1. ACC 310F Final Exam Review

TransAm Mail Service purchased equipment for $2,500. TransAm paid $400 in cash and signed a note for the balance. TransAm debited the Equipment account, credited Cash and

credited a liability account for $2,100. Equipment $2,500 Notes Payable $2,100* Cash $ 400 *$2,500 - $2,100

If a company fails to make an adjusting entry to record supplies expense, then

expense will be understated.

A truck that cost $72,000 and on which $60,000 of accumulated depreciation has been recorded was disposed of for $18,000 cash. The entry to record this event would include a

gain of $6,000 $18,000 - ($72,000 - $60,000) = $6,000

Managerial accounting consists of two tasks:

identifying the costs and benefits to measure, and then estimating the amount of each identified cost and benefit.

At June 1, 2016, Fishermen Co. reported stockholders' equity of $148,000. During the June, Fishermen Co. generated revenues of $27,000, incurred expenses of $15,000, purchased land for $7,000 and paid dividends of $3,000. What is the amount of stockholders' equity at June 30, 2016?

$157,000 $148,000 Beg. Stockholders Equity June 1 + $27,000 Revenues - $15,000 Expenses - $3,000 Dividends $157,000 End. Stockholders Equity June 30

Ale Company reports a $16,000 increase in inventory and a $8,000 increase in accounts payable during the year. Cost of Goods Sold for the year was $150,000. The cash payments made to suppliers were

$158,000 $150,000 + $16,000 - $8,000 = $158,000

At September 1, 2015, Promise Ring Co. reported stockholders' equity of $156,000. During the month, Promise Ring generated revenues of $38,000, incurred expenses of $21,000, purchased equipment for $5,000 and paid dividends of $2,000. What is the amount of stockholders' equity at September 30, 2015?

$171,000 $156,000+ $38,000 - $21,000 - $2,000 = $171,000

The following information is for Sunny Day Real Estate: Sunny Day Real Estate Balance Sheet December 31, 2015 Cash $ 25,000 Accounts Payable $ 60,000 Prepaid Insurance 30,000 Salaries and Wages Payable 15,000 Accounts Receivable 50,000 Mortgage Payable 85,000 Inventory 70,000 Total Liabilities 160,000 Land Held for Investment 85,000 Land 120,000 Buildings $100,000 Common Stock $120,000 Less Accumulated Retained Earnings 250,000 370,000 Depreciation (20,000) 80,000 Trademark 70,000 Total Assets $530,000 Total Liabilities and Stockholders' Equity $530,000 The total dollar amount of assets to be classified as property, plant, and equipment is

$200,000 $120,000 + $80,000 = $200,000

Cordet's Café has a potential investment of $920,000 which generated a depreciation tax shield of $50,000 and a tax rate of 25% for 2009. How much depreciation expense did Cordet's Café record during 2009?

$200,000 $50,000 / 25% = $200,000

Garnett Co. expects to purchase $180,000 of materials in July and $210,000 of materials in August. Three-fourths of all purchases are paid for in the month of purchase, and the other one-fourth are paid for in the month following the month of purchase. How much will August's cash disbursements for materials purchases be?

$202,500

Misra Company compiled the following financial information as of December 31, 2015: Revenues $340,000 Retained earnings (1/1/15) 60,000 Equipment 80,000 Expenses 250,000 Cash 90,000 Dividends 20,000 Supplies 10,000 Accounts payable 40,000 Accounts receivable 70,000 Common stock 80,000 Misra's stockholders' equity on December 31, 2015 is

$210,000 $140,000 + ($340,000 - $250,000) - $20,000 = $210,000

The Clarke Company provided the following information for the month of December: Beginning work-in-process $12,000 Ending work-in-process $9,000 Direct labor/materials used $14,000 Manufacturing overhead $7,000 The company's cost of goods manufactured for December is:

$24,000

ABC company is a financial planning service. The account balances at December 31, 2015 are shown below: Accounts Payable $ 5,000 Accounts Receivable 19,000 Buildings 140,000 Cash 11,700 Common Stock 143,400 Equipment 15,400 Land 42,000 Notes Payable 95,000 Dividend 3,000 Notes Receivable 8,100 Prepaid Insurance 6,400 Supplies 800 Salary Expenses 1,000 Prepaid Rent 1,200 What amount are shown as the total debits on its trial balance?

$243,400

At October 1, 2015, Padilla Industries had an accounts payable balance of $40,000. During the month, the company made purchases on account of $33,000 and made payments on account of $48,000. At October 31, 2015, the accounts payable balance is

$25,000 $40,000 + $33,000 - $48,000 = $25,000

Misra Company compiled the following financial information as of December 31, 2015: Revenues $340,000 Retained earnings (1/1/15) 60,000 Equipment 80,000 Expenses 250,000 Cash 90,000 Dividends 20,000 Supplies 10,000 Accounts payable 40,000 Accounts receivable 70,000 Common stock 80,000 Misra's assets on December 31, 2015 are

$250,000 $80,000 + $90,000 + $10,000 + $70,000 = $250,000

Sargent Corporation bought equipment on January 1, 2015. The equipment cost $360,000 and had an expected salvage value of $60,000. The life of the equipment was estimated to be 6 years. Assuming straight-line deprecation, the book value of the equipment at the beginning of the third year would be

$260,000 ($360,000 - $60,000) ÷ 6 = $50,000; $360,000 - ($50,000 × 2) = $260,000

The following data are available for Alamo Corporation. Sale of land $225,000 Sale of equipment $130,000 Issuance of common stock 140,000 Purchase of equipment 70,000 Payment of cash dividends 120,000 Net cash provided by investing activities is:

$285,000 $225,000 + $130,000 - $70,000 = $285,000

The net income reported on the income statement for the current year was $245,000. Depreciation was $40,000. Account receivable and inventories decreased by $12,000 and $35,000, respectively. Prepaid expenses and accounts payable increased, respectively, by $1,000 and $8,000. How much cash was provided by operating activities?

$339,000 $245,000 + $40,000 + $12,000 + $35,000 - $1,000 + $8,000 = $339,000

During the year 2015, Dilego Company earned revenues of $90,000, had expenses of $56,000, purchased assets with a cost of $10,000 and paid dividends of $6,000. Net income for the year is

$34,000. $90,000 - $56,000 = $34,000

A company's past experience indicates that 60% of its credit sales are collected in the month of sale, 30% in the next month, and 5% in the second month after the sale; the remainder is never collected. Budgeted credit sales were: January $360,000 February 216,000 March 540,000 The cash inflow in the month of March is expected to be

$406,800

The following information is available for the Downtown Furniture Company which produces two types of tables. Oak Cherry Total Sales volume (units) 500 300 800 Revenue $80,000 $78,000 $158,000 Variable Costs Direct materials $5,000 $8,000 $13,000 Direct labor $17,000 $21,000 $38,000 Contribution Margin $58,000 $49,000 $107,000 Fixed Costs Manufacturing $40,000 Administrative $33,000 Profit before Tax $34,000 Management feels that the fixed administrative costs should be allocated based on units sold. The rate at which fixed administrative costs which should be allocated, and the administrative costs allocated to cherry tables are:

$41.25 per unit and $12,375 Rate at which fixed administrative costs allocated: Administrative 33,000/ Total units 800=$41.25 per unit For cherry tables, the administrative costs allocated = 41.25 * 300=$12,375

Consider the following information regarding the purchase of a piece of equipment: Initial cost $68,000 Estimated life 5 years Annual net cash inflows $21,000 Income tax rate 40% Cost of Capital 12% Assuming the company uses straight-line depreciation, the depreciation tax shield in year 1 would amount to:

$5,440

Sargent Corporation bought equipment on January 1, 2015. The equipment cost $360,000 and had an expected salvage value of $60,000. The life of the equipment was estimated to be 6 years. The depreciation expense using the straight-line method of depreciation is

$50,000 ($360,000 - $60,000) ÷ 6 = $50,000

If total liabilities increased by $30,000 and stockholders' equity increased by $20,000 during a period of time, then total assets must change by what amount and direction during that same period?

