Acct (Chapter 8 - 11)

Calculate Net Present Value: Initial investment (2 limos)$1,500,000 Useful life 10years Salvage value$140,000 Annual net income generated $142,500 LLT's cost of capital 14%

Year annual cash flow PV Factor(14%) PV 0 (initial investment) x PV of $1 chart = PV 1 - 10 annual net cash flow x PV annuity of $1= PV 10 salvage value x PV of $1 chart = PV NPV = add all PVs together. (II should be neg) See photo for rest

Do cost centers impact revenue

Yes

mutally exclusive projects

competing alternatives. Managers invest in one but not the other. Ex. Deciding whether to lease or purchase vehicle

Responsibilities of a profit center manager may include ______.

controlling division costs contract negotiations involvement in strategic initiatives related to product success

When a transfer price is based on cost plus a percentage markup, the method being used is ______. Min acceptable price using this method is the _________.

cost based method / variable cost

The four groups of performance measures typically used in the balanced scorecard approach are financial, ______.

customer, internal business processes, and learning and growth

If you have $1,000 now and want to know what it will be worth in 3 years, you are solving a(n)

future value problem

In order to increase return on investment (ROI), the company must

increase sales or decrease operating expences or decrease average operating assets

The discount rate ______.

should reflect the company's cost of capital

Accounting Rate of Return (ARR)/ simple or unadjusted rate of return

tells managers how much net income a potential project is expected to generate as a percentage of initial investment Net operating income/ initial investment

The cost of capital is the ______.

weighted average after tax cost of debt and cost of equity

M11-5 (Algo) Calculating Accounting Rate of Return, Payback Period [LO 11-1, 11-2] Blue Marlin Company is considering the purchase of new equipment for its factory. It will cost $252,000 and have a $50,400 salvage value in five years. The annual net income from the equipment is expected to be $27,720, and depreciation is $40,320 per year.

Accounting rate of return = 11% Payback period = 3.70

What is true about capital budgeting?

Any capital budgeting technique can be used for screening decisions. Capital budgeting techniques that use time value of money are superior to those that don't.

Dane Inc. has forecast purchases on account to be $310,000 in March, $373,000 in April, $424,000 in May, and $495,000 in June. Sixty percent of purchases are paid for in the month of purchase, the remaining 40% are paid in the following month. What are budgeted cash payments for April?

April: Budgeted cost 373000 During month (.60) 223800 Previous month (.40) Take March and multiple Add together ($373,000 × 60%) + ($310,000 × 40%) = $347,800.

Determine IRR without calculations

If NPV is negative and cost of capital is 14%, IRR must be under 14%

Managers are evaluating two independent projects. Project X has a NPV of $282,500 and a profitability index of 2.1. Project Y has a NPV of $320,000 and a profitability index of 1.7. Which of the following statements are correct?

If funds are limited, Project X should be selected because it has the highest profitability index. If funds are not limited, the company should consider investing in both projects.

Peppertree Company has two divisions, East and West. Division East manufactures a component that Division West uses. The variable cost to produce this component is $1.49 per unit; full cost is $1.95. The component sells on the open market for $4.91. Assuming Division East has excess capacity, what is the lowest price Division East will accept for the component? What is the highest price that Division West will pay for it?

Lowest price: $1.49 (Variable cost) Highest price: 4.91 (Market value)

Dayton has forecast sales to be $213,000 in February, $277,000 in March, $297,000 in April, and $318,000 in May. The average cost of goods sold is 60% of sales. All sales are made on credit and sales are collected 55% in the month of sale, 30% the month following and the remainder two months after the sale. What are budgeted cash receipts in May?

May Budgeted Sales 318,000 Credit collected in month (.55) = 318k x .55= 174900 Credit collected previous month = 297,00 x .30 Credit collected 2 months ago = 277,000 x .15 Add all ($318,000 × 55%) + ($297,000 × 30%) + ($277,000 × 15%) = $305,550.

Lea Company produces hand tools. Budgeted sales for March are 10,700 units. Beginning finished goods inventory in March is budgeted to be 2,000 units, and ending finished goods inventory is budgeted to be 1,900 units. How many units will be produced in March?

