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Accounting capstone 4 ISU

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Beginning January 2, Year 1, a company deposited $50,000 in a savings account for 2 years. The account earns 10% interest, compounded annually. What amount of interest did the company earn during the 2-year period?

$10,500

Whopper, Inc., budgeted sales on account of $150,000 for July, $210,000 for August, and $198,000 for September. Collection experience indicates that 60% of the budgeted sales will be collected the month after the sale, 36% the second month, and 4% will be uncollectible. The cash receipts from accounts receivable that should be budgeted for September equal

$180000 July 150000*.36= 54,000 August 210,000*.60= 126,000 54,000+126,000=180,000

Based on potential sales of 500 units per year, a new product has estimated traceable costs of $990,000. What is the target price to obtain a 15% profit margin on sales?

$2,329 Costs of the product must be 85% of sales to achieve a 15% profit on sales. Thus, sales must be $1,164,706 ($990,000 + .85). The price per unit is $2,329 ($1,164,706 + 500).

If the U.S. dollar-peso exchange rate is $1 for 9 pesos, a product priced at 45 pesos will cost a U.S. consumer

Quick (Acid-Test) Ratio

(Cash & equivalents+ Market securities + net receivables)/ Current liabilities excludes inventories and prepaid items from the numerator. Such assets are difficult to liquidate at their carrying amounts. if the ratio is less than 1, paying off current liabilities with either cash, marketable securities, or net recievables results in equal decreases of the numerator and denominator. the effect is to decrease the quick ratio.

Copeland, Inc., produces X-547 in a joint manufacturing process. The company is studying whether to sell X-547 at the split-off point or upgrade the product to become Xylene. The following information has been gathered: I. Selling price per pound of X-547 II. Variable manufacturing costs of upgrade process Ill. Avoidable fixed costs of upgrade process IV. Selling price per pound of Xylene V. Joint manufacturing costs to produce X-547Which items should be reviewed when making the upgrade decision?

1, 11, 111, 1V

An accountant for Stability, Inc., must calculate the weighted-average cost of capital of the corporation using the following information. What is the weighted average cost of capital stability?

12.8%

Materials are added at the beginning of the process, and conversion costs are incurred uniformly throughout the process. Assuming use of the FIFO method of process costing, the equivalent units of production (EUP) with respect to conversion performed during December were

175000 180,000+5000=185,000 185000-10000=175000

The following information regarding inventory policy was assembled by the TKF Corporation. The company uses a 50-week year in all calculations. Sales 12,000 units per year Order quantity 4,000 units Safety stock 1,500 units Lead time 5 weeks The reorder point is

2700 The reorder point is the inventory level at which an order should be placed. It can be quantified using the following equation:Reorder point = (Average weekly demand x Lead time) + Safety stock = [(12,000 units+ 50 weeks) x 5 weeks]+ 1,500 units = 1,200 units + 1,500 units = 2, 700 units

Lucy Sportswear manufactures a specialty line of T-shirts using a job-order cost system. During March, the following costs were incurred in completing Job ICU2: direct materials. $13,700; direct labor, $4,800; administrative, $1,400; and selling, $5,600. Overhead was applied at the rate of $25 per machine hour, and Job ICU2 required 800 machine hours. If Job ICU2 resulted in 7,000 good shirts, the cost of goods sold per unit would be

5.5 Cost of goods sold is based on the manufacturing costs incurred in production but does not include selling or general and administrative expenses. Manufacturing costs equal $38,500 [$13,700 OM+ $4,800 DL + (800 hours x $25) OH]. Thus, per-unit cost is $5.50 ($38,500 + 7,000 units).

The estimated unit costs for Cole Co. using absorption (full) costing and planning to produce and sell at a level of 12,000 units per month are as follows: coles estimated total variable costs per unit are

70 32+20+15+3

Jackson's management expects machine hours for the month of May to be 1 ,400 hours. What is their expected total cost for the month of May using the high-low method?

720 Finally, calculate the expected total cost.Expected total cost = Expected fixed cost + Expected variable cost = $160 + ( 1 ,400 hours x $.40 per hour) = $160 + $560 = $720

Superior Industries' sales budget shows quarterly sales for the next year as follows: Company policy is to have a finished goods inventory at the end of each quarter equal to 20% of the next quarter's sales. Budgeted production for the second quarter of the next year would be

8800 units The finished units needed for sales (8,000), plus the units desired for ending inventory (12,000 units to be sold in the third quarter x 20% = 2,400), minus the units in beginning inventory (8,000 units to be sold in the second quarter x 20% = 1 ,600) equals budgeted production for the second quarter of 8,800 units.

gross demestic product = C + I +G +NX

= household+business+goverment+ Foriegn

Which one of the following provides a spontaneous source of financing for a firm?

Accounts payable

All of the following are true about perfect competition except that

In the long run, an increase in profit will have no effect on the number of firms in the market.

In the economic theory of production and cost, the short run is defined to be a production process

In which there is insufficient time to vary the amount of all inputs. The short run is defined as a period so brief that a firm has insufficient time to vary the amount of all inputs. Thus, the quantity of one or more inputs is fixed. The long run is a period long enough that all inputs, including plant capacity, can be varied.

The use of derivatives to either hedge or speculate results in

Offsetting risk when hedging and increased risk when speculating.

Components of national income

Salaries and wages, rents, interest, proprietor/ partnership incomes, corporate profits

When compared with ideal standards, practical standards

Serve as a better motivating target for manufacturing personnel.

The Federal Reserve System's reserve ratio is the

Specified percentage of a commercial bank's deposit liabilities that must be deposited in thecentral bank or kept on hand

forward rate

The number of units of a foreign currency that can be received in exchange for a single unit of the domestic currency at some definite date in the future.

During the month just ended, a department's fixed overhead standard costing system reported unfavorable spending and volume variances. The activity level selected for allocating overhead to the product was based on 80% of practical capacity. If 100% of practical capacity had been selected instead, how would the reported unfavorable spending and volume variances be affected? spending variance and volume variance

Unchanged, increased

Working capital Formula

Working capital= Current Assets - current liabilities

Decision Theory

a general approach to decision making when the outcomes associated with alternatives are often in doubt

Cash conversion cycle

avg collection period + days sales in inventory - avg payable period

The relationship of the total debt to the total equity of a corporation is a measure of

creditor risk

Operating Cycle

days sales in recievables + sales in inventory

If Dexter Industries has a beta value of 1.0. then its

expected return should approximate the overall market

Purchased direct materials are added in the second department of a three-department process. This addition does not increase the number of units produced in the second department and will

increase total unit cost

Sensitivity Analysis

investigation of what happens to NPV when only one variable is changed

Accounts receivable turnover ratio

is the number of times in a year the total balance of receivables is converted to cash. Net credit sales/Average balance in recievables

System flexibility, elimination of waste, and elimination of disruptions are characteristic goals of which business process?

lean operation

probability distribution

list of possible outcomes with associated probabilities

In inventory management, the safety stock will tend to increase if the

variability of the usage rate decreases

Market to market

• Another distinguishing feature of futures contracts is that the market price is posted and netted to each person's account at the close of every business day. This practice is called mark-to-market.

Market risk is also called __________ and _________.

• Market risk, also called undiversifiable risk and systematic risk, is the risk of the stock market as a whole. o Ideally, this is the only risk associated with a well diversified portfolio.

Using the income approach, calculate the national Income used to calculate GOP with the information provided below:

$117,000 National income is calculated using the following formula: national income = salaries and wages + rents + interest + proprietor and partnership incomes + corporate profits. Thus, national income equals $117,000 ($50,000 + $20,000 + $8,000 + $4,000 + $10,000 + $25,000).

What is the recessionary gap if the economy's full-employment real gross domestic productGDP) is $1.2 trillion and Its equilibrium real GDP is $1.0 trillion?

$200 billion divided by the multiplier. The $200 billion difference between full-employment GDP and equilibrium GDP can be eliminated byadditional consumption, government spending, or exports. Because of the multiplier effect, the amount of the increase can be less than $200 billion. The amount of additional activity necessary to close the gap Is ($200 billion / multiplier).

Pelder Products Company manufactures two types of engineering diagnostic equipment used in construction. The two products are based on different technologies, X-ray and ultrasound, but are manufactured in the same factory. Pelder has computed the manufacturing cost of the X-ray and ultrasound products by adding together direct materials, direct labor, and overhead cost applied based on the number of direct labor hours. The factory has three overhead departments that support the single production line that makes both products. Budgeted overhead spending for the departments is as follows: The budgeted cost to manufacture one ultrasound machine using the activity-based costing method is

$264 Charges for direct materials and direct labor are traceable to each type of machine ($8,000 and $12,000 respectively for the ultrasound). The departmental costs must be allocated based on each machine's proportional driver level. Engineering design costs can be allocated to the ultrasound machine at a rate of 33.3% [1 + (1 + 2)], material handling at a rate of 60% [600 + (600 + 400)], and setup at a rate of 46.7% [7 + (7 + 8)]. Pelder's cost for a single ultrasound machine can thus be calculated as follows:

During the past few years, Wilder Company has experienced the following average number of power outages: Each power outage results in out-of-pocket costs of $800. For $1,000 per month, Wilder can lease a generator to provide power during outages. If Wilder leases a generator in the coming year, the estimated savings (or additional expense) for the year will be

$3,200 The company can expect to have, on average, 1.58334 outages per month. At $800 per outage, the expected cost is $1 ,266.67. Thus, paying $1 ,000 to avoid an expense of $1,266.67 saves $266.67 per month, or $3,200 per year.

Petro-Chem, Inc., is a small company that acquires high-grade crude oil from low-volume production wells owned by individuals and small partnerships. The crude oil is processed in a single refinery into Two Oil. Six Oil, and impure distillates. Petro-Chem does not have the technology or capacity to process these products further and sells most of its output each month to major refineries. There were no beginning inventories of finished goods or work-in-process on November 1. The production costs and output of Petro-Chem for November are shown in the next column.

$3,636,000 The total production costs incurred are $10,000,000, consisting of crude oil of $5,000,000, direct labor of $2,000,000, and overhead of $3,000,000. The total physical output was 660,000 barrels, consisting of 300,000 barrels of Two Oil, 240,000 barrels of Six Oil, and 120,000 barrels of distillates. Thus, the allocation (rounded) is $3,636,000 {$10,000,000 x [240,000 + (300,000 + 240,000 + 120,000)]}.

$4,000,000 The total production costs incurred are $10,000,000, consisting of crude oil of $5,000,000, direct labor of $2,000,000, and overhead of $3,000,000. The total value of the output is as follows: Two Oil (300,000 x $20) $ 6,000,000 Six Oil (240,000 x $30) 7,200,000 Distillates (120,000 x $15) 1,800,000 Total sales value $15,000,000Because Two Oil composes 40% of the total sales value ($6,000,000 + $15,000,000), it will be assigned 40% of the $10,000,000 of joint costs, or $4,000,000.

Atlas Foods produces the following three supplemental food products simultaneously through a refining process costing $93,000.The joint products, Alfa and Betters. have a final selling price of $4 per pound and $10 per pound, respectively. after additional processing costs of $2 per pound of each product are incurred after the split-off point. Morefeed, a by-product, is sold at the split-off point for $3 per pound.Alfa 10,000 pounds of Alfa, a popular but relatively rare grain supplement having a caloric value of 4,400 calories per poundBetters 5,000 pounds of Betters, a flavoring material high in carbohydrates with a caloric value of 11,200 calories per poundMorefeed 1,000 pounds of Morefeed, used as a cattle feed supplement with a caloric value of 1,000 calories per poundAssuming Atlas Foods inventories Morefeed, the by-product, and that it incurs no additional processing costs for Alta and Betters, the joint cost to be allocated to Alta using the gross sales value method is

$40,000 The gross sales value of Alfa is $40,000 (10,000 pounds x $4), Betters has a total gross sales value of $50,000 (5,000 pounds x $10), and Morefeed has a split-off value of $3,000. If the value of Morefeed is inventoried and treated as a reduction in joint cost, the allocable joint cost is $90,000 ($93,000- $3,000). The total gross sales value of the two main products is $90,000 ($40,000 + $50,000). Of this total, $40,000 should be allocated to Alta [$90,000 x ($40,000 + $90,000)).

Clay Co. has considerable excess manufacturing capacity. A special job order's cost sheet includes the following applied manufacturing overhead costs: Fixed costs $21,000 Variable costs 33,000The fixed costs include a normal $3,700 allocation for in-house design costs, although no in-house design will be done. Instead, the job will require the use of external designers costing $7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job?

$40,750 Given excess capacity, neither increased fixed costs nor opportunity costs are incurred by accepting the special order. Thus, the marginal cost of the order (the minimum acceptable price) is $40,750 ($33,000 variable costs+ $7,750 cost of external design).