$50,000 increase $30,000 + $20,000 = $50,000

As of June 30, 2015, Actual Tigers Company has assets of $100,000 and stockholders' equity of $40,000. What are the liabilities for Actual Tigers Company as of June 30, 2015?

$60,000 $100,000 - $40,000 = $60,000

Engler Company purchases a new delivery truck for $55,000. The sales taxes are $4,000. The logo of the company is painted on the side of the truck for $1,600. The truck license is $160. The truck undergoes safety testing for $290. What does Engler record as the cost of the new truck?

$60,890 $55,000 + $4,000 + $1,600 + $290 = $60,890

Harms Shoe Company applies manufacturing overhead based on the number of units as the cost driver. Information concerning costs for July follows: Direct labor costs 800 hours and $14 PER HOUR Manufacturing overhead $8,000 Direct materials $45,000 How much is the unit product cost if 1,000 units are produced?

$64.20

Wesley Hospital installs a new parking lot. The paving cost $40,000 and the lights to illuminate the new parking area cost $25,000. Which of the following statements is true with respect to these additions?

$65,000 should be debited to Land Improvements. $40,000 + $25,000 = $65,000

Spudz Toys estimated production of 2,000 stuffed dogs each with a selling price of $8.00. If the variable cost per stuffed dog is $2.00 and fixed costs are $5,000, what is estimated profit?

$7,000 5,000 + (2.00 x 2,000) = $9,000 2,000 x $8.000 = $16,000 $16,000 - $9,000 = $7,000

Presto Company purchased equipment and these costs were incurred: Cash price $65,000 Sales taxes 3,600 Insurance during transit 640 Installation and testing 860 Total costs $70,100 Presto will record the acquisition cost of the equipment as

$70,100 $65,000 + $3,600 + $640 + $860 = $70,100

Bill and Ted recently opened a plumbing business. The business currently has $500 monthly depreciation for its two trucks as its only fixed costs. During the first month, the company had 10 service calls each earning $99 revenue per call and variable costs amounting to $20 per call for plumbing supplies and gas. How much is Bill and Ted's contribution margin for its first month?

$790 -Contribution margin = revenue - variable costs Revenue = $99 x 10 = $990 V.C. = $20 x 10 = $200 $990 - $200 = $790

Jean's Vegetable Market had the following transactions during 2014: 1. Issued $50,000 of par value common stock for cash. 2. Repaid a 6 year note payable in the amount of $22,000. 3. Acquired land by issuing common stock of par value $100,000. 4. Declared and paid a cash dividend of $2,000. 5. Sold a long-term investment (cost $3,000) for cash of $8,000. 6. Acquired an investment in IBM stock for cash of $15,000. What is the net cash provided (used) by investing activities?

($7,000) $8,000 - $15,000 = ($7,000)

Unit 10: Budgeting & Forecasting

- Describe the benefits of budgeting and essentials of effective budgeting that will best help you achieve these benefits. - Link individual budgets together to form an organization-wide plan and construct forecasted financial statements.

Unit 11: Long Horizon Decisions

- Describe the reasons for capital budgeting. - List the components of a project's cash flows and apply discounted cash flow techniques. - Apply discounted cash flow techniques. - Explain the role of taxes and the depreciation tax shield in project evaluation. - Identify issues in allocating scarce capital among projects.

Unit 9: Cost Flows

- Distinguish product costs from period costs. - Understand the flow of costs in service firms. - Understand the flow of costs in merchandising firms. - Explain the cost terminology and the flow of costs in manufacturing firms. - Allocate overhead costs to products and services.

Unit 13: Performance Evaluation

- Explain how companies use budgets for performance evaluation. - Compute return on equity and analyze this ratio from an investor's perspective. - Compute interest coverage ratio and analyze this ratio from a creditor's perspective. - Compute debt to tangible net assets and analyze this ratio from a creditor's perspective. - Compute leverage ratio and analyze this ratio from a creditor's perspective.

Unit 7: Completing the Accounting Cycle

- Explain the process of closing the books. - Describe the content and purpose of a post-closing trial balance. - State the required steps in the accounting cycle. - Identify the sections of a classified balance sheet.

Unit 6: Adjusting Entries

- Explain the time period assumption. - Explain the accrual basis of accounting. - Explain the reasons for adjusting entries and identify the major types of adjusting entries. - Prepare adjusting entries for deferrals. - Prepare adjusting entries for accruals. - Describe the nature and purpose of an adjusted trial balance.

Unit 12: Statement of Cash Flows

- Explain the usefulness of the Statement of Cash Flows. - Distinguish between operating, investing, and financing activities. - Prepare a Statement of Cash Flows using the indirect method

Unit 5: The Recording Process

- Explain what an account is and how it helps in the recording process. - Define debits and credits and explain their use in recording business transactions. - Identify the basic steps in the recording process. - Explain what a journal is and how it helps in the recording process. - Explain what a ledger is and how it helps in the recording process. - Explain what posting is and how it helps in the recording process. - Prepare a trial balance and explain its purpose.

Unit 2: Short-Horizon Decisions I

- Learn techniques to estimate fixed and variable costs. - Understand the cost-volume-profit (CVP) relation. - Use the CVP relation to plan profit and make short-term decisions. Equations: -Contribution margin = revenue - variable costs -Total costs = Fixed costs + (Unit variable costs x Volume of activity) -Breakeven volume = Fixed cost/unit contribution margin.

Four-Step Framework for Decision Making

1. Specify the Decision Problem 2. Identify Options 3. Measure Benefits and Costs to Determine Value 4. Make the Decision

Mott Company uses the units-of-activity method in computing depreciation. A new plant asset is purchased for $48,000 that will produce an estimated 100,000 units over its useful life. Estimated salvage value at the end of its useful life is $4,000. What is the depreciation cost per unit?

$.44 ($48,000 - 4,000) ÷ 100,000 = $.44

Carey Company buys land for $50,000 on 12/31/14. As of 3/31/15, the land has appreciated in value to $50,700. On 12/31/15, the land has an appraised value of $51,800. By what amount should the Land account be increased in 2015?

$0

A company budgeted unit sales of 204,000 units for January, 2013 and 240,000 units for February, 2013. The company has a policy of having an inventory of units on hand at the end of each month equal to 30% of next month's budgeted unit sales. If there were 61,200 units of inventory on hand on December 31, 2012, how many units should be produced in January, 2013 in order for the company to meet its goals?

214,800 units

Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870 boxes during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.40 per pound and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500 pounds in ending inventory. What is the total amount to be budgeted in pounds for direct materials to be purchased for the month?

38,880

The following information is taken from the production budget for the first quarter: Beginning inventory in units 1,200 Sales budgeted for the quarter 456,000 Production capacity in units 472,000 How many finished goods units should be produced during the quarter if the company desires 3,200 units available to start the next quarter?