Budgeted sales plus ending finished goods inventory, less budgeted beginning finished goods inventory equals budgeted production. 10,700 + 1,900 − 2,000 = 10,600.

Medlock Company has two divisions, Wheel and Chassis. The Wheel Division manufactures a wheel assembly that the Chassis Division uses. The variable cost to produce this assembly is $4.00 per unit; full cost is $5.00. The component sells on the open market for $9.00. What will the transfer price be if Medlock uses a pricing rule of variable cost plus 40 percent?

5.60

Parker Corp., which operates on a calendar year, expects to sell 5,500 units in October, and expects sales to increase 10% each month thereafter. Sales price is expected to stay constant at $12 per unit. What are budgeted revenues for the fourth quarter?

Calculate the projected number of units based on the rate of increase; then multiply that by the selling price per unit. [(5,500) + (5,500 × 1.10) + (5,500 × 1.10 × 1.10)] × $12.00 = $218,460.

Balanced Scorecard

A comprehensive management control system that balances traditional financial measures with measures of customer service, internal business processes, and the organization's capacity for learning and growth. Measures performance across several dimensions including past performance (lagging indicators) and future performance (leading indicators)

ROI vs. Residual Income

A manager might reject a proposal using ROI that the manager would accept using residual income. When managers use Residual income they are more likely to choose projects that will benefit the whole company

Grover has forecast sales to be $128,000 in February, $144,000 in March, $151,000 in April, and $140,000 in May. The average cost of goods sold is 70% of sales. All sales are on made on credit and sales are collected 65% in the month of sale, and 35% the month following. What are budgeted cash receipts in March?

($144,000 × 65%) + ($128,000 × 35%) = $138,400.

Shaw is a lumber company that also manufactures custom cabinetry. It is made up of two divisions: Lumber and Cabinetry. The Lumber Division is responsible for harvesting and preparing lumber for use; the Cabinetry Division produces custom-ordered cabinetry. The lumber produced by the Lumber Division has a variable cost of $2.20 per linear foot and full cost of $3.20. Comparable quality wood sells on the open market for $6.60 per linear foot.Required:1. Assume you are the manager of the Cabinetry Division. Determine the maximum amount you would pay for lumber.2. Assume you are the manager of the Lumber Division. Determine the minimum amount you would charge for the lumber if you have excess capacity. Repeat assuming you have no excess capacity.3. Assume you are the president of Shaw. Determine a mutually beneficial transfer price assuming there is excess capacity.

1. Max price = 6.60 or sales price 2. Min price with excess cap = 2.20 or variable price Min price without excess cap = 6.60 3. Mutually beneficial = 4.40 or sales price - variable price or contribution margin

Parker Corp., which operates on a calendar year, expects to sell 3,500 units in October, and expects sales to increase 10% each month thereafter. Sales price is expected to stay constant at $17 per unit. What are budgeted revenues for the fourth quarter?

196,350

0. Which of the following statements contrasting residual income with return on investment is correct? A. ROI may lead to goal incongruence while residual income does not. B. ROI is a lagging indicator while residual income is a leading indicator. C. Residual income is a financial measure while return on investment emphasizes the customer perspective. D. Residual income is a long-term measure while ROI is a short-term measu

A

True or false: Assume the net present value of $1,000 to be received in four years is $645. If you have the choice of receiving $645 now or $1,000 in four years, the best option is to take the $1,000 in four years.

False. Reason: Both options are equal so neither option is best.

M8-14 (Algo) Preparing Schedule of Cash Receipts [LO 8-4] Getty Company expects sales for the first three months of next year to be $190,000, $230,000 and $305,000, respectively. Getty expects 30 percent of its sales to be cash and the remainder to be credit sales. The credit sales will be collected as follows: 10 percent in the month of the sale and 90 percent in the following month.Compute a schedule of Getty's cash receipts for the months of February and March.