Presented are Valenz Company's records for the current fiscal year ended November 30: Direct materials used $300,000 Direct labor 100,000 Variable manufacturing overhead 50,000 Fixed manufacturing overhead 80,000 Selling and admin. costs - variable 40,000 Selling and admin. costs - fixed 20,000If Valenz Company uses variable costing, the inventoriable costs for the fiscal year are

$450,000 300,000+100,000+50,000=450,000

A bank with a reserve ratio of 20% and reserves of $1,000,000 can increase its total demand deposits by

$5,000,000 The amount of new money a bank can create equals actual reserves times the monetary multiplier (or divided by the required reserve ratio). This bank therefore can increase total demand deposits by $5,000,000 ($1 ,000,000 + 0.2).

Assume that real gross domestic product (GDP), measured In Year 1 dollars, rose from $3,000 billionIn Year 1 to $4,500 billion in Year 10. Assume also that the price index rose from 100 to 200 during the same period. The GDP for Year 1 expressed in terms of Year 10 prices is

$6,000 billion. Between Year 1 and Year 10, the price index doubled (from 100 to 200). Thus, the nominal value of Year 1 GDP ($3,000 billion) also must be doubled when restated in Year 10 terms. The Year 1 GDP in Year 10 prices is $6,000 billion.

Worley Company has underapplied overhead of $45,000 for the year. Before disposition of the underapplied overhead, selected year-end balances from Worley's accounting records were Sales $1,200,000Cost of goods sold 720,000Direct materials inventory 36,000Work-in-process inventory 54,000Finished goods inventory 90,000 Under Worley's cost accounting system, over- or underapplied overhead is assigned to appropriate inventories and COGS based on year-end balances. In its year-end income statement, Worley should report COGS of

$757,500 The assignment of underapplied overhead increases COGS. The underapplied overhead of $45,000 for the year should be assigned on a pro rata basis to work-in-process ($54,000), finished goods ($90,000), and COGS ($720,000). The sum of these three items is $864,000. Thus, $37,500 should be assigned to COGS [($720,000 + $864,000) x $45,000]. COGS after assignment is $757,500 ($37,500 + $720,000). The remaining $7,500 should be assigned proportionately to work-in-process and finished goods.

At the end of its fiscal year, C.G. Manufacturing recorded the data below: Prime cost $800,000 Variable manufacturing overhead 100,000 Fixed manufacturing overhead 160,000 Variable selling and other expenses 80,000 Fixed selling and other expenses 40,000If C.G. uses variable costing, the inventoriable costs for the fiscal year are

$900,000 800,000+100,000=900,000

Avionics Industrials reported at year end that operating income before taxes for the year equaled $2,400,000. The firm's weighted-average cost of capital (WACC) is 7.24%. The carrying amount of debt is $1,300,000, and the carrying amount of equity capital is $8,800,000. The income tax rate for Avionics is 30%. What is the economic value added (EVA)?

$948,760 EVA equals after-tax operating income minus the product of the weighted-average cost of capital (WACC) and the investment base. After-tax operating income equals operating income multiplied by 1 minus the tax rate, or $1,680,000 [$2,400,000- (1 - .3)]. The investment base is $10,100,000, consisting of $1 ,300,000 of debt and $8,800,000 of equity. Thus, EVA equals $948,760 {($1,680,000) - [$10,100,000 X (0.0724)]}.

Average collection period

(also called the days' sales in receivables) measures the average number of days between the time of a sale and receipt of payment. days sales in recievable = days in year/ accounts recievable turnover ratio

reorder point

(average daily demand * lead time in days) + Safety stock

If two projects are completely and positively linearly dependent (or positively related), the measure of correlation between them is

Hedging a "Short" Position

- An entity has a short position in an asset when the entity sells an asset that it does not own at the time of the sale - entities take short positions when they believe the value of the assets will decrease -Benifit from a drop in value -You borrow the stock to sell it when its a High price and then buy the stock back when the price goes low and return the stock

Forward Contract

- One way to mitigate risk is a forward contract. In a forward contract, the two parties agree that, at a set future date, one of them will perform and the other will pay a specified amount for the performance. - contract that requires the exchange of an agreed-on amount of a currency on an agreed-on date at a specified exchange rate

In regression analysis, which of the following coefficients of correlation represents the strongest linear relationship between the independent and dependent variables?

-.89 A coefficient of -1 .0 signifies a perfect inverse relationship, and a coefficient of 1.0 signifies a perfect direct relationship. Thus, the higher the absolute value of the coefficient of correlation, the stronger the linear relationship. A coefficient of - .89 suggests a very strong inverse relationship between the independent and dependent variables.

Hedging a "Long" Position

-An entity has a long position in an asset whenever the entity owns the asset - an entity with a long position therefore benefits from a rise in the assets value

Three types of exposure

-Transaction -economic -Translation

Last week, the quantity of apples demanded fell by 6%. If this was a result of a 10% price increase, what is the price elasticity of demand for apples?

0.60 The price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. Thus, the change in quantity of 6% divided by the 10% price increase produces an elasticity of 0.6.

What is the approximate IRR for a project that costs $50,000 and provides cash inflows of $20,000 for 3 years?

10% The applicable factor is 2.5, which is found just below 10% on the 3-year line of an annuity table

Wren Co. manufactures and sells two products with selling prices and variable costs as follows: Wren's total annual fixed costs are $38,400. Wren sells four units of A for every unit of B. If operating income last year was $28,800, what was the number of units Wren sold?

10,500 The contribution margins of the two products are $6 and $8, respectively ($18 - $12 and $22 - $14). The units sold can be calculated as follows: Because 4 units of A are sold for every unit of B, the volume of A was 8,400 units (2, 100 x 4 ). Thus, the total number of units sold was 10,500 (8,400A + 2,100B).

Maloney, Inc.'s $1,000 par-value preferred stock paid its $100 per share annual dividend on April 4 of the current year. The preferred stock's current market price is $960 a share on the date of the dividend distribution. Maloney's marginal tax rate (combined federal and state) is 40%, and the firm plans to maintain its current capital structure relationship. The component cost of preferred stock to Maloney would be closest to

10.4% The component cost of preferred stock is equal to the dividend yield, i.e., the cash dividend divided by the market price of the stock. (Dividends on preferred stock are not deductible for tax purposes; therefore, there is no adjustment for tax savings.) The annual dividend on preferred stock is $100 when the price of the stock is $960. The result is a cost of capital of about 10.4% ($100 + $960).

Thomas Company's capital structure consists of 30% long-term debt, 25% preferred stock, and 45% common equity. The cost of capital for each component is shown below. Long-term debt 8% Preferred stock 11% Common equity 15%If Thomas pays taxes at the rate of 40%, what is the company's after-tax weighted-average cost of capital?

10.94% The effective rate for Thomas' debt is the after-tax cost [8% x (1 .0-.40 tax rate)= 4.8%]. The weighted-average cost of capital (WACC) can thus be calculated as follows:

Jorelle Company's financial staff has been requested to review a proposed investment in new capital equipment. Applicable financial data is presented below. There will be no salvage value at the end of the investment's life and, due to realistic depreciation practices, it is estimated that the salvage value and net book value are equal at the end of each year. Aft cash flows are assumed to take place at the end of each year. For investment proposals, Jorelle uses a 12% after-tax target rate of return.

106160 The NPV is the sum of the present values of all cash inflows and outflows associated with the proposal. If the NPV is positive. the proposal should be accepted. The NPV is determined by discounting each expected cash flow using the appropriate 12% interest factor for the present value of $1 . Thus, the NPV is $106,160 [(.89 x $120,000) + (.80 x $108,000) + (.71 X $96,000) + (.64 X $84,000) +(.57 X $72,000)- (1 .00 X $250,000)]. The correct answer is: $106,160

Whatney Co. is considering the acquisition of a new, more efficient press. The cost of the press is $360,000, and the press has an estimated 6-year life with zero salvage value. Whatney uses straight-line depreciation for both financial reporting and income tax reporting purposes and has a 40% corporate income tax rate. In evaluating equipment acquisitions of this type, Whatney uses a goal of a 4-year payback period. To meet Whatney's desired payback period, the press must produce a minimum annual before-tax operating cash savings of

110,000 Payback is the number of years required to complete the return of the original investment. Given a periodic constant cash flow, the payback period equals net investment divided by the constant expected periodic after-tax cash flow. The desired payback period is 4 years, so the constant after-tax annual cash flow must be $90,000 ($360,000 + 4). Assuming that the company has sufficient other income to permit realization of the full tax savings, depreciation of the machine will shield $60,000 ($360,000 + 6) of income from taxation each year, an after-tax cash savings of $24,000 ($60,000 x 40%). Thus, the machine must generate an additional $66,000 ($90,000 - $24,000) of after-tax cash savings from operations. This amount is equivalent to $110,000 [$66,000 + (1 .0- .4)] of before-tax operating cash savings.

Skilantic Company needs to pay a supplier's invoice of $60,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at 11% per annum plus a 9% compensating balance. Assuming Skilantic Company borrows the money on the last day of the discount period and repays it 30 days later, the effective interest rate on the loan is

12.09 Skilantic's effective rate on this loan can be calculated as follows:Effective rate = Stated rate+ (1.0 - Compensating balance %) = 11% + (100% - 9%) = 11% + 91% = 12.09%

Global Company Press has $150 par-value preferred stock with a market price of $120 a share. The organization pays a $15 per share annual dividend. Global's current marginal tax rate is 40%. Looking to the future, the company anticipates maintaining its current capital structure. What is the component cost of preferred stock to Global?

12.5% The component cost of preferred stock is the dividend divided by the market price (also called the dividend yield). No tax adjustment is necessary because dividends are not deductible. Given that the market price is $120 when the dividend is $15, the component cost of preferred capital is 12.5% ($15 + $120).

During Year 1, Thor Lab supplied hospitals with a comprehensive diagnostic kit for $120. At a volume of 80,000 kits, Thor had fixed costs of $1 million and a profit before income taxes of $200,000. Because of an adverse legal decision, Thor's Year 2 liability insurance increased by $1.2 million over Year 1. Assuming the volume and other costs are unchanged, what should the Year 2 price be if Thor is to make the same $200,000 profit before income taxes?

135

RedRock Company uses flexible budgeting for cost control. RedRock produced 10,800 units of product during October, incurring indirect materials costs of $13,000. Its master budget for the year reflected indirect materials costs of $180,000 at a production volume of 144,000 units. A flexible budget for October production would reflect indirect materials costs of

13500 The cost of indirect materials for 144,000 units was expected to be $180,000. Consequently, the unit cost of indirect materials is $1.25 ($180,000 + 144,000). Multiplying the $1.25 unit cost times the 10,800 units produced results in an expected total indirect materials cost of $13,500.

Felicity Corporation manufactures a specialty line of dresses using a job-order cost system. During January, the following costs were incurred in completing job J-1: Direct materials $27,400 Direct labor 9,600 Administrative costs 2,800 Selling costs 11,200Overhead was applied at the rate of $50 per direct labor hour, and job J-1 required 400 direct labor hours. If job J-1 resulted in 4,000 good dresses, the cost of goods sold per unit is

14.25 Cost of goods sold is based on the manufacturing costs incurred in production. It does not include selling or general and administrative expenses. Manufacturing costs consist of direct materials ($27,400), direct labor ($9,600), and overhead (400 direct labor hours x $50 per hour = $20,000). The total of these cost elements is $57,000. Dividing the $57,000 of total manufacturing costs by the 4,000 units produced results in a per-unit cost of $14.25.

What is the after-tax cost of preferred stock that sells for $5 per share and offers a $0.75 dividend when the tax rate is 35%?

15% The component cost of preferred stock is the dividend yield, i.e., the cash dividend divided by the market price of the stock ($.75 + $5.00 = 15%). Preferred dividends are not deductible for tax purposes.

An analyst covering Guilderland Mining Co. common stock estimates the following information tor next year: Expected return on the market portfolio 12%Expected return on Treasury securities 5%Expected beta of Guilderland 2.2 Using the CAPM, the analyst's estimate of next year's risk premium for Guilderland's stock is closest to

15.4% According to the capital asset pricing model, the risk premium of a particular stock is the excess of the market rate of return over the risk-free rate weighted by the stock's beta coefficient. For Guilderland Mining, this calculation is Stock's risk premium = 2.2 x (12%- 5%)= 2.2 x 7%= 15.4%

Given an acid-test ratio of 2.0, current assets of $5,000, and inventory of $2,000, the value of current liabilities is

1500 The acid-test, or quick, ratio equals the ratio of the quick assets (cash, net accounts receivable, and marketable securities) divided by current liabilities. Current assets equal the quick assets plus inventory and prepaid expenses. This question assumes that the entity has no prepaid expenses. Given current assets of $5,000, inventory of $2,000, and no prepaid expenses, the quick assets must be $3,000. Because the acid-test ratio is 2.0, the quick assets are double the current liabilities. Current liabilities therefore are equal to $1 ,500 ($3,000 quick assets + 2.0).