458,000

Jawbreaker Company paid $940 on account to a creditor. The transaction was erroneously recorded as a debit to Cash of $490 and a credit to Accounts Receivable, $490. The correcting entry is

Accounts Receivable 490 Accounts Payable 940 Cash 1,430 $940 + $490 = $1,430

The production budget shows expected unit sales are 100,000. The required production units are 104,000. What are the beginning and desired ending finished goods units, respectively? Beginning Units Ending Units A. 10,000 6,000 B. 6,000 10,000 C. 4,000 10,000 D. 10,000 4,000

B Beginning of finished goods + Production - Sales = Ending of finished goods 6,000 + 104,000 - 100,000 = 10,000

Which of the following statements is true? A. The initial outlay for an asset does not include the cost of installation and training charges. B. The salvage of an asset is the residual value from disposing of the asset at the end of its useful life. C. Setting an estimated life expectancy of an asset too low understates the profitability of the investment and could result in the firm rejecting profitable opportunities.

B & C are true A is not true: The initial outlay includes all costs incurred to ready the asset for its intended use. both B and C are true

Which of the following items are not cash outflow? Select the best answer. 1) Depreciation expense 2) Initial investment 3) Fixed operating expense 4) Positive salvage value

B. 1) & 4) 1) Depreciation is an accounting expense which does not involve any cash flow. 4) Positive salvage value is a cash inflow from selling the assets.

The Wingo Company sells a single product for $21 per unit. If variable expenses are 70% of sales and fixed costs are $4,200, what would be the break-even point in dollars be?

Breakeven point in units = Fixed costs / Contribution margin Breakeven point in revenue = Breakeven units x Selling price Contribution margin: $21 - (21* 70%) = $6.3 Break-even unit: $4200(fixed cost) / $6.3(contribution margin) = 666.67 units Break-even point in dollars: 666.67 units * $21 per unit = $14,000

How are the following items considered in a net present value calculation? Depreciation Expense Sales Taxes A. Included Included B. Excluded Excluded C. Excluded Included D. Included Excluded

C NPV considers the depreciation tax shield, not the depreciation expense

Assume you are the owner of a video-rental store. Which of the following would be classified as a long-term decision?

Deciding whether to purchase a new building.

The following transactions took place for Xiu Xiu Company during the month of June: (a) Purchased equipment on account for $9,000. (b) Billed customers $5,000 for services performed. (c) Made payment of $2,300 on account for equipment purchased earlier in month. (d) Collected $2,900 on customer accounts for the services performed earlier in the month Based on the information given, which of the statements is correct regarding the ending balance at June 30?

Ending balance for account payable is $6,700

On August 13, 2015, Swell Maps Enterprises purchased equipment for $1,300 and supplies of $200 on account. Which of the following journal entries is recorded correctly and in the standard format?

Equipment 1,300 Supplies 200 Accounts Payable 1,500

If only a portion of the cost or revenue pertains to a particular decision option, then it is referred to as a traceable cost or traceable revenue.

False If only a portion of the cost or revenue pertains to a particular decision option, then it is an indirect cost or an indirect benefit.

Step costs change in direct proportion to the volume of activity.

False Step costs stay at the same level for a certain activity range, but jump to a higher amount if the volume of activity increases beyond the range.

When demand is high and a scarce resource is in short supply, a company should decide how much of each product to produce by ranking products by the contribution margin per unit of the product.

False When demand is high and a resource is in short supply, a company should decide how much of each product to produce by ranking products by the contribution margin per unit of the resource.

Zen Arcade paid the weekly payroll on January 2 by debiting Salaries and Wages Expense for $47,000. The accountant preparing the payroll entry overlooked the fact that Salaries and Wages Expense of $27,000 had been accrued at year end on December 31. The correcting entry is

Salaries and Wages Payable 27,000 Salaries and Wages Expense 27,000

Because fixed costs generally do not change in the short term:

Increasing contribution margin increases profit by an identical amount.

Which of the following is a drawback of using regression analysis?

It makes a number of assumptions about the data, and accounting data sometimes do not satisfy these assumptions. True. For example, the regression analysis may make an assumption that the relationship between the sales volume and profit is linear. But in the reality, it might not be case.

Live Wire Hot Rod Shop follows the revenue recognition principle. Live Wire services a car on July 31. The customer picks up the vehicle on August 1 and mails the payment to Live Wire on August 5. Live Wire receives the check in the mail on August 6. When should Live Wire show that the revenue was recognized?

July 31

A flower shop makes a large sale for $1,200 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,200 considered to be recognized?

November 30.

Relevant Costs

Relevant costs and benefits differ across decision-making alternatives.

From a bank's perspective, they would feel more comfortable with an outstanding loan if the borrower's most recent financial statements indicated that

Return on Equity and Interest Coverage Ratio had increased relative to the prior period and Liabilities to Tangible Net Worth and Leverage Ratio had decreased relative to the prior period

It is important to keep the time horizon in mind when making decisions because:

The horizon affects whether a cost or benefit is controllable for the decision.

The minimum expected rate of return of the management from any project is referred to as the:

The hurdle rate

which of the following statements is not correct?

The indirect and direct methods of preparing the statement of cash flows are identical except for the financing activities section

Contribution margin denotes:

The amount that remains after subtracting variable costs from revenue.

Under accrual-basis accounting

events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.

A credit to a liability account

indicates an increase in the amount owed to creditors.

Variability

is the relation between a cost or a benefit and an activity: (a) A variable cost is proportional to the volume of activity, (b) a fixed cost does not change as the volume of activity changes, and, (c) a mixed cost contains both fixed and variable components.

Balance sheet accounts are considered to be

permanent accounts.

Step Costs

are neither fixed nor variable

The book value of an asset is equal to the

asset's cost less accumulated depreciation.

If total liabilities increased by $8,000, then

assets must have increased by $8,000, or stockholders' equity must have decreased by $8,000.

At October 1, Arcade Fire Enterprises reported stockholders' equity of $70,000. During October, no stock was issued and the company earned net income of $18,000. If stockholders' equity at October 31 totals $78,000, what amount of dividends were paid during the month?

$10,000 $70,000 + $18,000 - X = $78,000; X = $10,000

Given the following data, calculate total profit variance. Master Budget Actual Results Revenue $73,000 $75,000 Variable costs $23,000 $20,000 Contribution margin $50,000 $55,000 Fixed costs $15,000 $10,000 Profit before taxes $35,000 $45,000

$10,000 Favorable.

If a gain of $12,000 is incurred in selling (for cash) office equipment having a book value of $110,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is

$122,000 $110,000 + $12,000 = $122,000

For any volume of activity, total costs are:

Fixed costs + (Unit variable costs x Volume of activity).

