysis

study of factors that cause or influence costs

value chain analysis

study of value-producing activities, stretching fro basic raw materials to the final consumer of a product or service.

cost estimation

the determination of the relationship between activity and cost

ethics

the moral quality of a course of action that can injure or benefit people.

cost behavior

the relationship between cost and quantity of cost driver

corporate governance

the system of policies that affect the way a company is directed and controlled

marginal cost

the varying increment in total cost

fixed costs

total costs - variable costs

All of the following are potentially dilutive in computing diluted EPS except: -Employee stock options -Convertible preferred stock -Convertible bonds -Warrants -All of the above are dilutive securities

All of the above are dilutive

The 2013 balance sheet of Microsoft Corp. reports total assets of $142,431 million, operating liabilities of $47,242 million, and total shareholders' equity of $78,944 million. Microsoft 2013 nonoperating liabilities are: -$63,487 million -$16,245 million -$95,189 million -$31,702 million -There is not enough information to calculate the amount.

$16,245 million

Tickets Today contracts with the producer of Riverdance to sell tickets online. Tickets Today charges each customer a fee of $6 per ticket and receives $15 per ticket from the producer. Tickets Today does not take control of the ticket inventory. Average ticket price for the event is $150. How much revenue should Tickets Today recognize for each Riverdance ticket sold? -$6 because the $15 from the producer is similar to a negative cost of goods sold -$150 because the $135 is cost of goods sold paid to the Riverdance producer -$21 because both the fee from the customer and the producer are earned -$156 because the $135 is cost of goods sold paid to the Riverdance producer -None of the above

$21 because both the fee from the customer and the producer are earned

Least-Squares Regression (aka Simple Regression)

*A mathematical technique to fit a cost-estimating equation to observed data. Accomplished with: excel, stat software, advanced calculators and calculations *Minimizes the sum of all squared vertical deviations between individual observations and the cost-estimating line *Superior to the high-low and scatter diagram methods (uses all data pts & does not rely on subjectivity) *Statistical measures are available to determine how well the equation fits the line (R squared)

Relevant Range

*A portion of a range of activity associated with the fixed cost of the current or expected capacity *A normal range of activity in which a company expects to operate, where the fixed costs remain linear, i.e., total cost remains the same

Managerial Acctg - Reporting

*Detail is based on mgmt needs *Reports oriented to future costs and decisions *Reporting periods based on need

Financial Acctg - Reporting

*Highly aggregated, little detail *Reports on historical costs and past decisions *Long reporting periods

Financial Acctg

*Information for internal and external users *Not timely enough for managing daily activities

Managerial Acctg

*Information for internal users *Reports are prepared as needed for making timely decisions

Financial Acctg - External Standards

*Must adhere to external reporting standards *Emphasis on objective data - measured in financial terms

Managerial Acctg - External Standards

*No external standards imposed *Measurement expresses in financial and non-financial terms, such as time and quality

Mattel Inc.'s 2013 financial statements show operating profit before tax of $1,168,103 thousand, net income of $903,944 thousand, provision for income taxes of $195,184 thousand and net nonoperating expense before tax of $68,975 thousand. Assume Mattel's statutory tax rate for 2013 is 37%. Mattel's 2013 tax shield is: -$43,454 thousand -$25,521 thousand -$264,159 thousand -$238,638 thousand -None of the above

-$25,521

Three cost drivers

1. Structural, 2. organizational, 3. activity

IMA's 4 standards of ethical conduct

1. competence 2. confidentiality 3. integrity 4. credibility

3 themes of strategic cost management

1. strategic position analysis 2. cost driver analysis 3. value chain analysis

four basic cost behavior patterns

1. variable, 2. fixed, 3. mixed, 4. step

In fiscal 2013, Snap-On Inc. reported a statutory tax rate of 35.00%, an effective tax rate of 31.68% and a tax rate on net earnings attributable to Snap-On Inc. of 32.30%. Income before income tax for 2013 was $526.2 million. What did Snap-On report as tax expense (on its income statement) in 2013? -$166.7 million -$170.0 million -$136.5 million -$184.7 million -None of the above

166.7 Million

The fiscal year-end 2014 financial statements for Staples, Inc. report revenues of $23,114,263 thousand, net operating profit after tax of $779,262 thousand, net operating assets of $6,752,490 thousand. The fiscal year-end 2013 balance sheet reports net operating assets of $6,920,568 thousand. Staples' 2014 net operating profit margin is: -29.2% -11.5% -3.4% -12.7% -There is not enough information to calculate the ratio.

3.4%

Selected ratios follow for Baker Hughes Inc. for the year ended December 31, 2013 (in millions). RNOA PM NOPM AT FL 5.94% 4.90% 5.59% 0.82 1.57 What is the company's return on equity (ROE) for the year? -7.20% -7.65% -6.31% -3.83%

6.31%

The 2013 financial statements of The New York Times Company reveal average shareholders' equity attributable to controlling interest of $752,618 thousand, net operating profit after tax of $97,898 thousand, net income attributable to The New York Times Company of $65,105 thousand, and average net operating assets of $ 402,427 thousand. The company's return on equity (ROE) for the year is: -8.7% -13.0% -16.2% -24.3% -There is not enough information to calculate the ratio.