Trumbull Company budgeted sales on account of $120,000 for July, $211 ,000 for August, and $198,000 for September. Collection experience indicates that 60% of the budgeted sales will be collected the month after the sale, 36% will be collected the second month, and 4% will be uncollectible. The cash receipts from accounts receivable that should be budgeted for September would be

169800 The budgeted cash collections for September are $169,800 [($120,000 July sales x 36%) + ($211,000 August sales x 60%)].

The Hopkins Company has estimated that a proposed project's 10-year annual net cash benefit, received each year end, will be $2,500 with an additional terminal benefit of $5,000 at the end of the 10th year.Information on present value factors is as follows: Present value of $1 at 8% at the end of 10 periods .463 Present value of an ordinary annuity of $1 at 8% for 10 periods 6.710Assuming that these cash inflows satisfy exactly Hopkins' required rate of return of 8%, what is theinitial cash outlay?

19090 If the 8% return exactly equals the present value of the future flows (the NPV is zero), the present value of the future inflows equals the initial cash outlay. Thus, the initial cash outlay is $19,090 [($2,500)(present value of an ordinary annuity at 8% for 10 periods) + ($5,000)(present value of a single amount at 8% for 10 periods = ($2,500)(6.710) + ($5,000)(.463)].

Union Company uses a standard cost accounting system. The following factory overhead and production data are available for August: Standard fixed overhead rate per DLH $1 Standard variable overhead rate per DLH $4 Budgeted monthly DLH 40,000 Actual DLH worked 39,500 Standard DLH allowed for actual production 39,000 Overall overhead variance - favorable $2,000The applied factory overhead for August should be

195000 The applied overhead equals the standard direct hours allowed for actual production multiplied by the total standard overhead rate per hour. 39,000 X ($4 VOH + $1 FOH) = $195,000

This year, Nelson Industries increased earnings before interest and taxes (EBIT) by 17%. During the same period, earnings per share increased by 42%. The degree of financial leverage that existed during the year is

2.47 If earnings before interest and taxes increased by 17%, and earnings per share income was up 42%, the firm is using leverage effectively. The degree of financial leverage is the percentage change in earnings per share divided by the percentage change in EBIT. Accordingly, Nelson's degree of financial leverage is 2.47 (.42 + .17).

Hamilton Company uses job-order costing. Manufacturing overhead is applied to production at a predetermined rate of 150% of direct labor cost. Any over- or underapplied overhead is closed to the cost of goods sold account at the end of each month. Additional information is available as follows:• Job 101 was the only job in process at January 31, with accumulated costs as follows:Direct materials $4,000Direct labor 2,000Applied manufacturing overhead 3,000Total manufacturing costs $9,000• Jobs 102. 103, and 104 were started during February.• Direct materials requisitions for February totaled $26,000.• Direct labor cost of $20,000 was incurred for February.• Actual manufacturing overhead was $32.000 for February.• The only job still in process on February 28 was Job 104, with costs of $2,800 for direct materials and $1,800 for direct labor. Over- or underapplied manufacturing overhead should be closed to the cost of goods sold account at February 28 in the amount of

2000 underapplied The amount of over- or underapplied overhead is the difference between the actual overhead incurred and the overhead applied. The amount of overhead applied was $30,000 ($20,000 DL cost x150%). The amount of overhead incurred was $32,000. Consequently, underapplied overhead of $2,000 ($32,000 actual- $30,000 applied) should be closed to COGS.

Tub Co. uses a standard cost system. The following information pertains to direct labor for product B for the month of October: Standard hours allowed for actual production 2,000 Actual rate paid per hour $8.40 Standard rate per hour $8.00 Labor efficiency variance $1,600 UWhat were the actual hours worked?

2200 The labor efficiency variance is the difference between the standard hours and the actual hours worked, timesthe standard wage rate. (SQ - AQ) x SP = Labor efficiency variance (2,000 hours- AQ) x $8 = -$1 ,600 $16,000-$8AQ = -$1,600 -$8AQ = -$17,600 AQ = 2,200 hours

If a firm purchases raw materials from its supplier on a 2/10, net 40, cash discount basis, the equivalent annual interest rate (using a 360-day year) of forgoing the cash discount and making payment on the 40th day is

24.49 Cost of not taking discount = [2% + (100% - 2%)] x [360 days+ (40 days- 10 days)] = (2% + 98%) x (360 days+ 30 days) = 2.0408% X 12 = 24.49%

Skilantic Company needs to pay a supplier's invoice of $60,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at 11% per annum plus a 9% compensating balance. Skilantic fails to take the discount and pays on the 40th day. Assuming a 360-day year, what effective rate of annual interest does it pay the vendor?

24.49% By failing to take the discount, Skilantic is essentially borrowing $58,800 for 30 days. Thus, at a cost of $1,200, it acquires the use of $58,800, resulting in a rate of 2.0408% ($1,200 + $58,800) for 30 days. Assuming a 360-day year, the effective annual rate is 24.49% [2.0408% x (360 days + 30 days)].

Mili Co. plans to discontinue a division with a $20,000 contribution to overhead. Overhead allocated to the division is $50,000, of which $5,000 cannot be eliminated. The effect of this discontinuance on Mili's pretax income would be an increase of

25000 This disinvestment decision eliminates $45,000 of overhead ($50,000 - $5,000) and the $20,000 contribution to overhead. The net effect on pretax income is therefore a $25,000 increase ($45,000 - $20,000).

What are Jackson's conversion costs for the year?

29000 Conversion costs are all manufacturing costs other than direct material costs. Conversion costs equal direct manufacturing labor cost ($9,000) plus indirect manufacturing costs ($20,000), or $29,000.

Using the arc method, the price elasticity of demand for this product when the price decreases form $50 to $45 is

3.8 A product's price elasticity of demand is measured as the percentage change in quantity demandeddivided by the percentage change in price. When price falls from $50 to $45, the coefficient is 3.8, calculated as follows:Ed = [(150 -100) + {150 + 100)] +[($50- $45) +{$50+ $45)) = (50 + 250) + ($5 + $95) = 20.0% + 5.26% = 3.8

The selected information below (in thousands)pertains to Devlin Company. Devlin Company's inventory turnover for Year 2 was

3.88 Inventory turnover equals cost of goods sold divided by the average balance in inventory. Thus, the inventory turnover is 3.88 times per year {$330 COGS + [($90 + $80) + 2]}.

Atlas Foods produces the following three supplemental food products simultaneously through a refining process costing $93,000.The joint products, Alfa and Betters. have a final selling price of $4 per pound and $10 per pound, respectively. after additional processing costs of $2 per pound of each product are incurred after the split-off point. Morefeed, a by-product, is sold at the split-off point for $3 per pound.Alfa 10,000 pounds of Alfa, a popular but relatively rare grain supplement having a caloric value of 4,400 calories per poundBetters 5,000 pounds of Betters, a flavoring material high in carbohydrates with a caloric value of 11,200 calories per poundMorefeed 1,000 pounds of Morefeed, used as a cattle feed supplement with a caloric value of 1,000 calories per poundAssuming Atlas Foods inventories Morefeed, the by-product, the joint cost to be allocated to Alfa using the net realizable value method is

30000 The NRV at split-off for each of the joint products must be determined. Given that Alfa has a $4 selling price and an additional $2 of processing costs, the value at the split-off is $2 per pound. The total value at split-off for 10,000 pounds is $20,000. Betters has a $10 selling price and an additional $2 of processing costs. Thus, the value at split-off is $8 per pound. The total value of 5,000 pounds of Betters is therefore $40,000. The 1 ,000 pounds of Morefeed has a split-off value of $3 per pound, or $3,000. Assuming that Morefeed (a by-product) is inventoried (recognized in the accounts when produced) and treated as a reduction of joint costs, the allocable joint cost is $90,000 ($93,000 - $3,000). The total net realizable value of the main products is $60,000 ($20,000 Alfa + $40,000 Betters). The allocation to Alfa is $30,000 [$90,000 x ($20,000 + $60,000)].

The following information pertains to Clove Co. for the month just ended: Budgeted sales $1,000,000 Breakeven sales 700,000 Budgeted contribution margin 600,000 Cash flow breakeven 200,000Clove's margin of safety is

300000 The margin of safety measures the amount by which sales may decline before losses occur. It is the excess of budgeted or actual sales over the breakeven sales. Given that the budgeted sales are $1 ,000,000 and the breakeven sales are $700,000, the margin of safety is $300,000 ($1,000,000 - $700,000).

A lumber company produces two-by-fours and four-by-eights as joint products and sawdust as a by-product. The packaged sawdust can be sold for $2 per pound. Packaging costs for the sawdust are $.10 per pound and sales commissions are 10% of sales price. The by-product net revenue serves to reduce joint processing costs for joint products. Joint products are assigned joint costs based on board feet. Cost and production data are: Joint processing costs $ 50,000 Two-by-fours produced (board feet) 200,000 Four-by-eights produced (board feet) 100,000 Sawdust produced (pounds) 1,000What is the cost assigned to two-by-fours?

32200 The net revenue from sale of the by-product is $1,700 [(1,000 lb. x $2 price) - (1,000 lb. x $.10) - (1,000 lb. x $2 x .1)]. Joint processing costs to be allocated to joint products are therefore $48,300 ($50,000 - $1,700 net by-product revenue). Of this amount, $32,200 should be assigned to the two-by-fours [$48,300 x (200,000 board feet of two-by-fours + 300,000 total board feet)].

Jackson Corporation uses net present value techniques in evaluating its capital investment projects. The company is considering a new equipment acquisition that will cost $100,000, fully installed, and have a zero salvage value at the end of its 5-year productive life. Jackson will depreciate the equipment on a straight-line basis for both financial and tax purposes. Jackson estimates $70,000 in annual recurring operating cash income and $20,000 in annual recurring operating cash expenses. Jackson's desired rate of return is 12% and its effective income tax rate is 40%. The present value factors for 12% are as follows: Present value of $1 at the end of five periods .567 Present value of an ordinary annuity of $1 for five periods 3.605What is the net present value of this investment on an after-tax basis?

36990 Annual cash outflow for taxes is $12,000 {[$70,000 inflows- $20,000 cash operating expenses ($ 100,000 + 5) depreciation] x 40%}. The annual net cash inflow is therefore $38,000 ($70,000 - $20,000 - $12,000). The present value of these net inflows for a 5-year period is $136,990 ($38,000 x 3.605 present value of an ordinary annuity for 5 years at 12%), and the NPV of the investment is $36,990 ($136,990- $100,000 investment).

Dr. G invested $10,000 in a lifetime annuity for his granddaughter Emily. The annuity is expected to yield $400 annually forever. What is the anticipated annual rate of return for the annuity?

4% A return is the amount received by an investor as compensation for taking on the risk of the investment. The rate of return is the return stated as a percentage of the amount invested. In this case, it is 4% ($400 + $10,000).

A sporting goods manufacturer buys wood as a direct material for baseball bats. The Forming Department processes the baseball bats, and the bats are then transferred to the Finishing Department, where a sealant is applied. The Forming Department began manufacturing 10,000 "Casey Sluggers" during the month of May. There was no beginning inventory. Costs for the Forming Department for the month of May were as follows: Direct materials $33,000 Conversion costs 17,000 Total $50,000A total of 8,000 bats were completed and transferred to the Finishing Department; the remaining 2,000 bats were still in the forming process at the end of the month. All of the Forming Department's direct materials were placed in process, but, on average, only 25% of the conversion cost was applied to the ending work-in-process inventory.The cost of the units transferred to the Finishing Department is

42400 The total EUP for materials equal 10,000 because all materials for the ending work-in-process had already been added to production. Thus, the materials cost per unit was $3.30 ($33,000 + 10,000). For conversion costs, the total EUP equal 8,500 [8,000 completed + (2,000 in EWIP x 25%)]. Thus, the conversion cost was $2.00 per unit ($17,000 + 8,500). The total cost transferred was therefore $42,400 [8,000 units x ($3.30 + $2.00)].

A company purchases inventory on terms of net 30 days and resells to its customers on terms of net 15 days. The inventory conversion period averages 60 days. What is the company's cash conversion cycle?

45 A firm's cash conversion cycle is the amount of time that passes between the actual outlay of cash for inventory purchases and the collection of cash from the sale of that inventory. Accordingly, the cash conversion cycle is equal to the average collection period plus days' sales in inventory minus the average payables period. Per the formula, the company's cash conversion cycle is 45 days (15 days average collection period + 60 days' sales in inventory- 30 days average payables period).