Unit 6 Summary

Lesson 1: Accrual Accounting versus Cash Accounting Lesson 2: Overview of Adjusting Entries Lesson 3: Deferral Adjusting Entries Lesson 4: Accrual Adjusting Entries Lesson 5: Adjusted Trial Balance Throughout the period, we record journal entries for transactions that occur in such a way as to keep this equation in balance. A helpful way to keep track of all this is to remember the following operations on this equation: Debits are increases in assets and expenses or decreases in liabilities, owners' equity and revenue Credits are decreases in assets and expenses or increases in liabilities, owners' equity and revenue Following these definitions of debits and credits, if we record journal entries so that within each journal entry the debits equal the credits, then the accounting equation will stay in balance. All journal entries are recorded in two places. The first is the general journal, which is a chronological record of all transactions with both their credit and debit sides. The second is the general ledger, where the journal entries are broken apart and each part is posted to its respective cumulative balance for that account as represented by a T-account. We then prepare an unadjusted trial balance, which is a list of all accounts with their debit and credit balances. We use this to ensure that the debits equal the credits, which helps to ensure that we have not made certain kinds of errors in the recording process. In this unit, we extended the accounting cycle by recording adjusting entries at the end of the period. These entries were necessary to correct the accounts for economic events that have occurred primarily as a result of the passage of time. There are four types of such entries: recording a revenue that has been earned that was previously deferred as a liability recording an expense that has been incurred that was previously deferred as an asset accruing an expense incurred but not yet paid and recording the associated liability accruing a revenue earned but not yet received and recording the associated asset Notice that all of these adjusting entries have both an income statement effect (revenue or expense) and a balance sheet effect (an asset or liability). As with all journal entries, these journal entries are first recorded in the general journal and then posted to the general ledger. When this is done, we can prepare an adjusted trial balance. This is similar to the unadjusted trial balance (a list of all accounts with their debit and credit balances), but after the adjusting entries have been recorded.

Unit 4 Summary

Lesson 1: The Basic Accounting Equation Lesson 2: The Balance Sheet Lesson 3: Position vs. Performance Lesson 4: Using the Accounting Equation - Transaction Analysis Lesson 5: Summary of Financial Statements This concludes our first unit on financial accounting. We have seen that the purpose of financial accounting is to communicate information to interested parties to help them make decisions about their relationship with the reporting entity. The most common users of this financial information are investors or creditors. Investors have invested money or are thinking of investing money in the company, and creditors have lent money or are thinking of lending money to the company. But financial accounting information can also be useful for customers who are buying from the company or thinking of buying from the company; suppliers who are selling to the company or are thinking of selling to the company; and employees who are working for the company or thinking of working for the company. The focus of this communication is the wealth that investors have invested in the company and changes in the wealth that investors have invested in the company. The wealth is measured as the assets of the company less the liabilities of the company and is reported on the balance sheet. Changes in the wealth that investors have invested in the company can arise for two different reasons. The first reason involves transactions between the owners and the company. This occurs when the company sells shares to the owners, buys shares back from the owners, or when the company pays a dividend to the owners. These are, in effect, the owners' deposits and withdrawals of their investment in the company. The second reason that wealth from investors may change is related to the set of transactions between the company and all non-owners. These are the transactions that the company engages in to make money. The effect of these transactions on the changes in wealth that the owners have invested in the company is reported on the income statement in terms of revenues and expenses. Revenues are increases in assets or decreases in liabilities from providing goods and services to customers. Expenses are decreases in assets or increases in liabilities from providing goods and services to customers. Revenues and expenses are temporary owners' equity accounts that count changes in the wealth that investors have invested in the company for the current period only. At the end of the current period, the revenue and expense accounts (which equal net income for the period) are closed into owners' equity and reset to zero so they can count changes in wealth again in the next period. Throughout the accounting period, the company will engage in hundreds or thousands of transactions (millions for very large companies like Starbucks). The accounting system must keep track of the effects of each of these transactions on the wealth that investors have invested in the company and the changes in that wealth, either from additional deposits and withdrawals from the company or from earnings revenues and incurring expenses. These transactions often will involve cash, but they will not always involve cash, such as when a customer buys a product and promises to pay later, or when the company uses electricity and will pay for it later, or when a company pays for advertising in advance that appears on TV or the radio later. The type of accounting that accounts for these non-cash transactions, in addition to cash transactions, is referred to as "accrual accounting." Accrual accounting differs from cash accounting by focusing on wealth (assets minus liabilities) that investors have invested in the company rather than just the cash that investors have invested in the company. As a result of focusing on wealth, the accountant must measure the value of all of the company's assets and liabilities, at least all that are reasonably measurable. Such measurement requires judgment on the part of managers, and we are afraid that the managers will exercise that judgment to further their own interests rather than report accurate information that is most useful to investors and creditors and others in making their decisions. To help insure that accounting information is accurate, managers are constrained in several ways by how they are permitted to report to outsiders. First, there are accounting rules, referred to as Generally Accepted Accounting Principles (GAAP), that managers are required to follow. Second, companies that are publicly-traded are required to have their financial statements audited by outside auditors to ensure that the managers follow the accounting rules they are required to follow. Third, regulators oversee both the financial statements that are prepared and the auditing of the financial statements. Taken together, these constraints help to ensure that financial reporting is accurate, but they cannot guarantee accuracy. The effects of all of these transactions are communicated to financial statement users on four financial statements. One of these statements, the balance sheet, reports the position of the company in terms of its assets, liabilities, and owners' equity. The other three statements report more details about various changes on the Balance Sheet from one accounting period to the next. The Statement of changes in Stockholders' Equity explains why the various line items in owners' equity have changed during the accounting period. The Income Statement explains how owners' equity has changed during the period by operating the business, making sales to customers, and incurring the cost of providing those goods and services. Finally, the Statement of Cash Flows explains why the cash balance changed from the beginning to the end of the accounting period. Taken together, these four statements provide a detailed overview of the financial position and performance of the company.

Which one of the following correctly describes the relationship between the NPV and discount rate?

The higher the discount rate, the lower the NPV of a cash flow.

When there is a production constraint, the company should first produce the product with

The highest contribution margin per unit of the constrained resource

Both revenues and variable costs are proportional to sales volume.

True

A dividend is

a distribution of the company's earnings to its stockholders.

The Return on Equity ratio is

Net Income divided by Owners' Equity

Which one of the following correctly indicates how to calculate breakeven volume?

Fixed costs divided by unit contribution margin.

Which of the following is classified as operating activities? Choose the best answer. 1) Interest received from bond investment 2) Dividends paid to stockholders 3) Interest paid to lenders 4) Dividends received

1,3 and 4 Dividends paid to stockholders is cash outflows in financing activities

Kam Department Store reported the following information for 2013: October November December Budgeted sales $1,240,000 $1,160,000 $1,440,000 All sales are on credit. Customer amounts on account are collected 50% in the month of sale and 50% in the following month. How much cash will Kam receive in November?

$1,200,000

Redbird Corporation provides the following data: Cash inflows $50,000 Cash outflows $43,000 Net income $35,000 Depreciation deduction $ 5,000 Accumulated depreciation $10,000 Tax rate 30% What is Redbird's tax shield?

$1,500

Gate Grocery's most popular candy bars cost $0.50 each and sells for $0.75. Management determined that it had purchased 3,000 candy bars in February. It began February with 200 bars and had 150 remaining at the end of February. How much is cost of goods sold for February?

$1,525

Tiff's Corporation manufactures travel clocks and watches. Overhead costs are currently allocated using direct labor hours. Clocks Watches Total Direct labor hours (unit) 35,000 105,000 140,000 #Units Shipped 75,000 45,000 120,000 Total Overhead Cost $210,000 What is the OH allocation rate if the total OH cost is allocated based on labor hours?

$1.50 OH Rate: $210,000 Total OH / 140,000 Total Direct Labor Hours = $1.50/hour

Wilson Company reported net income of $105,000 for the year ended December 31, 2014. During the year, inventories decreased by $15,000, accounts payable decreased by $20,000, depreciation expense was $18,000 and a gain on disposal of equipment of $9,000 was recorded. Net cash provided by operating activities in 2014 using the indirect method was

$109,000 $105,000 + $15,000 - $20,000 + $18,000 - $9,000 = $109,000

Variability deals with:

How activities influence costs and benefits.