8.7%

Which of the following is not one of Porter's five forces that determine a company's competitive intensity? -Supplier power -Threat of substitution -Ability to obtain financing -Threat of entry

Ability to obtain financing

Which of the following are relevant in an analysis of a company's business environment? -Financing -Labor -Buyers -Governance -Correct -All of the above

All of the Above

Which of the following items create risk related to revenue recognition? -Bonuses tied to sales goals -Long-term construction contracts -Multiple element sales contracts -Consignment goods -All of the above

All of the Above

Opportunity Costs

Any benefit forgone as a result of rejecting one alternative in favor of another Always relevant when making decisions among competing alternatives

A mortgage bond differs from a debenture in that mortgage bonds: -Are issued for amounts over $1,000,000 -Are short-term with maturities of less than 270 days -Are secured by property -Are paid back over the term of the loan

Are secured by property

As inventory and property plant and equipment on the balance sheet are consumed, they are reflected -As a revenue on the income statement -As an expense on the income statement -As a use of cash on the statement of cash flows -On the balance sheet because assets are never consumed -Both B and C because the financial statements articulate

As an expense on the income statement

How would a sale of $400 of inventory on credit affect the balance sheet if the cost of the inventory sold was $160? -It would increase noncash assets by $400 and increase equity by $400 -It would decrease noncash assets by $160 and decrease equity by 160 -It would increase cash by $400 and increase equity by $400 -Both A and B, above happen simultaneously -None of the above

Both A and B, above happen simultaneously

Which of the following items is NOT found on a balance sheet? -Property, plant and equipment -Non-owner Financing -Cost of Goods Sold -Stockholders' Equity -Sales

COGS Sales

Expected credit loss is calculated as: -Chance of default X Long-term Debt -Chance of default X Z-Score -Chance of default X Loss given default. -Chance of default X Market value of Equity

Chance of default X Loss given default.

Variable Costs

Change in total cost in direct proportion to changes in volume

Step Costs

Constant within a narrow range of activity, but shift to a higher level when activity exceeds the range

Mixed Costs

Contain a fixed and variable cost element; sometimes called semi-variable costs

The variable Market Value of Equity divided by Total Liabilities in the Altman Z-Score measures which of the following concepts? -Current level of profitability -Current level of net operating assets -Current level of leverage -Current level of efficiency

Current level of leverage

Which of the following concepts is not captured by one of the variables in Altman's Z-Score? -Current level of profitability -Current level of net operating assets -Current level of liquidity -Current level of efficiency

Current level of net operating assets

The variable EBIT divided by Total Assets in the Altman Z-Score measures which of the following concepts? -Current level of profitability -Current level of net operating assets -Current level of liquidity -Current level of efficiency

Current level of profitability

Disposal Value vs. Salvage Value

DISPOSAL VALUE Amount of cash an old asset can be sold for at the time the new asset is purchased Relevant cash inflow (Obtained only if the replacement alternative is accepted) SALVAGE VALUE Amount of cash an asset will bring at the end of its useful life if held to that time

Fixed Costs

Do not change in response to a change in activity volume

A customer's prepayment for services not yet rendered is initially recorded as unearned revenue (a liability). Then, at the end of the accounting period, the unearned revenue is moved from the balance sheet to the income statement. This is an example of the revenue recognition principle. T or F

False

According to the revenue recognition principle, companies are required to record revenue when cash is received as this provides the most objective evidence for the auditors. T or F

False

Bed Bath and Beyond has a return policy which states that the customer "may return a purchase for a refund, merchandise credit, or exchange to any of our stores nationwide or to our returns processing center". The company can report revenue on the full amount as soon as the merchandise is sold. T or F

False

For an item to be classified as extraordinary, it needs to be both unusual and infrequent. However, there is an exception for material items - for one-time items that are extremely large, firms have the option of classify these items as extraordinary to provide better information to investors. T or F

False

Retained earnings articulate across time which means that last period's retained earnings plus current period net income (or loss) is equal to the current period's retained earnings T or F

False

The statement of cash flows has two main sections: cash flows from operating activities and cash flows from investing activities. T or F

False

Net working capital = Current assets + Current liabilities T or F

False -Net Working Capital = Current assets- current liabilities

Irrelevant Costs

Future costs that DO NOT differ among competing decision alternatives

Relevant Costs

Future costs that differ among competing decision alternatives ONLY RELEVANT COSTS ARE USED IN DECISION MAKING.