Paradise Company budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1 through June 30: * Two units of direct material are needed to produce each unit of finished product. If Paradise Company plans to sell 480,000 units during the fiscal year, the number of units it will have to manufacture during the year is

450000 units If 480,000 units are sold with an ending finished goods inventory of 50,000 units, 530,000 units must be available. Given that 80,000 units are in beginning inventory, production must be 450,000 units (530,000 - 80,000).

The following information pertains to Sisk Co.: Sales (25,000 units) $500,000 Direct materials and direct labor 150,000 Factory overhead: Variable 20,000 Fixed 35,000 Selling and general expenses: Variable 5,000 Fixed 30,000Sisk's breakeven point in number of units is

5000 The breakeven point in units equals the fixed costs divided by the unit contribution margin (UCM). The fixed costs are $65,000 ($35,000 manufacturing overhead + $30,000 SG&A). The UCM is calculated as follows: Thus, the breakeven point in units is 5,000 ($65,000 fixed costs + $13 UCM).

What is the sales volume variance for July?

5000 favorable The sales volume variance is the difference between the actual volume and the budgeted volume in units, times the budgeted contribution margin per unit. =(Actual volume- Budgeted volume) x (Selling price - Unit variable cost) =(42,000- 40,000) X ($6 - $3.50) = $5,000 F

Aerosub, Inc., has developed a new product for spacecraft that includes the production of a complex part. The manufacture of this part requires a high degree of technical skill. Management believes there is a good opportunity for its technical force to learn and improve as they become accustomed to the production process. The production of the first unit requires 10,000 direct labor hours. Management projects an 80% learning curve and wants to produce a total of eight units. Upon completion of the eighth unit, Aerosub's cumulative average direct labor hours required per unit of the product will be

5120 The underlying assumption of learning curve analysis is that workers gain productivity at a predictable rate as they gain experience with a new process. A common assumption is that the number of hours required for each doubling of output is 80% of the hours required for the previous doubling. The effects of Aerosub's projected learning curve on this product can be calculated as follows:

The estimated unit costs for Cole Co. using absorption (full) costing and planning to produce and sell at a level of 12,000 units per month are as follows: Cole's estimated prime costs per unit are

52 The direct costs of manufacturing, also called prime costs, are the costs of direct materials and direct labor. They are costs that can be directly associated with the finished product. Thus, direct manufacturing costs per unit are $52 ($32 direct materials + $20 direct labor).

Presented are Valenz Company's records for the current fiscal year ended November 30: Direct materials used $300,000 Direct labor 100,000 Variable manufacturing overhead 50,000 Fixed manufacturing overhead 80,000 Selling and admin. costs - variable 40,000 Selling and admin. costs - fixed 20,000Using absorption (ful.l) costing, inventoriable costs for Valenz are

530000 The absorption method is required for financial statements prepared according to GAAP. It charges all costs of production to inventories. The variable cost of materials ($300,000), direct labor ($100,000), variable overhead ($50,000), and fixed overhead ($80,000) are included. They total $530,000.

Atlas Foods produces the following three supplemental food products simultaneously through a refining process costing $93,000.The joint products, Alfa and Betters. have a final selling price of $4 per pound and $10 per pound, respectively. after additional processing costs of $2 per pound of each product are incurred after the split-off point. Morefeed, a by-product, is sold at the split-off point for $3 per pound.Alfa 10,000 pounds of Alfa, a popular but relatively rare grain supplement having a caloric value of 4,400 calories per poundBetters 5,000 pounds of Betters, a flavoring material high in carbohydrates with a caloric value of 11,200 calories per poundMorefeed 1,000 pounds of Morefeed, used as a cattle feed supplement with a caloric value of 1,000 calories per poundAssuming Atlas Foods does not inventory Morefeed, the by-product, the joint cost to be allocated to Betters using the net realizable value method is

62000 The NRV of Alfa is $20,000, and the NRV of Betters is $40,000. If the joint cost is not adjusted for the value of the by-product, the amount allocated to Betters is $62,000 {$93,000 X [$40,000 + ($20,000 + $40,000))}.

A company employs a process cost system using the first-in, first-out (FIFO) method. The product passes through both Department 1 and Department 2 in order to be completed. Units enter Department 2 upon completion in Department 1. Additional direct materials are added in Department 2 when the units have reached the 25% stage of completion with respect to conversion costs. Conversion costs are added proportionally in Department 2. The production activity in Department 2 for the current month was as follows: Beginning work-in-process inventory (40% complete with respect to conversion costs) 15,000 Units transferred in from Department 1 80,000 Units completed and transferred to finished goods 85,000 Ending work-in-process inventory (20% complete with respect to conversion costs) 10,000How many equivalent units for direct materials were added in Department 2 for the current

70000 Beginning inventory is 40% complete. Thus, direct materials have already been added. Ending inventory has not reached the 25% stage of completion, so direct materials have not yet been added to these units. Thus, the EUP for direct materials calculated on a FIFO basis are equal to the units started and completed in the current period (85,000 units completed - 15,000 units in BWIP = 70,000 units started and completed).

7600 The EUP for materials equal 10,000 (8,000 + 2,000) because the work-in-process is 100% complete as to materials. Thus, dividing the $33,000 by 10,000 units results in a unit cost for materials of $3.30. The EUP for conversion costs equal 8,500 units [8,000 + (2,000 units x .25)]. Dividing the $17,000 of conversion costs by 8,500 EUP results in a unit cost of $2 per bat, and the total cost of goods transferred out is $5.30, consisting of $3.30 for materials and $2 for conversion costs. Multiplying $5.30 by the 8,000 bats completed results in a total transfer of $42,400. Consequently, the cost of the ending work-in-process must have been $7,600 ($50,000 total costs incurred - $42,400).

77700 COGM is the sum of the costs in BWIP and all the costs incurred during the period minus the costs in EWIP. The calculation of COGM uses applied overhead ($30,000 = $20,000 DL cost x 150%). The $7,300 in EWIP includes $2,800 for direct materials, $1 ,800 for direct labor, and $2,700 for applied overhead (at 150% of DL cost). BWIP $ 9,000 Direct labor 20,000 Applied overhead 30,000 Direct materials 26,000 EWIP (7,300) COGM $77,700

Information on Hanley's direct labor costs for the month of January is as follows: Actual direct labor rate $7.50 Standard direct labor hours allowed 11,000 Actual direct labor hours 10,000 Direct labor rate variance - favorable $5,500The standard direct labor rate in January was

8.05 The labor rate variance, actual hours, and actual rate are given. Thus, the standard rate can be derived by substituting into the following formula: AQ x (SP - AP) = Labor rate variance 10,000 X (SP- $7.50) = $5,500 F 10,000SP- $75,000 = $5,500 10,000SP = $80,500 SP = $8.05

Selected data from Sheridan Corporation's year-end financial statements are presented below. The difference between average and ending inventory is immaterial. Current ratio 2.0 Quick ratio 1.5 Current liabilities $120,000 Inventory turnover (based on cost of goods sold) 8 times Gross profit margin40% Assuming no prepaid expenses are included in current assets, Sheridan's net sales for the year were

800,000 Net sales can be calculated indirectly from the inventory turnover ratio and the other ratios given. If the current ratio is 2.0, and current liabilities are $120,000, current assets must be $240,000 (2.0 x $120,000). Similarly, if the quick ratio is 1.5, the total quick assets must be $180,000 (1.5 x $120,000). The difference between quick assets and current assets is that inventory is not included in the definition of quick assets. Consequently, ending inventory must be $60,000 ($240,000 - $180,000). The inventory turnover ratio (COGS + average inventory) is 8. Thus, cost of goods sold must be 8 times average inventory, or $480,000, given no material difference between average and ending inventory. If the gross profit margin is 40%, the cost of goods sold percentage is 60%, cost of goods sold equals 60% of sales, and net sales must be $800,000 ($480,000 + 60%).

The following computations were made from Bruckner Co.'s current-year books: Number of days' sales in inventory 55 Number of days' sales in trade accounts receivable 26What was the number of days in Bruckner's current-year operating cycle?

81 The operating cycle is the time needed to turn cash into inventory, inventory into receivables, and receivables back into cash. It is equal to the sum of the number of days' sales in inventory (average number of days to sell inventory) and the number of days' sales in receivables (the average collection period). The number of days' sales in inventory is given as 55 days. The number of days' sales in receivables is given as 26 days. Hence, the number of days in the operating cycle is 81 (55+ 26).

Pena Company is considering a project that calls for an initial cash outlay of $50,000. The expected net cash inflows from the project are $7,791 for each of 10 years. What is the IRR of the project?

9% The IRR can be calculated by equating the initial cash outlay with the present value of the net cash inflows: $7,791 x PV at i for 10 periods = $50,000 = 6.418

Cox Company has sold 1,000 shares of $100 par, 8% preferred stock at an issue price of $92 per share. Stock issue costs were $5 per share. Cox pays taxes at the rate of 40%. What is Cox's cost of preferred stock capital?

9.20% Because the dividends on preferred stock are not deductible for tax purposes, the effect of income taxes is ignored. Thus, the relevant calculation is to divide the $8 annual dividend by the quantity of funds received from the issuance. In this case, the funds received equal $87 ($92 proceeds- $5 issue costs). Thus, the cost of capital is 9.2% ($8 + $87).

Scrunchy-Tech, Inc., has determined that it can minimize its weighted-average cost of capital (WACC) by using a debt-equity ratio of 2/3. If the firm's cost of debt is 9% before taxes, the cost of equity is estimated to be 12% before taxes, and the tax rate is 40%, what is the firm's WACC?

9.36% A firm's weighted-average cost of capital (WACC) is derived by weighting the (after-tax) cost of debt of 5.4% [9% x (1 - 40%)] and cost of equity of 12%. The tax rate does not affect the cost of equity. Scrunchy-Tech's WACC can be calculated as follows:

Estimated total costs that Cole would incur during a month with a production level of 12,000 units and a sales level of 8,000 units are

948000 Manufacturing costs at a production level of 12,000 units are $73 per unit ($32 + $20 + $15 + $6). Total estimated manufacturing costs are therefore $876,000 (12,000 units x $73). Fixed selling costs are expected to be $48,000 (12,000 units x $4). The anticipated total variable selling costs are $24,000 (8,000 units x $3). Thus, the total estimated costs are $948,000 ($876,000 + $48,000 + $24,000). conversion costs per unit $41= (20+15+6)

In an organization that plans by using comprehensive budgeting, the master budget is

A compilation of all the separate operational and financial budget schedules of the organization.

A normal profit is

A cost of resources from an economic perspective.

Which one of the following factors would cause the aggregate supply curve shown below to shift from AS1 to AS2? (Moves left)

A decrease in productivity.

A working capital method that delays the outflow of cash is

A draft

Which one of the following statements regarding the difference between a flexible budget and a static budget is true?

A flexible budget provides cost allowances for different levels of activity, whereas a static budget provides costs for one level of activity.

A characteristic of a monopoly is that

A monopoly will produce when marginal revenue is equal to marginal cost.

The situation depicted In the graph below could be caused by (line shifts to the right)

A rise in the country's population. A downward-sloping curve relating price to quantity depicts the demand schedule for a normal good. When a country's population grows. producers can sell more of their products at every price level. This is depicted as a rightward shift in the demand curve.

Which of the following results could be expected from an open market operation of the Federal Reserve?

A sale of securities would raise interest rates. A sale of securities removes money from the economy and reduces bank reserves. Thus, banks cannot lend as much as previously, and higher interest rates follow. Money supply and Interest rates are inversely related.

Flexible budgets

Accommodate changes in activity levels. A flexible budget conceptually is a series of budgets prepared for various levels of activity. A flexible budget adjusts the master budget for changes in activity so that actual results can be compared with meaningful budget amounts.

The method that divides a project's annual after-tax net income by the average investment cost to measure the estimated performance of a capital investment is the

Accounting rate of return method

To determine the operating cycle for a retail department store, which one of the following pairs of items is needed?

Accounts recievable turnover and inventory The operating cycle is the time needed to turn cash into inventory, inventory into receivables, and receivables back into cash. For a retailer, it is the time from purchase of inventory to collection of cash. Thus, the operating cycle of a retailer is equal to the sum of the number of days' sales in inventory and the number of days' sales in receivables. Inventory turnover equals cost of goods sold divided by average inventory. The days' sales in inventory equals 365 (or another period chosen by the analyst) divided by the inventory turnover. Accounts receivable turnover equals net credit sales divided by average receivables. The days' sales in receivables equals 365 (or other number) divided by the accounts receivable turnover.