The following transactions for the month of March have been journalized and posted to the proper accounts. Mar. 1 The business received $9,000 cash and issued common stock to stockholders. Mar. 2 Paid the first month's rent of $900. Mar. 3 Purchased equipment by paying $3,000 cash and executing a note payable for $7,000. Mar. 4 Purchased office supplies for $730 cash. Mar. 5 Billed a client for $10,000 of design services completed. Mar. 6 Received $7,900 on account for the services previously recorded. What is the balance in Cash?

$12,270 Cash is increased by the March 1 transaction of $9,000 and the March 6 amount of $7,900 and decreased by the March 2 payment of $900, March 3 payment of $3,000, and March 4 payment of $730 for a final cash balance of $12,270.

Kennedy Company issued stock to Ed Kennedy in exchange for his investment of $75,000 cash in the business. The company recorded revenues of $555,000, expenses of $420,000, and had paid dividends of $30,000. What was Kennedy's net income for the year?

$135,000 $555,000 - $420,000 = $135,000

Accounts receivable arising from sales to customers amounted to $40,000 and $55,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $180,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is

$165,000 $180,000 - $15,000 = $165,000

Centro-matic Company began the year with stockholders' equity of $30,000. During the year, Centro-matic issued additional shares of stock in exchange for cash of $42,000, recorded expenses of $120,000, and paid dividends of $8,000. If Centro-matic's ending stockholders' equity was $112,000, what was the company's revenue for the year?

$168,000 $30,000 + $42,000 + (X - $120,000) - $8,000 = $112,000; X = $168,000

The following information is for Sunny Day Real Estate: Sunny Day Real Estate Balance Sheet December 31, 2015 Cash $ 25,000 Accounts Payable $ 60,000 Prepaid Insurance 30,000 Salaries and Wages Payable 15,000 Accounts Receivable 50,000 Mortgage Payable 85,000 Inventory 70,000 Total Liabilities 160,000 Land Held for Investment 85,000 Land 120,000 Buildings $100,000 Common Stock $120,000 Less Accumulated Retained Earnings 250,000 370,000 Depreciation (20,000) 80,000 Trademark 70,000 Total Assets $530,000 Total Liabilities and Stockholders' Equity $530,000 The total dollar amount of assets to be classified as current assets is

$175,000 $25,000 + $30,000 + $50,000 + $70,000 = $175,000

Tad's Tackle Shop has a potential investment of $750,000 which generated a depreciation tax shield of $35,000 and a tax rate of 20% for 2016. How much depreciation expense did Tad's Tackle Shop record during 2016?

$175,000 $35,000 / 20% = $175,000

The cost of goods sold during the year was $183,000. Merchandise inventory decreased by $8,000 during the year and accounts payable decreased by $4,000 during the year. Using the direct method of reporting cash flows from operating activities, cash payments for merchandise total

$179,000 $183,000 - $8,000 + $4,000 = $179,000

Gagner Clinic purchases land for $175,000 cash. The clinic assumes $1,500 in property taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land graded for $2,200. What amount does Gagner Clinic record as the cost for the land?

$179,700 $175,000 + $1,500 + $1,000 + $2,200 = $179,700

Billings Company's plant manager is trying to better understand his plant's inventory workflow. He determined that $10 million was spent on raw materials, $2 million on direct labor and $3 million on manufacturing overhead. If raw materials beginning and ending inventories are $2 million and $1 million, respectively, and work-in-process beginning and ending inventories are $6 million and $4 million respectively, how much is cost of goods manufactured?

$18 million.

Variable costs per unit are as follows: Raw materials $2.15 Direct labor $1.45 Fixed costs are $5,000 per month. If the company produces 4,000 units in the month of March their total costs will be: Fixed costs + (VC x Units)

$19,400 5,000 + (3.60 x 4,000) = 5,000 + (14,400) = 19,400

Mary Chain Investments purchased an 18-month insurance policy on May 31, 2015 for $3,600. The December 31, 2015 balance sheet would report Prepaid Insurance of

$2,200 ($3,600 ÷ 18) × (18 - 7) = $2,200

On January 1, 2014, Doolittle Company purchased furniture for $7,560. The company expects to use the furniture for 3 years. The asset has no salvage value. The book value of the furniture at December 31, 2015 is

$2,520 $7,560 × 1/3 = $2,520

Smith & Sons Company provided the following information for the month of May: Beginning raw materials $5,000 Ending raw materials $3,000 Purchases of raw materials $2,000 Beginning work-in-process $10,000 Ending work-in-process $6,000 Direct labor $8,000 Manufacturing overhead $5,000 The company's cost of goods manufactured for May is

$21,000 Step 1: Beg. raw materials $5,000 + Purchases of raw materials $2,000 - End. raw materials $3,000 = Cost of materials used $4,000 Step 2: Beg. work-in-process $10,000 + Cost of materials used $4,000 + Direct labor $8,000 + Manufacturing overhead $5,000 - End. work-in-process $6,000 = Cost of goods manufactured $21,000

Phair and Associates is a financial planning service. The account balances at December 31, 2015 are shown below: Accounts Payable $ 5,000 Accounts Receivable 19,000 Buildings 140,000 Cash 11,700 Common Stock 143,400 Equipment 15,400 Land 42,000 Notes Payable 95,000 Notes Receivable 8,100 Prepaid Insurance 6,400 Supplies 800 What amount are shown as the total debits on its trial balance?

$243,400 Cash...............................................................$ 11,700 Accounts Receivable.......................................... 19,000 Prepaid Insurance..........................................6,400 Supplies....................................................................800 Notes Receivable...................................................8,100 Equipment........................................................... 15,400 Buildings............................................................. 140,000 Land.......................................................................42,000 Total debits $243,400

In the Papyrus Corporation, cash receipts from customers were $136,000, cash payments for operating expenses were $102,000, and one-third of the company's $9,300 income taxes were paid during the year. Net cash provided by operating activities is:

$30,900 $136,000 - $102,000 - ($9,300/3) = $30,900

The income statement for the year 2015 of Fugazi Co. contains the following information: Revenues $70,000 Expenses: Salaries and Wages Expense $45,000 Rent Expense 12,000 Advertising Expense 10,000 Supplies Expense 6,000 Utilities Expense 2,500 Insurance Expense 2,000 Total expenses 77,500 Net income (loss) $ (7,500) At January 1, 2015, Fugazi reported retained earnings of $50,000. Dividends for the year totalled $10,000. At December 31, 2015, the company will report retained earnings of

$32,500 $50,000 - $10,000 - $7,500 = $32,500

Spikes Company manufactures 5,000 high-end racing bicycles each period. Spikes has been making all the components for the bikes, but a supplier has approached Spikes with an offer to sell her bicycle seats at a price of $40. The cost per unit of manufacturing one bicycle seat is computed as follows: Direct Material $10 Direct Labor $18 Manufacturing overhead (100% fixed) $10 If the bicycle seats are purchased from the outside supplier, $1 per unit of the fixed manufacturing overhead costs can be avoided. If Spikes purchases the seats, the facility used to manufacture the seats would be rented for $20,000 per period. If Spikes chooses to purchase the bicycle seats, then the change in annual net operating income is an:

$35,000 decrease

The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2015: Accounts payable $ 18,000 Accounts receivable 11,000 Accumulated depreciation - equipment 28,000 Advertising expense 21,000 Cash 15,000 Common stock 42,000 Dividends 14,000 Depreciation expense 12,000 Insurance expense 3,000 Note payable, due 6/30/16 70,000 Prepaid insurance (12-month policy) 6,000 Rent expense 17,000 Retained earnings (1/1/15) 60,000 Salaries and wages expense 32,000 Service revenue 133,000 Supplies 4,000 Supplies expense 6,000 Equipment 210,000 What are total current assets at December 31, 2015?