Texas Company currently has a current ratio of 0.9. The company decides to borrow $1,000,000 from First Stone Bank for a period of nine months. After the borrowing Texas's current ratio will be: -Greater than 0.9 -0.9 -Less than 0.9 -Unable to determine without more information

Greater than 0.9

An accrual of wages expense would produce what effect on the balance sheet? -Increase liabilities and decrease earned capital -Decrease liabilities and increase earned capital -Increase expenses and increase liabilities -Increase assets and increase liabilities -Decrease assets and decrease liabilities

Increase liabilities and decrease earned capital

Commercial paper is issued with maturities that do not exceed 270 days because: -Companies do not want to pay high interest rates. -It exempts the borrowing from SEC regulation. -Usually the collateral consists of short-term assets -Companies use it to fund working capital needs.

It exempts the borrowing from SEC regulation

Assets are recorded in the balance sheet in order from: -Market Value -Historic Value -Liquidity -Maturity -None of the above

Liquidity

Which of the following groups would likely not be interest in the financial statements of a large public company such as Berkshire Hathaway? -Shareholders -Employees -Competitors -Taxing agencies -None of the above

None of the above

Which of the following are included in current assets? -Prepaid rent -Taxes payable -Common stock -Automobiles -None of the above

Prepaid rent

A letter of credit: -Ensures a company that funds will be available when needed -Is analogous to a credit card that companies can draw on as needed -Is a representation that a company has a high credit rating -Provides a guarantee of payment from the buyer, reducing the credit risk to the seller

Provides a guarantee of payment from the buyer, reducing the credit risk to the seller

A company's net cash flow will equal its net income... -Almost always -Rarely -Occasionally -Only when the company has no investing cash flow for the period -Only when the company has no investing or financing cash flow for the period

Rarely

All of the following ways can diminish accounting quality, except: -Unintentional errors -Deliberate management intervention -Reliable numbers that are predictive -Pro forma disclosures -All of the above can diminish accounting quality

Reliable number that are predicted

Sunk Costs

Result from past decisions that cannot be changed. These costs are NEVER relevant. EX: Sunk costs in decisions to replace a machine: >Cost of old machine >Book value of old machine Also, these costs can cause ethical dilemmas, such as Managers often avoid disposing of old assets (disposing may create a loss on the income statement, making the manager's performance look bad)

Which of the following is included as a components of stockholders equity -Buildings -Retained earnings -Prepaid property taxes -Accounts payable -Dividends

Retained earnings

The Ratio of net income to equity is also known as: -Total net equity ratio -Profit margin -Return on equity -Net income ratio -None of the above

Return on Equity

Many companies have cyclical operating cash needs due to: -Mergers and acquisitions -The seasonality of sales -Delays in customer payments -Refinancing of deb

The seasonality of sales

A company with outstanding in-the money employee stock options will report a diluted EPS that is lower than basic EPS. T or F

True

According to GAAP revenue recognition criteria, in order for revenue to be recognized on the income statement, it must be earned and realized (realizable). T or F

True

Assets are listed on the balance sheet in order of liquidity and liabilities are listed in order of maturity T or F

True

Employee severance costs, as part of board-approved restructuring plans, are reported in the income statement even if the actual payment for these costs occurs in subsequent periods. T or F

True

In addition to purchased assets like inventories and equipment, companies also may report on their balance sheets intangible assets such as the value of a brand name. T or F

True

Income tax expense is not recorded at the amount owing to the tax authorities even if this is the most objectively measured amount. T or F

True

R&D expense is treated as an operating expense, not a capital expenditure, unless the R&D assets acquired have an alternative future use. T or F

True

The two factors that enhance the quality of accounting information are reliability and relevance. T or F

True

Under accrual accounting principles, the cost of inventory should be reported as an expense in the income statement when it is sold, regardless of when it was purchased. T or F

True

When a company reports a deferred tax asset it means that the company will receive a tax benefit in the future. T or F

True

High-Low Cost Estimation

Use data from two time periods; a high activity period and a low activity period.

variable cost: Y = bX

Y (Y axis) = total cost, b = variable cost per unit (slop of the cost function), X (X axis) = total activity

Y = a + bx Total Cost Equation

Y = Total Cost Equation a = Total Fixed Cost b = Var Cost per Unit x = # of units

total costs

Y = a + b(X)

fixed cost: Y = a

Y = total cost, a = total fixed costs. The slope is zero because fixed costs do not change with activity

mixed costs: Y = a + bX

Y = total cost, a = total fixed costs. b = variable cost per unit, X = total activity. Contain both fixed and variable costs. They increase but not in relation to increases in activity cost drivers.

enterprise risk management (ERM)

a process, effected by an entity's board of directors and management, applied across the company, managing risk and providing reasonable assurance of achieving objectives.

strategic position analysis

an examination of an organization's basic way of competing to sell products or services

Sarbanes-Oxley Act of 2002 (SOX)

deals with issues pertaining to the relationship

variable costs per unit

difference in total costs/difference in activity

fixed costs

do not respond to changes in activity cost drivers within a period or range.

committed fixed costs (capacity costs)

fixed costs required to maintain current service or production capacity or to fill previous legal commitments.