Of the following decisions, capital budgeting techniques would least likely be used in evaluating the

Adoption of a new method of allocating nontraceable costs to product lines.

Systematic Risk

Also called market risk, is the risk faced by all firms. Changes in the economy, such as inflation or the business cycle, affect all those in the market. o Sometimes referred to as undiversifiable risk.

• Unsystematic Risk

Also called unique risk or company risk, is the risk inherent in a particular investment. It is the risk of a specific company. o Sometimes referred to as diversifiable risk.

The profitability index approach to investment analysis

Always yields the same accept/reject decisions for independent projects as the net present value method The profitability index is the ratio of a discounted cash flow amount to the initial investment. It is a variation of the net present value (NPV) method and facilitates the comparison of different-sized investments. Because it is based on the NPV method, the profitability index yields the same decision as the NPV for independent projects. However, decisions may differ for mutually exclusive projects of different sizes.

The money supply in a nation's economy will decrease following

An Increase In the reserve ratio. The reserve ratio is the minimum percentage of its deposits that a bank must keep on deposit with the Federal Reserve or in its vault. When the reserve ratio increases, banks must maintain larger reserves, and less money is available for lending and investment. Consequently, the money supplydecreases.

Which of the following may provide a leading indicator of a future increase in gross domestic product?

An Increase in the average hours worked per week of production workers An economic indicator is highly correlated with changes in aggregate economic activity. A leading indicator changes prior to a change in the direction of the business cycle. The leading indicators included in the Conference Board's index are (1) average weekly hours worked by manufacturing workers, (2) unemployment claims, (3) consumer goods orders, (4) stock prices, (5) orders for fixed assets, (6) building permits, (7) timeliness of deliveries, (8) money supply, (9) consumer confidence, and (1 0) the spread between the yield on 10-year Treasury bonds and the federal funds rate. An increase in weekly hours worked by product1on workers is favorable for economic growth.

If a company is customer-centered, its customers are defined as

Anyone external to the company and those internal who rely on its product to get their job done.

The cost of statistical quality control in a product quality cost system is categorized as a(n)

Appraisal cost The four categories of quality costs are (1) prevention, (2) appraisal, (3) internal failure, and (4) external failure (lost opportunity). Appraisal costs include quality control programs, inspection, and testing. However, some authorities regard statistical quality and process control as preventive activities. They not only detect faulty work but also allow for adjustment of processes to avoid future defects.

lnventoriable costs

Are regarded as assets before the products are sold. Product (inventoriable) costs are capitalized as part of inventory. But period costs are expensed as they are incurred and are not capitalized as assets. Under an absorption costing system, inventoriable costs include variable and fixed costs of production. Under variable costing, inventoriable costs include only variable production costs.

Neary Company has entered into a contract to lease computers from Baldwin Company starting on January 1. Relevant information pertaining to the lease is provided below. Lease term 4 years Useful life of computers 5 years Present value of future lease payments $100,000 Fair value of leased asset on date of lease $105,000 Baldwin's implicit rate 10%At the end of the lease term, ownership of the asset transfers from Baldwin to Neary. Neary has properly classified this lease as a capital lease on its financial statements and uses straight-line depreciation on comparable assets. At January 1, the leased equipment would be reported on Neary's books as a(n)

Asset and a liability

A segment of an organization is referred to as a profit center if it has

Authority to make decisions affecting the major determinants of profit including the power to choose its markets and sources of supply.

In a make-versus-buy decision, the relevant costs include variable manufacturing costs as well as

Avoidable fixed costs

inventory turnover

COGS/ average balance in inventory

Which one of the following may be considered an independent item in the preparation of the annual master budget?

Capital investment budget The capital investment budget may be prepared more than a year in advance, unlike the other elements of the master budget. Because of the long-term commitments that must be made for some types of capital investments, planning must be done far in advance and is based on needs in future years as opposed to the current year's needs.

Stewart Co. uses the economic order quantity (EOQ) model for inventory management. A decrease in which one of the following variables would increase the EOQ?

Carrying costs

Managers are most likely to accept allocations of common costs based on

Cause and effect

The U.S. dollar has a freely floating exchange rate. When the dollar has fallen considerably in relation to other currencies, the

Cheaper dollar helps U.S. exporters of domestically produced goods.

A compensating balance

Compensates a financial institution for services rendered by providing it with deposits of funds.

The primary mechanism of monetary control of the Federal Reserve System is

Conducting open market operations. Open market operations (buying and selling government securities) are the primary means used by the Fed to control the money supply. Fed purchases are expansionary. They increase bank reserves and the money supply. Fed sales are contractional. If money is paid into the Federal Reserve, bank reserves are reduced, and the money supply decreases.

The largest component of GDP, and its most important determinant is personal incomes

Consumer Spending

Which of the following is a tariff?

Consumption taxes on imported goods

If a product required a great deal of electricity to produce, and crude oil prices increased, which of the following costs most likely increased?

Conversion costs

Wilson Company uses a comprehensive planning and budgeting system. The proper order for Wilson to prepare certain budget schedules would be

Cost of goods sold, income statement, balance sheet, and statement of cash flows.

Government price regulations in competitive markets that set maximum or ceiling prices below the equilibrium price will in the short run

Create shortages of that product.

Unless the shares are specifically restricted. a holder of common stock with a preemptive right may share proportionately in all of the following except

Cumulative Dividends

What are the most liquid assets?

Current Assets They are expected to be converted to cash, sold, or consumed within 1 year or the operating cycle, whichever is longer

Current Ratio

Current Assets/ current liabilities o (working capital ratio) is the most common measure of liquidity.o (working capital ratio) is the most common measure of liquidity. if ratio is less then 1.0 the numerator is lower than the denominator if the ratio is less than 1, paying off current liabilities with current assets results in equal decreases of the numerator and denomintor. the effect is to decrease the current ratio

Net working capital is the difference between

Current assets and current liabilities.

Net Working Capital

Current assets- current Liabilities equals the resources the company must have to continue operating in the short run if it must liquidate all of its current liabilities.

Current liabilities

Current liabilities are the liabilities with the earliest due dates. They are expected to be settled or converted to other liabilities within 1 year or the operating cycle, whichever is longer.

On a balanced scorecard, which is more of an internal process measure than an external-based measure?

Cycle time

The accompanying graph depicts the supply of and demand for U.S. dollars in terms of euros at a moment in time. Currently, the equilibrium exchange rate is $1 to 0.65 €. If inflation of the dollar exceeds that of the euro, the new equilibrium exchange rate would most likely settle at

D. indeterminate quantity and 0.60 price

Days sales in invetory

Days in year/inventory turnover ratio

decentralized organization

Decision making is at the lowest level possible. The premise is that the local manager can make more informed decisions than a manager farther from the decision. four types of responsibility centers. cost center, revenue center, profit center, investment center

centralized organizations

Decision making is consolidated so that activities may be more effectively coordinated from the top.

Which changes in costs are most conducive to switching from a traditional inventory ordering system to a just-in-time ordering system? cost per purchase order and inventory unit carrying costs

Decreasing, increasing

If the average household income increases and there is relatively little change in the price of a normal good, then the

Demand curve will shift to the right The demand schedule is a relationship between the prices of a product and the quantity demanded at each price, holding other determinants of the quantity demanded constant. A movement along an existing demand curve occurs when the price is changed. A shift in the curve itself occurs when any of the determinants changes. Such shifts can be caused by a change in the tastes and preferences of consumers toward a product, for example, as a result of a successful advertising campaign, an increase in consumer income (if a product Is a normal good), or changes in the prices of substitute or complementary products. An increase in consumer income would shift the demand curve to the right and result in greater consumption of the product at each price.

In cost terminology, conversion costs consist of

Direct labor and factory overhead

Personal income is equal to

Disposable Income plus personal tax payments.

Diversification reduces aggregate volatility

Diversifiable risk should continue to decrease as the number of different securities increases.

Which statement best describes the emphasis of total quality management (TOM)?

Doing each job right the first time The basic principles of TOM include (1) doing each job right the first time, (2) being customer-oriented, (3) committing the organizational culture to continuous improvement, and (4) promoting teamwork and employee empowerment.

The demand curve for a normal good is

Downward sloping because of the income and substitution effects of price changes. The demand curve for a normal good is downward sloping to the right. At high prices, the amountdemanded is relatively low. As prices decrease, the amount demanded increases. The substitution effect is the change in the cost of a good relative to others that will cause a cheaper good to be substituted for more expensive ones. The income effect is the change in purchasing power experienced by consumers as a result of a price change (real income increases or decreases).Both of these effects cause the price of a product and the quantity demanded to be inversely related.

peanut butter effect

Draw back of volume based systems (ABC) o Direct labor and direct materials are traced to products or service units. o A single pool of indirect cost is accumulated for a given organizational unit. o Indirect costs from the pool are assigned using an allocative procedure.

Which one of the following is not a key assumption of perfect competition?

Each firm can price its product above the industry price.

When long-run average cost is declining over a range of increasing output, the firm is experiencing

Economies of scale.

Which of the following results in a complete elimination of trade?

Embargoes

The best basis upon which cost standards should be set to measure controlab6e production Inefficiencies is

Engineering standards based on attainable performance

The risk of loss because of fluctuations in the relative value of foreign currencies is called

Exchange Risk Rate When amounts to be paid or received are denominated in a foreign currency, exchange rate fluctuations may result in exchange gains or losses. For example, if a U.S. firm has a receivable fixed in terms of units of a foreign currency, a decline in the value of that currency relative to the U.S. dollar results in a foreign exchange loss.

When budgeting, the items to be considered by a manufacturing firm in going from a sales quantity budget to a production budget would be the

Expected change in the quantity of finished goods and work-in-process inventories Production quantities are not identical to sales because of changes In inventory levels. Both finished goods and work-in-process inventories may change during a period, necessitating an analysis of both inventory levels before the production budget can be set.

Catherine & Co. has extra cash at the end of the year and is analyzing the best way to invest the funds. The company should invest in a project only if the

Expected return on the project exceeds the return on investments of comparable risk.

expected value

Expected value is a means of associating a dollar amount with each possible outcome of a probability distribution.

The four categories of costs associated with product quality costs are

External failure, Internal failure, prevention, and appraisal. The four categories of quality costs are (1) prevention, (2) appraisal, (3) internal failure, and (4) external failure. Costs of prevention include attempts to avoid defective output, such as (1) employee training, (2) review of equipment design, (3) preventive maintenance, and (4) evaluation of suppliers. Appraisal includes quality control programs, inspection, and testing. Internal failure costs are incurred when detection of defective products occurs before shipment. They include costs of (1) scrap, (2) rework, (3) tooling changes, and (4) downtime. External failure costs are incurred after the product has been shipped. They include costs of the costs associated with warranties, product liability, and loss of customer goodwill.

Any business firm that has the ability to control the price of the product it sells

Faces a downward-sloping demand curve.

The cash budget must be prepared before completing the

Forecasted balance sheet.

Put option

Gives the buyer (Holder) the right to sell the underlying asset at a fixed price

Call Option

Gives the buyer (holder) the right to purchase the underlying asset at a fixed price

Which one of the following components of gross domestic product (GDP) has the greatest fluctuation from year to year?

Gross domestic private investment.

Kode Co. manufactures a major product that gives rise to a by-product called May. May's only separable cost is a $1 selling cost when a unit is sold for $4. Kode accounts for May's sales by deducting the $3 net amount from the cost of goods sold of the major product. There are no inventories. If Kode were to change its method of accounting for May from a byproduct to a joint product, what would be the effect on Kode's overall gross margin?

Gross margin increases by $1 for each unit of may sold Gross margin is the difference between sales and the cost of goods sold. Subtracting the $3 net amount from cost of goods sold does not have the same effect on overall gross margin as recording the $4 sales revenue and subtracting the $1 cost. In the latter case, the $1 unit selling cost is not subtracted in arriving at the gross margin. Thus, gross margin increases by $1 for each unit of May sold.

The Booster Club at Blair College sells hot dogs at home basketball games. The group has a frequency distribution of the demand for hot dogs per game and plans to apply the expected value decision rule to determine the number of hot dogs to stock. The Booster Club should select the demand level that

Has the greatest expected monetary value

Hedging

Hedging uses offsetting commitments to minimize or avoid the impact of adverse price movements. • To hedge the investment, the entity takes a position in a financial instrument that is almost perfectly correlated with the original asset but in the opposite direction.

A company, which has many branch stores, has decided to benchmark one of its stores for the purpose of analyzing the accuracy and reliability of branch store financial reporting. Which one of the following is the most likely measure to be included in a financial benchmark?

High amount of bad debt write-offs.

Long term bonds have higher or lower interest rates then short term bonds?