$36,000 $11,000 + $15,000 + $6,000 + $4,000 = $36,000

The following information is for Bright Eyes Auto Supplies: Bright Eyes Auto Supplies Balance Sheet December 31, 2015 Cash $ 40,000 Accounts Payable $ 130,000 Prepaid Insurance 80,000 Salaries and Wages Payable 50,000 Accounts Receivable 100,000 Mortgage Payable 150,000 Inventory 140,000 Total Liabilities 330,000 Land Held for Investment 180,000 Land 250,000 Buildings $200,000 Common Stock $400,000 Less Accumulated Retained Earnings 340,000 740,000 Depreciation (60,000) 140,000 Trademark 140,000 Total Assets $1,070,000 Total Liabilities and Stockholders' Equity $1,070,000 The total dollar amount of assets to be classified as current assets is

$360,000 $40,000 + $80,000 + $100,000 + $140,000 = $360,000

The Peterson Company incurred the following costs in the month of May: Direct materials purchased $12,000 Commissions paid to salespeople $5,000 Direct labor paid $9,000 Manufacturing plant utility costs $19,000 Advertising costs $2,000 The company's product costs total:

$40,000

The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2015: Accounts payable $ 18,000 Accounts receivable 11,000 Accumulated depreciation - equipment 28,000 Advertising expense 21,000 Cash 15,000 Common stock 42,000 Dividends 14,000 Depreciation expense 12,000 Insurance expense 3,000 Note payable, due 6/30/16 70,000 Prepaid insurance (12-month policy) 6,000 Rent expense 17,000 Retained earnings (1/1/15) 60,000 Salaries and wages expense 32,000 Service revenue 133,000 Supplies 4,000 Supplies expense 6,000 Equipment 210,000 What is the company's net income for the year ending December 31, 2015?

$42,000 $133,000 - $21,000 - $12,000 - $3,000 - $17,000 - $32,000 - $6,000 = $42,000

During 2015, its first year of operations, Neko's Bakery had revenues of $60,000 and expenses of $35,000. The business paid dividends of $20,000. What is the balance of retained earnings at December 31, 2015?

$5,000 credit $60,000 (credit) - $35,000 (debit) - $20,000 (debit) = $5,000 (credit)

Young Co. has budgeted its activity for December according to the following information: 1. Sales at $600,000, all for cash. 2. Budgeted depreciation for December is $15,000. 3. The cash balance at December 1 was $15,000. 4. Selling and administrative expenses are budgeted at $60,000 for December and are paid for in cash. 5. The planned merchandise inventory on December 31 and December 1 is $18,000. 6. The invoice cost for merchandise purchases represents 75% of the sales price. All purchases are paid in cash. How much are the budgeted cash disbursements for December?

$510,000 $600,000*.75 = $450,000 $450,000 + $60,000 = $510,000

During the month of September the Gaffney Company, which operates one factory location and one administrative location, reported the following costs: Repair costs for the factory's air conditioning system $3,500 Property taxes on its administrative office building $ 900 Rent on factory building $1,400 Bonuses paid to a factory manager $ 500 What is the total facility costs?

$5400 = $3500 + 1400 + 500 Property tax should not be accounted for when calculating the administrative costs.

Stahl Consulting started the year with total assets of $60,000 and total liabilities of $15,000. During the year, the business recorded $48,000 in catering revenues and $30,000 in expenses. Stahl issued stock of $9,000 and paid dividends of $15,000 during the year. The stockholders' equity at the end of the year was

$57,000 ($60,000 - $15,000) + ($48,000 - $30,000) + $9,000 - $15,000 = $57,000

Tomko Company purchased machinery with a list price of $96,000. They were given a 10% discount by the manufacturer. They paid $600 for shipping and sales tax of $4,500. Tomko estimates that the machinery will have a useful life of 10 years and a residual value of $30,000. If Tomko uses straight-line depreciation, annual depreciation will be

$6,150 ($96,000 × .90) + $600 + $4,500 - $30,000] ÷ 10 = $6,150

The following material budgets have been developed for the Criders Company: Price per pound $6.50 Pounds per unit 1 Purchase price variance: $3,200 unfavorable If the company purchased 16,000 units, the actual price per pound of material purchased must have been:

$6.70 Budgeted material purchasing cost=16,000*1*6.5=$104,000 Actual material purchasing cost=104,000+3,200=$107,200 Actual price per pound of material purchased=107,200/16,000=$6.7

Rubble Company reported net income of $70,000 for the year. During the year, accounts receivable increased by $6,000, accounts payable decreased by $5,000 and depreciation expense of $8,000 was recorded. Net cash provided by operating activities for the year is

$67,000 $70,000 - $6,000 - $5,000 + $8,000 = $67,000

Beach Surf Boards is making a decision on whether to add long boards as a new product line to complement its short boards. A recent analysis determined that the average long board can be sold for $300.00 with unit variable costs of $225. Fixed costs are currently $51,000 per month but would be increased to $69,000 if long boards are added. How much is incremental profit or (loss) if long boards are added and its sales volume is expected to be 250 units?

$750 $300*250 = $75,000 Revenue $225*250 = $56,250 Variable Costs $69,000 - $51,000 = $18,000 incremental fixed cost $75,000 - $56,250 - $18,000 = $750 profit

Tomba Civil Engineers' manager is attempting to calculate its cost of providing services to clients. Its profit before taxes for January is $4,000, and it's selling and administration costs are $8,000, service revenue is $20,000. How much is its cost of providing service?

$8,000

Unit 1: Identifying and Measuring Cost Benefits

- Apply the four-step framework for making decisions. - Identify the relevant and controllable costs and decisions benefits of a decision. - Understand the impact of traceability and variability on the estimation of costs and benefits.Equations: Total cost = Fixed costs + Variable costs (VC x units)

Unit 8: Long-Term Assets & Liabilites

- Describe how the historical cost principle applies to plant assets. - Explain the concept of depreciation and how to compute it. - Distinguish between revenue and capital expenditures and explain the entries for each. - Explain how to account for disposal of a plant asset. - Describe the accounting for notes payable. - Describe the accounting for long-term notes payable.

Unit 4: Overview of Financial Accounting

- Explain what accounting is. - Identify the users and uses of accounting. - Understand why ethics is a fundamental business concept. - Explain generally accepted accounting principles. - State the accounting equation and define its components. - Analyze the effects of business transactions on the accounting equation. - Understand the four financial statements and how they are prepared. Net income = revenues - expenses

Unit 3: Short-Horizon Decisions II

- Understand the factors that trigger short-horizon decisions. - Evaluate decision alternatives that can help fill an idle resource. - Determine the best use of a resource in short supply. - Consider the qualitative and longer-term aspects of short-horizon decisions -Breakeven volume = Fixed costs/unit contribution margin. -Contribution margin = revenue - variable costs

The Jackson Company produces 2 different products, each of which has unlimited demand. If there are 4,000 total available labor hours, and the company desires to maximize its contribution margin, how many units of each product should be produced? Product X Z Selling price per unit $8 $16 Variable cost per unit $4 $9 Labor hours per unit 2 4

2,000 units of Product X and 0 units of Product Z

The Southeast Company makes three products in one manufacturing facility. Data regarding these products are as follows: A B C Direct Materials $5.70 $6.20 $8.90 Direct Labor 2.05 1.90 2.20 Variable Overhead .70 .80 .90 Fixed Overhead 1.10 1.40 1.60 Unit Product Cost $9.55 $10.30 $13.60 Machine Hours Per Unit .5 1 .25 Selling Price per Unit $16.00 $18.00 $20.00 Demand (units) 1,200 1,400 800 How many machine hours would be required to meet the demand for all products?