Feb: Sales 230,000 Cash Sales (30%) 230,000 x .30 Credit (70%) Collected in month (10%) 230,000 x .7 x .10 Collected following month (90%) Previous month sales x .7 x .9 Budgeted cash receipts Cash sales + Collected in month + collected following month

Nelson Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $166,375. The equipment will have an initial cost of $530,000 and have a 5 year life. If the salvage value of the equipment is estimated to be $195,000, what is the accounting rate of return? Ignore income taxes.

First, calculate the increase in net income from the equipment. Depreciation expense equals $67,000 per year [($530,000 − $195,000)/5 = $67,000] and cash flow increase is $166,375. The effect of these two things on net income is a $99,375 increase [$166,375 increase − $67,000 depreciation expense = $99,375 increase per year]. Calculate accounting rate of return by dividing the increase in net income ($99,375) by the initial investment ($530,000) $99,375/$530,000 = 18.75%.

return on investment

Net Operating Income / Average Operating Assets

M8-5 (Algo) Preparing Sales Budget [LO 8-3a] Beatrice Company estimates that unit sales of its lawn chairs will be 8,000 in October; 8,200 in November; and 9,850 in December.Compute Beatrice's sales budget for the fourth quarter assuming each unit sells for $26.00.

Oct = Budgeted unit sales (8000) x budgeted unit price (26) = budgeted sales rev 208,000 Noc = Budgeted unit sales (8200) x budgeted unit price (26) = budgeted sales rev 213200 Dec = Budgeted unit sales (9850) x budgeted unit price (26) = budgeted sales rev 256100 Quarter 4: add everything together

Calculate Payback period: Initial investment (2 limos)$1,500,000 Useful life 10years Salvage value$140,000 Annual net income generated $142,500 LLT's cost of capital 14%

Payback period = initial investment/ annual cash flow annual cashflow = net income + Depreciation Depreciation = (initial investment - salvage value) / useful life in years

Calculating Unknowns Based on Production, Sales, Beginning and Ending Inventory Value Chart

Production = sales + ending inventory - beginning inventory Sales = beg in + production - ending inv Ending Inv + beg inv + production - sales Beg Inv = Sales + end inv - production

Which of the following budgets shows how many units will be produced each period? A. Direct materials budget B. Direct labor budget C. Sales budget D. Production budge

Production Budget

Determine budgeted cash payments

Purchases Cash Disbursements: Credit purchases paid in month of purchase (.45) = purchases times percentage Credit purchases paid in month following purchase(.55) = purchases of previous month times percentage cash paid for operating expenses = get from chart budgeted cash payments = CC paid in month + paid in followind + operating expenses

Violet Company has sales of $464,000, net operating income of $249,000, average invested assets of $801,000, and a hurdle rate of 8.25 percent.

ROI = 31.09% Residual income = 182,918

Full ROI formula

ROI = investment turnover x profit margin (net op income/average invested assets) = (sales rev/ average invested assets) x (NOI/sales rev)

Madison Corporation's expected beginning cash balance is $35,000. Cash collections are budgeted at $50,000 and cash disbursements are estimated to be $80,000. The minimum required cash balance is $20,000 and the company can borrow as much as needed in increments of $10,000. Calculate the expected ending cash balance for the month.

Reason: $35,000 + $50,000 - $80,000 = $5,000. Since they can borrow in increments of $10,000, they must borrow $20,000 to meet or exceed the minimum cash balance, making the ending balance $25,000.

Capital budgeting decisions include ______.

Reason: Capital budgeting decisions are significant investments in projects that have long-term implications. choosing to lease or buy new equipment purchasing new equipment to reduce cost deciding to replace old equipment determining which equipment to purchase among available alternatives acquiring a new facility to increase capacity

Pastoria Enterprises has scheduled raw material purchases of $100,000 in January, $130,000 in February, and $150,000 in March. The company pays for 75% of its purchases in the month of purchase and 25% the month after the purchase. Calculate the expected cash disbursements for the month of February.

Reason: February purchases ($130,000 × 75%) $97,500 + January purchases ($100,000 × 25%) $25,000 = $122,500.

Calderon Kitchen Supplies is planning to invest $210,000 in a new product. The product is expected to generate a net present value of $56,700. The project profitability index is ______.