Higher interest Rate

Which of the following is irrelevant in projecting the cash flows of the final year of a capital project?

Historical cost of equipment disposed of in the project's first year.

If a $1,000 bond sells for $1,125, which of the following statements are true? I. The market rate of interest is greater than the coupon rate on the bond. II. The coupon rate on the bond is greater than the market rate of interest. Ill. The bond sells at a premium. IV. The bond sells at a discount.

II and Ill. The excess of the price over the face value is a premium. A premium is paid because the coupon rate on the bond is greater than the market rate of interest. Thus, because the bond is paying a higher rate than other similar bonds, its price is bid up by investors.

A company obtained a short-term bank loan of $250,000 at an annual interest rate of 6%. As a condition of the loan, the company is required to maintain a compensating balance of $50,000 in its checking account. The checking account earns interest at an annual rate of 2%. Ordinarily, the company maintains a balance of $25,000 in its account for transaction purposes. What is the effective interest rate of the loan?

If a firm borrows $250,000 but is required to maintain $50,000 as a minimum compensating balance, then the firm only has use of $200,000, but is paying 6% interest on the entire $250,000. To determine the effective interest rate, the interest in dollars ($250,000 × 6%, or $15,000) should be divided by the amount of the loan available to the borrower, the effective loan amount, which is only $200,000. However, there are two issues that further complicate this problem. This company ordinarily maintains a $25,000 balance in its checking account. Therefore, the company will only be out $25,000 ($50,000 - $25,000). This means the effective loan amount is $225,000 ($250,000 - $25,000), not $250,000. Also, the company earns checking account interest which partially offsets the loan interest. The applicable amount on which to determine interest is only the part that pertains to this borrowing, the additional $25,000. The interest on this is $500 (2% × $25,000). The effective interest dollar amount for this borrowing is $14,500 ($15,000 - $500). The effective interest rate is now calculated as:$14,500 ÷ $225,000 = .0644, or 6.44% effective interest rate

forward premium

If the exchange rate for the domestic currency is higher in relation to a foriegn currency in the forward market

The appropriate remedy for the dumping of products by a foreign firm in the U.S. market would be to

Impose countervailing duties or tariffs.

Jones, a department manager, exercises control over the department's costs. The following is selected information relating to the department for July:Variable factory overhead Budgeted based on standard hours allowed $80,000 Actual 85,000Fixed factory overhead Budgeted 25,000 Actual 27,000In a three-way analysis of variance, the department's unfavorable spending variance for July was

In three-way analysis, the spending variance is the sum of the variable overhead spending variance and the fixed overhead spending variance. The variable overhead spending variance equals the actual number of units of the overhead driver consumed times the application rate minus the amount actually incurred ($80,000 - $85,000 = $5,000 unfavorable). The fixed overhead spending variance equals the budgeted amount minus the actual amount incurred ($25,000 - $27,000 = $2,000 unfavorable). The department's total unfavorable spending variance for July is thus $7,000 ($5,000 + $2,000).

Demand-pull inflation occurs when

Incomes rise suddenly.

The breakeven point in units increases when unit costs

Increase and sales price remains unchanged

If the central bank of a country raises interest rates sharply, the country's currency will likely

Increase in relative value. Exchange rates fluctuate depending upon the demand for each country's currency. If a country raises its interest rates, its currency will appreciate. The demand for investment at the higher interest rates will shift the demand curve for the currency to the right. The reverse holds true for a decrease in interest rates.

The NPV of a project has been calculated to be $215,000. Which one of the following changes in assumptions would decrease the NPV?

Increase the discount rate

A company serves as a distributor of products by ordering finished products once a quarter and using that inventory to accommodate the demand over the quarter. If it plans to ease its credit policy for customers, the amount of products ordered for its inventory every quarter will be

Increased to accommodate higher sales levels.

Components of Net Domestic Product (NDP)

Inderect, business, taxes, net, foreign, factor, income

If Brewer Corporation's bonds are currently yielding 8% in the marketplace, why is the firm's cost of debt lower?

Interest is deductible for tax purposes. Because interest is deductible for tax purposes, the actual cost of debt capital is the net effect of the interest payment and the offsetting tax deduction. The actual cost of debt equals the interest rate times the difference of 1 minus the marginal tax rate. Thus, if a firm with an 8% market rate is in a 40% tax bracket, the net cost of the debt capital is 4.8% [8% x (1.0- .40)].

Option premium equals

Intrinsic value + time premium

In general, it is more expensive for a company to finance with equity capital than with debt capital because

Investors are exposed to greater risk with equity capital

Correlation is a term frequently used in conjunction with regression analysis and is measured by the value of the coefficient of correlation, r. The best explanation of the value r is that it

Is a measure of the relative relationship between two variables. The coefficient of correlation (r) measures the strength of the linear relationship between the dependent and independent variables. The magnitude of r is independent of the scales of measurement of x and y. The coefficient lies between -1.0 and +1 .0. A value of zero indicates no linear relationship between the x and y variables. A value of +1 .0 indicates a perfectly direct relationship, and a value of -1 .0 indicates a perfectly inverse relationship.

The major advantages of joint ventures include each of the following except

Limited liability for the actions of the partners.

When managing cash and short-term investments, a corporate CFO is primarily concerned with

Liquidity and safety.

The yield curve shown implies that the (curve increase of interest and years)

Long-term interest rates have a higher annualized yield than short-term rates.

If a government were to use only fiscal policy to stimulate the economy from a recession. it would

Lower consumer taxes and increase government spending. According to Keynesian economics, fiscal policy should be expansionary when the economy is in recession. Increases in government spending, decreases in taxation, or both have a stimulative effect. To achieve this effect, the increase in spending should not be matched by a tax increase, the effect of which is contractionary. Thus, deficit spending is the result of an expansionary fiscal policy.

Import restrictions for purposes of creating domestic employment

May lead to retaliation by other countries. Protectionism in the form of import restrictions can lead to a variety of economic and social costs, including higher prices to consumers for both domestic and imported goods, higher taxes, and retaliation by other countries.

Transaction Exposure

Multinational corporations enter into numerous individual cross-border transactions during a year. Each transaction is subject to exchange rate variations between the transaction date and the settlement date. To address transaction exposure, a firm must o Estimate its net cash flows in each currency for impacted transactions o Measure the potential effect of exposure in each currency o Use hedging methods to mitigate exposure to exchange rate fluctuations

Using the balanced scorecard approach, an organization evaluates managerial performance based on

Multiple financial and nonfinancial measures. The trend in managerial performance evaluation is the balanced scorecard approach. Multiple measures of performance permit a determination as to whether a manager is achieving certain objectives at the expense of others that may be equally or more important. These measures may be financial or nonfinancial and usually include items with four perspectives: (1) financial; (2) customer; (3) internal business processes; and (4) learning, growth, and innovation.

The expected rate of return for the stock of Cornhusker Enterprises is 20%, with a standard deviation of 15%. The expected rate of return for the stock of Mustang Associates is 10%, with a standard deviation of 9%. The stock with the worse risk/return relationship is

Mustang because the coefficient of variation is higher. deviation/ expected return= coefficient

The distinguishing characteristic of oligopolistic markets is

Mutual interdependence of firm pricing and output decisions. The oligopoly model is much less specific than the other market structures, but there are typically few firms in the industry. Thus, the decisions of rival firms do not go unnoticed. Products can be either differentiated or standardized. Prices tend to be rigid (sticky) because of the interdependence among firms. Entry is difficult because of either natural or created barriers. Price leadership is typical in oligopolistic industries. Under price leadership, price changes are announced first by a major firm. Once the industry leader has spoken, other firms in the industry match the price charged by the leader. The mutual interdependence of the firms influences both pricing and output decisions.

Each of the following is a limitation of GDP's usefulness as a measure of a nation's prosperity except

No practical means are available to compare real GDP from different time periods.

For the purposes of cost accumulation, which of the following are identifiable as different individual products before the split-off point?

No, No In a joint production process, at the split-off point, neither by-products nor joint products are separately identifiable as individual products. Joint costs up to the split-off point are usually related to both joint products and by-products. After split-off, additional (separable) costs can be traced and charged to the individual products. By-products usually do not receive an allocation of joint costs.

Real GDP

Nominal GDP/Price Index

The amount paid to laborers are

Nominal wages.

Rice, Inc., uses the allowance method to account for uncollectible accounts. An account receivable that was previously determined uncollectible and written off was collected during May. The effect of the collection on Rice's current ratio and total working capital is

None, none The entry to record this transaction is to debit receivables, credit the allowance, debit cash, and credit receivables. The result is to increase both an asset (cash) and a contra asset (allowance for bad debts). These appear in the current asset section of the balance sheet. Thus, the collection changes neither the current ratio nor working capital because the effects are offsetting. The credit for the journal entry is made to the allowance account on the assumption that another account will become uncollectible. The firm had previously estimated its bad debts and established an appropriate allowance. It then (presumably) wrote off the wrong account. Accordingly, the journal entry reinstates a balance in the allowance account to absorb future uncollectibles.

A company with three products classifies its costs as belonging to five functions: design, production, marketing, distribution, and customer services. For pricing purposes, all company costs are assigned to the three products. The direct costs of each of the five functions are traced directly to the three products. The indirect costs of each of the five business functions are collected into five separate cost pools and then assigned to the three products using appropriate allocation bases. The allocation base that will most likely be the best for allocating the indirect costs of the distribution function is

Number of shipments

Determining the appropriate level of working capital for a firm requires

Offsetting the benefit of current assets and current liabilities against the probability of technical insolvency.

A forward contract involves a commitment today to purchase a product

On a specific future date at a price determined today.

The director of sales asks for a count of customers grouped in descending numerical rank by (1) the number of orders they place during a single year and (2) the dollar amounts of the average order. The visual format of these two pieces of information is most likely to be a(n)

Pareto diagram

The technique that measures the number of years required for the after-tax cash flows to recover the initial investment in a project is called the

Payback method The usual payback formula divides the initial investment by the constant net annual cash inflow. The payback method is unsophisticated because it ignores the time value of money. But it is widely used because of its simplicity and emphasis on recovery of the initial investment.

goal congruence

Performance measures must be designed so that they relate directly to accomplishment of the organization's goals.

Which of the following assumptions is associated with the economic order quantity formula?

Periodic demand is known The economic order quantity (EOQ) model is a mathematical tool for determining the order quantity that minimizes the sum of ordering costs and carrying costs. The following assumptions underlie the EOQ model: (1) Demand is uniform, (2) order (setup) costs and carrying costs are constant, and (3) no quantity discounts are allowed.

Which one of the following is the best characteristic concerning the capital budget? The capital budget is a(n)

Plan that assesses the long-term needs of the company for plant and equipment purchases.

In using cost-volume-profit analysis to calculate expected unit sales, which of the following should be added to fixed costs in the numerator?

Predicted operating income

Preferred and common stock differ in that

Preferred stock has a higher priority than common stock with regard to earnings and assets in the event of bankruptcy.

The unit costs for direct materials, machining, and assembly of a manufactured product represent

Prime costs

All of the following actions are valid tools that the Federal Reserve Bank uses to control the supply of money except

Printing money when the level of M1 appears low. The amount of money to print is a decision for the Department of the Treasury (an executive branch agency), not the Federal Reserve (an independent agency). Moreover, paper currency and coins make up only about half of the M1 money supply. The Fed has other, more complex tools for implementing monetary policy.

After performing a thorough study of Michigan Company's operations, an independent consultant determined that the firm's labor standards were too tight. Which of the following is Inconsistent with the consultant's conclusion?

Production supervisors found several significant fluctuations in manufacturing volume, with short-term increases in output being followed by rapid, sustained declines.

If the value of the U.S. dollar in foreign currency markets changes from $1 = .75 euros to $1 = .70 euros,

Products imported from Europe to the U.S. will become more expensive. The dollar has declined in value relative to the euro. If an American had previously wished to purchase a European product that was priced at 10 euros, the price would have been about $13.33. After the dollar's decline in value, the price of the item has increased to about $14.29. Thus, imports from Europe should decrease and exports increase.

When a firm prepares financial reports by using absorption costing,

Profits may decrease with increased sales even if there is no change in selling prices and costs In an absorption costing system, fixed overhead costs are included in inventory. When sales exceed production, more overhead is expensed under absorption costing because fixed overhead is carried over from the prior inventory. If sales exceed production, more than one period's fixed overhead is recognized as expense. Accordingly, if the increase in fixed overhead expensed is greater than the contribution margin of the increased units sold, less profit may result from an increased level of sales.

Wood, Inc., is considering four independent investment proposals. Wood has $3 million available for investment during the present period. The investment outlay for each project and its projected net present value (NPV) is presented below. Which of the following project options should be recommended to Wood's management?