2,200

Which of the following statements are false? 1) If a company can estimate the salvage value of an asset when acquiring it, it should include it in present value calculation. 2) The net present value of an investment is the total present value of all its cash flows. 3) An investment is attractive if its IRR is smaller than a company's cost of capital. 4) The higher the discount rates, the lower the NPV of a cash flow, if everything else is constant.

3 only Explanation: An investment is attractive if its IRR is greater than a company's cost of capital.

A plant asset was purchased on January 1 for $60,000 with an estimated salvage value of $12,000 at the end of its useful life. The current year's Depreciation Expense is $6,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $30,000. The remaining useful life of the plant asset is

3 years ($60,000 - $12,000) ÷ 6,000 = 8; 8 - ($30,000 ÷ $6,000) = 3

The direct materials budget shows: Units to be produced 3,000 Total pounds needed for production 9,000 Total materials required 9,900 What are the direct materials per unit?

3.0 pounds

A company purchased office equipment for $40,000 and estimated a salvage value of $8,000 at the end of its 5-year useful life. The constant percentage to be applied against book value each year if the double-declining-balance method is used is

40% (1 ÷ 5) × 2 = .40

Lion Industries required production for June is 132,000 units. To make one unit of finished product, three pounds of direct material Z are required. Actual beginning and desired ending inventories of direct material Z are 300,000 and 330,000 pounds, respectively. How many pounds of direct material Z must be purchased?

426,000

The following information is taken from the production budget for the first quarter: Beginning inventory in units 1,200 Sales budgeted for the quarter 426,000 Capacity in units of production facility 472,000 How many finished goods units should be produced during the quarter if the company desires 3,200 units available to start the next quarter?

428,000

The production budget shows expected unit sales of 32,000. Beginning finished goods units are 3,600. Required production units are 33,600. What are the desired ending finished goods units?

5,200

Doe Manufacturing plans to sell 6,000 purple lawn chairs during May, 5,700 in June, and 6,000 during July. The company keeps 15% of the next month's sales as ending inventory. How many units should Doe produce during June?

5,745

The Huffman Tire Company has 3,000 tires in its inventory which are considered obsolete. Each unit originally cost the company $35. Management is considering options to reduce these inventory levels. Units can be sold directly to car dealerships for $30 per tire as opposed to the normal selling price of $45 per tire. The other option is to offer their current customers a $10 per tire rebate on their purchase. In addition to the $10 rebate, the program would cost the company approximately $24,000 to manage. They predict that either option will rid them completely of their excess inventory. The decision to sell directly to the car dealerships over offering the rebate will result in:

A $9,000 increase in profits.

Which of the following statements is correct?

A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale

Which of the following statements describes how step costs relate to fixed and variable costs?

A step cost behaves more like a variable cost as the step size decreases.

A GAAP income statement combines which of the following costs? A. Fixed costs with variable costs. B. Controllable costs with non-controllable costs. C. Costs of providing services and period costs. D. A and B only. E. A, B, and C.

D. A and B only.

A company has an opportunity cost of capital of 9.5%. Which of the following is the most acceptable investment for this company?

An investment with an NPV of $5

Controllable Costs

Controllable costs and benefits are incurred as a result of the decision-making alternative, relative to doing nothing. Said another way, controllable costs and benefits are all costs and benefits that differ between the decision-making alternative and the status quo.

Which of the following inventory equations produces the Cost of Goods Sold?

Cost of beginning inventory + cost of goods purchased during period - cost of ending inventory

Simpson Enterprises is considering expanding operations and building a new plant. The current discount rate is 15%. In which element of Simpson's capital expenditure decision would this be included?

Cost of capital.

When capacity is limited, which of the following are alternative courses of action to consider? A. Produce the items with the largest contribution margin per unit of capacity. B. Purchase some components from outside suppliers. C. Produce the items with the largest selling price to maximize revenue. D. A and B only. E. A, B and C.

D. A and B only.

Meat Puppets Company purchased equipment for $7,200 on December 1. It is estimated that annual depreciation on the equipment will be $1,800. If financial statements are to be prepared on December 31, the company should make the following adjusting entry:

Debit Depreciation Expense, $150; Credit Accumulated Depreciation, $150. $1,800 ÷ 12 = $150

In a make-or-buy decision relevant costs would include all of the following except:

Depreciation expense on the plant equipment currently used to make the part The depreciation expenses are fixed costs for the plant and are not relevant in the decision making process.

A credit is not the normal balance for which account listed below?

Dividends account

Variances could arise A. During the normal course of operations because a machine unexpectedly breaks down. B. Because of a permanent change in the firm's operating environment such as a competitor introduces a new product. C. Because budgets or standards are either too tight or too loose. D. Both A and B. E. A, B, and C.

E. A, B, and C.

Which of the following statements is true? A. We calculate cost variances as the budgeted amount less the actual result. B. We calculate sales, contribution margin, and profit variances as the actual result less the budgeted amount. C. If budgeted labor costs exceed actual labor cost, the variance is favorable and positive. D. A and B are true E. All statememts are true

E. All Statements are True

Which of the following statements is not true? If actual sales are greater than budgeted sales, the result is a favorable variance. If actual cost is greater than budgeted cost, the result is an unfavorable variance. If budgeted sales are greater than actual sales, the result is an unfavorable variance. If budgeted cost is greater than actual cost, the result is an unfavorable variance. If actual cost is less than budgeted cost, the result is an favorable variance.

If budgeted cost is greater than actual cost, the result is an unfavorable variance.

Which of the following statements is not true? If budgeted sales are greater than actual sales, the result is an unfavorable variance If actual sales are greater than budgeted sales, the result is a favorable variance If actual cost is greater than budgeted cost, the result is an unfavorable variance If budgeted cost is greater than actual cost, the result is an unfavorable variance. If actual cost is less than budgeted cost, the result is a favorable variance

If budgeted cost is greater than actual cost, the result is an unfavorable variance.

Unit 13 Summary

In this unit we viewed performance evaluation, determining how well a company did in the most recent period, from three different perspectives: a manager in the company, a passive investor, and a lender. Managers inside the company have access to any information they want that is collected by the company, especially budgets that are detailed financial plans about how the company was expected to perform in the period. These budgets are a natural benchmark against which the manager can evaluate the actual performance of the company. When the manager sees large differences between the budget and what actually occurs, the manager will investigate to determine the cause of the difference and form a strategy for fixing any problems that are uncovered in that investigation. In contrast to the manager, the passive investor has no special access to information, but must rely on the public financials statements that the company discloses. Using the information, the passive investor can compute a variety of financial ratios, which can then be compared to the company's performance in prior periods or to one or more competitive companies to evaluate the company's performance. We focused on one of these ratios, perhaps the most common, the return on equity. This analysis will help the passive investor to decide whether to buy the stock if she does not already own it, or whether to sell the stock if she already owns it. In terms of access to information, the bank lender is somewhere between the manager and the passive investor. Bank lenders rely very heavily on financial statements, but because they often have a personal relationship with company managers they often gain access to more information than is available to the passive investor. The bank lender uses financial statement ratios, similar to those used by the passive investor, for two general purposes. The first is to make the decision about whether to make a loan to a particular applicant at the time they apply. The second is to monitor the loan as it is outstanding to make sure that the borrower is still able to pay it back. We focused on three ratios that are commonly used by bank lenders. The first, the interest coverage ratio, is a measure of the borrower's ability to generate enough cash flows to repay the loan. The second ratio, the tangible net assets ratio, is to help the bank lender make sure there are enough tangible net assets in the company to provide security for the loan if the borrower is not generating enough cash flows to repay the loan. The third ratio, leverage, is a measure of how much other debt the borrower has outstanding with whom the bank would have to compete for repayment in the event that the borrower is not generating enough cash flows to repay all of its obligations. Users of financial statements may compute many different kinds of ratios besides the four we discussed here. In fact, many users invent ratios that are specific to the information they are most interested in evaluating. However, these four ratios give you a very good idea how outside investors and creditors use financial statement information to help them make decisions.