Reason: The profitability index is calculated using the present value of the future cash flows, not the net present value. ($210,000 + $56,700) ÷ $210,000 = 1.27

Segment Margin

Sales revenue less all costs that are directly attributable to the segment, including variable costs and direct fixed costs.

The two types of capital investment decisions are ______ and ______ decisions.

Screening - Narrowing down a set of projects for further consideration. Determing whether project meets some min criteria Preference - Managers are required to evaluate and compare more than one capital investment alternative

Required rate of return or hurdle rate

The discount rate (cost of funds) that the IRR must exceed for a project to be considered acceptable. Considers factors such as risk of investment, cost of financing, opportunity costs

Marcos Co. is considering a project that will increase residual income by $15,000. The project has a 12% return on investment (ROI) which exceeds the company's 10% required rate of return. Marcos Co. currently has an overall 15% ROI in the department where this project would be implemented. Which of the following statements regarding this potential investment are true?

The project should be accepted by the company because it increases overall residual income. The department manager may not want to accept the project because it will lower the overall ROI for the department.

True or false: For capital budgeting purposes, capital assets includes item research and development projects.

True

cost center

a business segment whose manager has control over cost but has no control over revenue or investments in operating assets. Anything that does not generate revenue. Ex. Accounting dept, personnal dept, manufacturing facility

Equal interest rates, interest periods, and dollar amounts each interest period are all characteristics of ______. an example is a house and car payment

annuities

Return on investment, residual income, and economic value added ______.

are all lagging measures of performance

Average invested Assets

beginning total assets + ending total assets / 2

A tool to help managers make decisions about investments in major assets such as new facilities, equipment, and products is called

capital budgeting

Investing in new technology to save on labor costs is an example of a(n) _______________________ decision.

capital investment

If the interest rate earned increases, net present value will ______.

decrease

In a lease or buy decision, ______ is not relevant to the decision.

depreciation expense because it is a noncash cost

Net present value is the _____

difference between the present value of a project's cash inflows and the present value of the project's cash outflows

The rate applied to future cash flows to reflect the time value of money is called the

discount rate

When projects are ______________ or unrelated to one another, each project can be evaluated on its own merit and investing in one project does not preclude investing in the other.

independent

In order to fully evaluate ROI, managers should compute both

investment turnover and profit margin

Given the choice it ______.

is better to receive money today instead of a year from today

The weighted -average cost of capital ______.

is how much it costs a company to fund capital projects should be reflected in the company's discount rate

The transfer pricing method that treats the two segments as if they were independent businesses is the ______ method. Also provides most benefit to seller.

market price

A transfer price developed using the ________________________ method should fall somewhere between the variable cost and the wholesale price. Inside information about the other division's costs, capacity, and demand will impact setting a transfer price using the ______ method

negotiation

Net cash flow formula

net income + depreciation = net cash flow sales rev - cash expenses = net cashflow

When deciding between two competing alternatives, the best capital budgeting method to use is the ______.

net present value

Net operating income is income before

other income, interest and taxes

The term discounting cash flows refers to the process of calculating the ______ value of the cash flows.

present

Capital budgeting techniques involve solving __________________________ problems because of the need to know how much something is worth today. It involves discounting future cash flows and is superior to the payback method.

present value

Profitability Index Formula

present value future cash flows / initial investment Higher the index the better

The ratio of a project's benefits (measured by the present value of future cash flows) to its required investment is the

profitability index

When investment funds are limited, the amount of economic value (represented by the present value of future cash flows) that is generated per unit of scarce resource (investment cash) is measured by the

profitabilty index

When prioritizing independent projects when limited investment funds are available, the best capital budgeting method to use is the ______.

profitabilty index

Payback Period

the amount of time required for an investment to generate cash flows sufficient to recover its initial cost

The internal rate of return method indicates ______.

the discount rate that makes the present value of the cash inflows equal to the present value of the cash outflows

Residual Income

the net operating income that an investment center earns above the minimum required return on its operating assets Residual income = NOI - min acceptable profit Redidual income = NOI - (avg invested assets x hurdle rate)

The time value of money is the idea that ______.

the value of the dollar changes over time

The amount that one division charges when it sells goods or services to another division of the same company is called a(n)

transfer price