Projects I, II, and Ill only. profitability index

Which of the following is an economic reason for government intervention in trade?

Protecting infant industries. The infant-industry argument is that protective tariffs are needed to allow new domestic industries to become established. Once such industries reach the maturity stage in their life cycles, the tariffs supposedly can be removed.

Which of the following is not included in the gross domestic product (GDP)?

Purchase of common stock. GDP is the value of all final goods and services produced in the U.S., whether by domestic or foreign-owned sources, during a specified period. A common stock purchase is not a new good or service. It is instead a claim to ownership of property that already exists.

Which one of the following statements pertaining to the return on investment (ROI) as a performance measurement is false?

ROI relies on financial measures that are capable of being independently verified, while other forms of performance measures are subject to manipulation.

One of the measures economists and economic policy makers use to gauge a nation's economic growth is to calculate the change in the

Real per capita output. Real per-capita output is defined as the GDP adjusted for changes in the general price level and divided by the population. It is often used to measure the standard of living.

On July 14, Avila Co. collected a receivable due from a major customer. Which of the following ratios is increased by this transaction?

Receivable turnover ratio.

Diana has noticed that many of her coworkers at Bubble, Inc., have been laid off over the past year due to low profits. Also, prices were lowered recently due to economic conditions. Even though Diana is worried about her future at Bubble, she has noticed that employment has risen over the past month and that prices are slowly increasing. Because other companies have had the same experience, what phase of the business cycle is the economy currently in?

Recovery

A company with significant sales in a particular foreign country has recently been subjected to extreme variations in the exchange rate with that country's currency. These variations are expected to continue. To mitigate the resulting economic exposure, a likely strategy for the company to implement would be to

Reduce sales to that country.

Entry into monopolistic competition is

Relatively easy, with only a few obstacles.

Charlie's Service Co. is a service center. For the month of June, Charlie's had the following operating statistics: Sales $750,000 Operating income 25,000 Net profit after taxes 8,000 Total assets available 500,000 Shareholders' equity 200,000 Cost of capital 6%Charlie's has a

Residual income of $(5,000) Residual income is the excess of operating income (a pretax amount) over a targeted amount equal to an imputed interest charge on invested capital. Using total assets available as the investment base, Charlie's targeted amount is $30,000 ($500,000 total assets x 6% cost of capital). Subtracting this amount from operating income results in residual income of $(5,000).

Through the use of decision models, managers thoroughly analyze many alternatives and decide on the best alternative for the company. Often the actual results achieved from a particular decision are not what was expected when the decision was made. In addition, an alternative that was not selected would have actually been the best decision for the company. The appropriate technique to analyze the alternatives by using expected inputs and altering them before a decision is made is

Sensativity analysis

A widely used approach that managers use to recognize uncertainty about individual items and to obtain an immediate financial estimate of the consequences of possible prediction errors is

Sensitivity analysis After a problem has been formulated into any mathematical model, it may be subjected to sensitivity analysis. Sensitivity analysis examines how the model's outcomes change as the parameters change.

A widely used approach that managers use to recognize uncertainty about individual items and to obtain an immediate financial estimate of the consequences of possible prediction errors is

Skilantic Company needs to pay a supplier's invoice of $60,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at 11% per annum plus a 9% compensating balance. The amount Skilantic Company must borrow to pay the supplier within the discount period and cover the compensating balance is

Skilantic's total borrowings on this loan can be calculated as follows:Total borrowings = Amount needed + (1.0- Compensating balance %) = ($60,000 X 98%) + (100% - 9%) = $58,800 + 91% = $64,615

Pro forma financial statements are part of the budgeting process. Normally, the last pro forma statement prepared is the

Statement of cash flows

In decision theory, those uncontrollable future events that can affect the outcome of a decision are

States of nature Applying decision theory requires the decision maker to develop an exhaustive list of possible future events. All possible future events that might occur must be included, even though the decision maker is likely to be uncertain about which specific events will occur. These future uncontrollable events are states of nature.

The use of the master budget throughout the year as a constant comparison with actual results signifies that the master budget is also a

Static Budget

In decision theory, those uncontrollable future events that can affect the outcome of a decision are

Statues of nature Applying decision theory requires the decision maker to develop an exhaustive list of possible future events. All possible future events that might occur must be included, even though the decision maker is likely to be uncertain about which specific events will occur. These future uncontrollable events are states of nature.

The rate of unemployment caused by changes in the composition of employment opportunities over time is referred to as the

Structural unemployment rate. Economists define full employment as occurring when cyclical unemployment is zero. Thus, the natural rate of unemployment (the full employment unemployment rate) equals the sum of structural and frictional unemployment. Cyclical unemployment is caused by insufficient aggregatedemand. Frictional unemployment occurs when both jobs and the workers qualified to fill them are available This definition acknowledges that workers change jobs, are laid off, abandon paid work temporarily, etc. Structural unemployment exists when aggregate demand is sufficient to provide full employment but the distribution of the demand does not correspond precisely to the composition of the labor force. This form of unemployment results when the required job skills or the geographic distribution of jobs change.

Which statement best describes total quality management (TQM)?

TQM is the continuous pursuit of quality TQM is the continuous pursuit of quality in every aspect of organizational activities through (1) a philosophy of doing it right the first time, (2) employee training and empowerment, (3) promotion of teamwork, (4) improvement of processes, and (5) attention to satisfaction of customers, both internal and external.

What is the most likely economic effect of tariffs and quotas?

Tariffs but not quotas affect all importers of the affected goods equally.

Domestic content rules

Tend to be imposed by capital-intensive countries. Domestic content rules require that at least a portion of any imported product be constructed from parts manufactured in the importing nation. This rule sometimes is used by capital-intensive nations. Parts can be produced using idle capacity and then sent to a labor-intensive country for final assembly.

The spot rate for one Australian dollar is $0.92685 and the 60-day forward rate is $0.93005. Which one of the following statements is consistent with these facts?

The U.S. dollar is trading at a forward discount with respect to the Australian dollar.

Which of the following statements regarding benchmarking is false?

The benchmarked organization against which a firm is comparing itself must be a direct competitor.

Which one of the following items would have to be included for a company preparing a schedule of cash receipts and disbursements for Calendar Year 1?

The borrowing of funds from a bank on a note payable taken out in June Year 1 with an agreement to pay the principal and interest in June Year 2. A schedule of cash receipts and disbursements (cash budget) should include all cash inflows and outflows during the period without regard to the accrual accounting treatment of the transactions. Thus, it should include all checks written and all sources of cash, including borrowings. A borrowing from a bank in June Year 1 should appear as a cash receipt for Year 1.

Which of the following is a characteristic of business process reengineering?

The bottom-up revision of the way the organization carries out a particular business process.

coefficient of correlation

The coefficient of correlation (r) measures the degree to which any two variables, e.g., the prices of two stocks, are related.

Peters Company has a 2-to-1 current ratio. This ratio would increase to more than 2 to 1 if

The company sold merchandise on open account that earned a normal gross margin

Which of the following business combinations is a vertical integration?

The corner gas station acquires the gasoline distributor to ensure they can get gas in times of shortages. A vertical integration is where a company acquires control through ownership of its suppliers. Because the corner gas station acquires control through ownership of the gas distributor, its supplier, this is a vertical integration.

Windham Company has current assets of $400,000 and current liabilities of $500,000. Windham Company's current ratio will be increased by

The current ratio equals current assets divided by current liabilities. An equal increase in both the numerator and denominator of a current ratio less than 1.0 causes the ratio to increase. Windham Company's current ratio is .8 ($400,000 + $500,000). The purchase of $100,000 of inventory on account would increase the current assets to $500,000 and the current liabilities to $600,000, resulting in a new current ratio of .83.

Derived demand can best be described as

The demand for an input generated by the demand for the final product.

Philip Enterprises, distributor of video discs, is developing its budgeted cost of goods sold for next year. Philip has developed the following range of sales estimates and associated probabilities for the year:

The expected value of sales is $84,000 [($60,000 × 25%) + (85,000 × 40%) + ($100,000 × 35%). Therefore, cost of goods sold is estimated to be $67,200 ($84,000 × 80%).

intrinsic value

The intrinsic value of a call option is the amount by which the exercise price is less than the current price of the underlying.

Selected information (in thousands) from the statement of financial position for King Products Corporation for the fiscal years ended December 31, Year 2. and Year 1, is presented below. Net credit sales and cost of goods sold for Year 2 were $600,000 and $440,000, respectively.

The inventory turnover ratio equals cost of goods sold divided by the average balance in inventory. Consequently, the inventory turnover is 4 times per year {$440,000 + [($120,000 + $100,000) + 2]}.

If a rent control law in a competitive housing market establishes a maximum or ceiling rent that is above the market or equilibrium rent,

The law has no effect on the rental market.

Which one of the following items is least likely to directly impact an equipment replacement capital expenditure decision?

The net present value of the equipment that is being replaced.

Spot Rate

The number of units of a foreign currency that can be received today in exchange for a single unit of the domestic currency.

Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000.Assume that Whitehall Corporation agreed to sell AM-12 to Flank Corporation for $5.50 per unit after further processing. During the first month of production, Whitehall sold 50,000 units with 10,000 units remaining in inventory at the end of the month. With respect to AM-12. which one of the following statements is true?

The operating profit last month was $50,000, and the inventory value is $45,000. Joint costs are allocated based on units of production. Accordingly, the unit joint cost allocated to AM-12 is $3.00 [$300,000 + (60,000 units of AM-12 + 40,000 units of BM-36)). The unit cost of AM-12 is therefore $4.50 [$3.00 joint cost+ ($90,000 additional cost + 60,000 units)]. Total inventory value is $45,000 (10,000 units x $4.50), and total operating profit is $50,000 [50,000 units sold x ($5.50 unit price - $4.50 unit cost)].

Which of the following is not a business purpose for divestment of a part of a business?

The owner wants to acquire a new subsidiary and wants to avoid jealousy by the existing employees.

Holder Vs Writer

The party buying an option is referred to as the holder - The seller is referred to as the writer.

Controllability

The performance measures on which the manager's compensation is based should be, as far as practicable, under the manager's influence.

Assuming no beginning work-in-process inventory, and that the ending work-in-process inventory is 100% complete as to materials costs, the number of equivalent units as to materials costs is

The same as the units placed in process

Because of economies of scale, as output from production expands,

The short-run average cost of production decreases.

Which one of the following statements supports the conclusion that the U.S. dollar has gained purchasing power against the Japanese yen?

The yen's spot rate with respect to the dollar has just fallen.

Increasing the efficiency of all phases of a given process is specifically discouraged by which of the following models?

Theory of constraints

Which limitation is common to the calculations of the payback period, discounted payback, internal rate of return (IRR), and net present value (NPV)?

They rely on forecasts of future data.

Monte Calro Simulation

This technique is often used in simulation to generate the individual values for a random variable.

delphi approach

This technique solicits opinions from experts, summarizes the opinions, and feeds the summaries back to the experts (without revealing participants to each other).

When Beta Company bought Gamma Company, Beta sold off about 30% of Gamma's assets because they did not need them. Beta kept only the part of Gamma that is counter-cyclical to Beta's other business. Why did they do this?

To reduce their seasonal variation in sales via diversification.

If the ratio of total liabilities to equity increases, a ratio that must also increase is

Total liabilities to total assets.

A U.S. manufacturer sold a piece of equipment to an engineering firm in New Zealand. The New Zealand firm must pay the invoice in U.S. dollars in 30 days and would like to mitigate the risk that the New Zealand dollar will depreciate against the U.S. dollar in the meantime. The type of exchange rate risk contemplated by the New Zealand firm is known as

Transaction exposure Transaction exposure is the exposure to fluctuations in exchange rates between the date a transaction is entered into and the settlement date.

According to John Maynard Keynes, the three major motives for holding cash are for

Transactional, precautionary, and speculative purposes.

Which security is most often held as a substitute for cash?

Treasury bills

The risk of a single stock is

Unsystematic Risk Unsystematic Risk is the risk of a single stock, but portfolio risk is the net risk of the holding a portolio of diversified securities. Portfolio risk therefore includes systematic and unsystematic risk.

Short-term interest rates are

Usually lower than long-term rates Historically, a facet of the term structure of interest rates (the relationship of yield and time to maturity) is that short-term interest rates ordinarily have been lower than long-term rates. One reason is that less risk is involved in the short run. Moreover, future expectations about interest rates affect the term structure. Most economists believe that a long-term interest rate is an average of future expected short-term interest rates. For this reason, the yield curve will (1) slope upward if future rates are expected to rise, (2) slope downward if interest rates are anticipated to fall, and (3) remain flat if investors think the rate is stable. Future inflation is incorporated into this relationship. Another consideration is liquidity preference. Investors in an uncertain world accept lower rates on short-term investments because of their greater liquidity.

Pongo Company's managers are attempting to value a piece of land they own. One potential occurrence is that the old road bordering the land gets paved. Another possibility is that the road does not get paved. A third outcome is that the road might be destroyed and completely replaced by a new road. Based on the following future states of nature, their probabilities, and subsequent values of the land, what is the expected value of the land?

Value * probability and then add all the values together $195,000

In the application of variable costing as a cost-allocation process in manufacturing.

Variable indirect costs are treated as product costs.

For capital budgeting purposes, management would select a high hurdle rate of return for certain projects because management

Wants to factor risk into its consideration of projects. Risk analysis measures the likelihood of the variability of future returns from the proposed investment. Risk can be incorporated into capital budgeting decisions in various ways, one of which is to use a hurdle rate (desired rate of return) higher than the firm's cost of capital, that is, a risk-adjusted discount rate. This method adjusts the interest rate used for discounting upward as an investment becomes riskier. The expected flow from the investment must be relatively larger, or the increased discount rate will generate a negative NPV, and the proposed acquisition will be rejected.

If a company uses off-balance-sheet financing, assets have been acquired

With operating leases

Tosh Enterprises' amount of working capital is What is Tosh Enterprises' quick (acid-test) ratio? The current ratio for Tosh Enterprises is

Working capital equals current assets minus current liabilities. For Tosh Enterprises, current assets consist of accounts receivable, cash, inventory, and prepaid expenses, a total of $1,480,000 ($400,000 + $200,000 + $800,000 + $80,000). Current liabilities consist of accounts payable and interest payable, a total of $280,000 ($260,000 + $20,000). Accordingly, working capital is $1,200,000 ($1,480,000 - $280,000). The quick ratio equals quick assets divided by current liabilities. For Tosh, quick assets consist of cash ($200,000) and accounts receivable ($400,000), a total of $600,000. Current liabilities consist of accounts payable ($260,000) and interest payable ($20,000), a total of $280,000. Thus, the quick ratio is 2.14 ($600,000 + $280,000). The current ratio equals current assets divided by current liabilities. Current assets consist of accounts receivable, cash, inventory, and prepaid expenses, a total of $1 ,480,000 ($400,000 + $200,000 + $800,000 + $80,000). Current liabilities consist of accounts payable and interest payable, a total of $280,000 ($260,000 + $20,000). Hence, the current ratio is 5.29 ($1 ,480,000 + $280,000).

Which of the following ratios, if any, are useful in assessing a company's ability to meet currently maturing or short-term obligations? acid test ratio and debt equity ratio

Yes, No Liquidity ratios measure the ability of a company to meet its short-term obligations. A commonly used liquidity ratio is the acid-test, or quick, ratio, which equals quick assets (net accounts receivable, current marketable securities, and cash) divided by current liabilities. The debt-to-equity ratio is a leverage ratio. Leverage ratios measure the impact of debt on profitability and risk.

Which of the following variances would be useful in calling attention to a possible short-term problem in the control of overhead costs? Spending variance and volume variance

Yes, No The volume variance is the difference between fixed overhead applied and fixed overhead budgeted. Thus, the volume variance has no relation to cost control because the amount of fixed costs is constant. The variance results only from a change in the level of the application base. However, the spending variance is simply a price variance for manufacturing overhead. Consequently, it is the spending variance, not the volume variance, that is useful in detecting problems in the control of overhead costs.

Many companies use comprehensive budgeting in planning for the next year's activities. When both an operating budget and a financial budget are prepared, which one of the following is correct concerning the financial budget?

Yes, Yes, Yes In the financial budget, the emphasis is on obtaining the funds needed to purchase operating assets. It contains the capital budget, projected cash disbursement schedule, projected cash collection schedule, cash budget, pro forma balance sheet, and pro forma statement of cash flows.

The units transferred in from the first department to the second department should be included in the computation of the equivalent units for the second department under which of the following methods of process costing? Fifo, weighted-average

Yes, yes

In accounting for by-products, the value of the by-product may be recognized at the time of (Product - Sale)

Yes, yes Practice with regard to recognizing byproducts in the accounts is not uniform. The most cost-effective method for the initial recognition of by-products is to account for their value at the time of sale as a reduction in the joint cost or as a revenue. The alternative is to recognize the net realizable value at the time of production, a method that results in the recording of by-product inventory.

The standard unit cost is used in the calculation of which of the following variances? Materials price variance and Materials usage variance

Yes, yes The materials price variance is isolated at either the time of purchase or use in production. It is calculated by multiplying the actual quantity of units purchased (or used) by the difference between actual price and standard price. The materials quantity (usage) variance is calculated by multiplying the difference between (1) the standard quantity of units (the actual output times the standard number of inputs per unit of output) and (2) the actual quantity of units consumed, times standard price. Thus, the standard unit cost is used to compute both the materials price variance and the materials quantity variance.

Futures contracts

a commitment to buy or sell an asset at a fixed price during a specific future period. • Another distinguishing feature of futures contracts is that the market price is posted and netted to each person's account at the close of every business day. This practice is called mark-to-market.

A lockbox system

accelerates the inflow of funds

The Coefficient of Determination

also known as the coefficient of correlation squared, is a measure of the fit between the indpenednt and dependent variables.

A manufacturer that wants to improve its staging process compares its procedures against the check-in process for a major air1ine. Which of the following tools is the manufacturer using?

benchmarking

Assume that the interest rate is greater than zero. Which of the following cash-inflow streams should you prefer?

choice A or choice D

All of the following are alternative marketable securities suitable for short-term investment

convertible bonds Marketable securities are near-cash items used primarily for short-term investment. Examples include (1) U.S. Treasury bills, (2) Eurodollars, (3) commercial paper, (4) money-market mutual funds with portfolios of short-term securities, (5) bankers' acceptances, (6) floating rate preferred stock, and (7) negotiable CDs of U.S. banks. A convertible bond is not a short-term investment because its maturity date is usually more than 1 year in the future and its price can be influenced substantially by changes in interest rates or by changes in the investee's stock price.

Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the information given in the next column: Under a costing system that allocates overhead on the basis of direct labor hours, Zeta Company's materials handling costs allocated to one unit of wall mirrors would be

https://www.chegg.com/homework-help/volume-based-cost-driver-versus-abctioga-company-manufacture-chapter-5-problem-26e-solution-9780078110917-exc If direct labor hours are used as the allocation base, the $50,000 of costs is allocated over 400 hours of direct labor. Multiplying the 25 units of each product times 200 hours results in 5,000 labor hours for each product, or a total of 10,000 hours. Dividing $50,000 by 10,000 hours results in a cost of $5 per direct labor hour. Multiplying 200 hours times $5 results in an allocation of $1,000 of overhead per unit of product.

Which of the following methods is a push system used to control inventory and minimize total inventory costs? I. Just-in-time (JIT) system II. Kanban method Ill. Materials requirements planning IV. Manufacturing resource planning

iii and IV A push inventory system is a system that controls inventory based on forecasted demand. Materials requirements planning (MRP) is a push system. The demand for materials is driven by the forecasted demand for the final product as programmed into the system. MRP, in effect, creates schedules of when items of inventory are needed in the production departments and thus reduces unnecessary inventory costs. Manufacturing resource planning (MRP II) is an advanced MRP system that extends the scope of an MRP system. Thus, both MRP and MRP II are push systems.JIT is a pull system that is demand-driven. In a manufacturing environment. production of goods does not begin until an order has been received. In this way, finished goods inventories also are eliminated. Kanban is also a pull system. It uses tickets to control the flow of production or parts so that they are produced or obtained in the needed amounts at the needed times.

Brown and Company uses the internal rate of return (IRR) method to evaluate capital projects. Brown is considering four independent projects with the following IRRs: Project IRR I 10% II 12% Ill 14% IV 15%Brown's cost of capital is 13%. Which one of the following project options should Brown accept based on IRR?

iii and iV

As a company becomes more conservative in its working capital policy, it tends to have a(n)

increase n the ratio of current assets to current liabilities A conservative working capital policy minimizes liquidity risk by increasing net working capital (current assets - current liabilities). The result is that the company forgoes the potentially higher returns available from using the additional working capital to acquire long-term assets. A conservative working capital policy is characterized by a higher current ratio (current assets + current liabilities) and acid-test ratio (quick assets + current liabilities). Thus, the firm will increase current assets or decrease current liabilities. A conservative policy finances assets using long-term or permanent funds rather than short-term sources.

Osgood Products has announced that it plans to finance future investments so that the firm will achieve an optimum capital structure. Which one of the following corporate objectives is consistent with this announcement?

maximize the net worth of the firm Financial structure is the composition of the financing sources of the assets of a firm. Traditionally, the financial structure consists of current liabilities, long-term debt, retained earnings, and stock. For most firms, the optimum structure includes a combination of debt and equity. Debt is cheaper than equity, but excessive use of debt increases the firm's risk and drives up the weighted-average cost of capital.

Accounts Receivable Turnover

net credit sales= avg balance in receivables

Under the three-variance method for analyzing factory overhead, the difference between the actual factory overhead and the factory overhead applied to production is the

net factory overhead variance

Relevant cash flows for capital budgeting

o Cost of new equipment o Annual after-tax cash savings or inflows o Proceeds from disposal of old equipment/residual (salvage) value o Adjustment for depreciation expense on new equipment

Different Types of Investment Risk

o Credit default risk o Liquidity risk o Maturity risk (interest rate risk) o Inflation risk o Political risk o Exchange rate risk o Business risk (operations risk) o Country Risk o Principal Risk

Three motives for holding cash

o Use as a medium of exchange (the transactional motive) o Provide for unexpected contingencies (the precautionary motive) o Take advantage of unexpected opportunities (the speculative motive)

If the coefficient of elasticity is zero, then the consumer demand for the product is said to be

perfectly inelastic When the coefficient of elasticity (percentage change in quantity + percentage change in price) is less than one, demand is inelastic. When the coefficient is zero, demand is perfectly Inelastic.

A consultant recommends that a company hold funds for the following two reasons: Reason #1: Cash needs can fluctuate substantially throughout the year. Reason #2: Opportunities for buying at a discount may appear during the year.The cash balances used to address the reasons given above are correctly classified as

preactionary, speculative

The following excerpt was taken from a company's financial statements: " ... 10% convertible participating ... $10,000,000." What is most likely being referred to?

preferred stock

An example of an internal failure cost is

rework In a quality management system, one of the costs of product nonconformance is internal failure cost, the cost of discovering, after appraisal but before shipment, that a completed product does not meet quality standards. An example is the cost of reworking the product.

A firm plans to use 2,500 inventory units (D) during the 180- day period. The ordering cost per order is $30 (O). The carrying costs per inventory unit is $15 (c). In order to minimize the total inventory cost for the 180-day period, the firm should order 100 inventory units (EOQ) in each order.

sQR(2*2500*30/15)=100 2500/100=25. the firm should make 25 orders during that period

Bond Corporation has a current ratio of 2 to 1 and a (acid test) quick ratio of 1 to 1. A transaction that would change Bond's quick ratio but not its current ratio is the

sale of inventory on account at cost The quick ratio is determined by dividing the sum of cash, short-term marketable securities, and accounts receivable by current liabilities. The current ratio is equal to current assets divided by current liabilities. The sale of inventory (a nonquick current asset) on account increases accounts receivable (a quick asset), changing the quick ratio. The sale of inventory on account, however, replaces one current asset with another, and the current ratio is unaffected.

The difference between the actual labor rate multiplied by the actual hours worked and the standard labor rate multiplied by the standard labor hours is the

total labor variance

Each share of nonparticipating, 8%, cumulative preferred stock in a company that meets its dividend obligations has all of the following characteristics except

voting rights in corporate elections Dividends on cumulative preferred stock accrue until declared. That is, the carrying amount of the preferred stock increases by the amount of any undeclared dividends. Participating preferred stock participates with common shareholders in excess earnings of the firm. Accordingly, 8% participating preferred stock might pay a dividend each year greater than 8% when the corporation is extremely profitable. Thus, nonparticipating preferred stock will receive no more than is stated on the face of the stock. Preferred shareholders rarely have voting rights. Voting rights are exchanged for preferences regarding dividends and liquidation of assets.

coefficient of variation

• The coefficient of variation (CV) is useful when the rates of return and standard deviations of two investments differ. o It measures the risk per unit of return.

Portfolio Management

• The goal of portfolio management is to construct a basket of securities that generates a reasonable rate of return without the risks associated with one security

Simulation Analysis

• This method represents a sophisticated refinement of standard probability theory and sensitivity analysis. a combination of scenario and sensitivity analysis

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