Unit 12 Summary

In this unit, we added the third main financial statement, the Statement of Cash Flows, to the previous two statements we had discussed, the Balance Sheet and the Income Statement. The purpose of the Statement of Cash Flows is to report all of the reasons that the cash balance changed during the year. The statement is organized into three sections, operating, investing and financing, usually in that order. Beginning at the bottom, the financing section reports how much cash was generated by borrowing from creditors or by selling stock to investors. The financing section also reports how much cash was used to repay creditors or to return money to investors either by paying dividends or by buying back the company's stock. The investing section reports how much cash was spent on new plant and equipment, intangible assets, financial investments or in the acquisition of other companies. This section also reports how much cash was generated from the sale of any of these items. The operating section reports the effect on cash of all other transactions, which are principally collecting cash from customers and paying cash to suppliers, employees, the government, etc. For almost all companies, the operating section is presented using the indirect method. This method computes cash from operations by beginning with net income, and then (a) subtracting non-cash revenue from net income and adding non-cash expense to net income, and (b) adding cash inflows not included in net income and subtracting cash outflows not included in net income. This statement is important for several reasons. First, cash is the lifeblood of the company, without generating sufficient cash to pay all of its obligations the company cannot continue to exist. The statement of cash flows gives financial statement users information about how the company has generated cash in the recent past (e.g., by operating the business or borrowing more money) to help them predict how the company will generate cash in the future. A second use of this statement is to provide a more objective measure of the company's performance, which is otherwise measured on an accrual basis on the Income Statement. We have seen that in the determination of net income, accountants make many estimates of how much revenue and expense should be recorded in a certain period. These estimates are necessary because we are doing accrual accounting, measuring changes in wealth, rather than cash accounting, which measures changes in cash. As we have seen with the indirect operating section of the statement of cash flows, the statement of cash flows reverses all those accruals and deferrals and reports as cash from operations what income would have been on a cash basis. This gives financial statement users another view of the performance of the company. This alternative may be less informative because it does not measure changes in wealth, but it may be a useful complement to the income statement because it does not rely so much on accountants' estimates.

A decision maker's control over costs and benefits:

Increases as the time horizon increases.

The controller of Simpson Enterprises estimates that the installation and training for a new computer system will cost around $125,000. In which element of the project cash flow elements will this cost be included?

Initial outlay

Unit 1 Summary

Lesson 1: Applying the Four-Step Framework A four-step framework for making decisions is that individuals (1) specify the objectives they want to accomplish when making their decision, (2) identify the alternatives they want to consider, (3) measure the costs and benefits of these alternatives, and (4) choose the alternative with the highest value. In order to improve decision making, most courses in business attempt to improve abilities along one or more of these steps. A specific role of accounting is to enhance the ability to measure the costs and benefits of decision alternatives. Lesson 2: Relevant/Controllable Costs & Benefits The principles of relevance and controllability facilitate the identification and measurement of costs and benefits. When deciding between the status quo and other alternatives, relevant/controllable costs and benefits are ones that differ between these decision alternatives. For example, when deciding whether or not to take this course, a relevant/controllable cost is any tuition or fee that must be paid before taking the course. That is, since the fee is paid only if the course is taken, this fee is a relevant/controllable cost of this decision alternative. The controllability of costs and benefits is linked to the time horizon of the decision. In short horizons, organizations often have a difficult time altering many of its capacity-related resources such as property, plant, equipment, and salaried personnel. Similarly, changing many personal capacity resources such as living quarters and modes of transportation is difficult as well. Thus, these capacity resources are typically not controllable for short-horizon decisions. When making longer-horizon decisions, however, these capacity resources become more changeable and, thus, more controllable. Lesson 3: Traceability & Variability The concept of variability can further assist in the identification and measurement of costs and benefits. Variability is the relation between a cost or benefit and an activity. A better understanding of how activities drive costs and benefits improves our ability to predict how decisions affect these costs and benefits. Finally, traceability is the degree to which a cost or benefit relates to a decision option. A direct cost or benefit relates entirely to a decision option. Alternatively, only a portion of an indirect cost relates to a decision option. As such, we often relate indirect costs to decision options with less confidence. For example, friends dining together are much more confident as to how to split the final food bill if everyone ordered their own entrees and drinks (i.e., all costs are directly traceable to each friend) relative to a family style meal where everyone eats from the same entrée and shares drinks (i.e., all costs are indirect to each friend).

Unit 9 Summary

Lesson 1: Distinguish Product Costs from Period Costs Lesson 2: Understand the Flow of Costs in Service Firms Lesson 3: Discuss How Inventories Affect the Flow of Costs in Merchandising Firms Lesson 4: Explain the Cost Terminology and the Flow of Costs in Manufacturing Firms Lesson 5: Allocate Overhead Costs to Products and Services We discussed how costs flow through organizations for financial accounting purposes. First, we observed that financial accounting systems classify costs according to business function. Costs related to getting a product or service ready for sale are product costs. All other costs are period costs. Product costs appear "above the line" in computing gross margin (i.e., subtract product costs from revenues when computing gross margins). Period costs appear "below the line" after computing the gross margin. We then discussed how costs flow through three different types of organizations. First, service organizations offer products that are neither tangible nor storable. Thus, they do not maintain inventories and, therefore, all product-related costs are expensed immediately. Second, merchandising organizations sell substantially the same product they purchase from their supplier. Most merchandising organizations maintain an inventory of goods that they buy and sell. The presence of inventory means that costs on purchases often do not equal the expense related to cost of goods sold during the period. Rather, cost of goods sold = the value of beginning inventory + the cost of purchases - the value of ending inventory. The value of ending inventory remains on the balance sheet until a future period when these products are sold. Because merchandising organizations buy goods at different times and different prices, they make inventory cost flow assumptions such as FIFO to compute the value of inventory and cost of goods sold. Third, manufacturing organizations use labor and equipment to substantially transform inputs such as raw material and components into outputs. Manufacturing firms typically maintain the following three inventory accountings: raw materials, work-in-progress, and finished goods. Product costs are the sum of all manufacturing costs (i.e., typically all costs of running and maintaining the factory). These include direct materials, direct labor, and manufacturing overhead. All non-manufacturing costs are period expenses. Organizations expense these period costs in the period in which they are incurred. While some costs such as direct materials and direct labor can be directly traced to a product, other costs such as manufacturing overhead are common among the items giving rise to the costs. Thus, organizations need to allocate these costs across these items. While allocations play an important role in calculating product cost for financial reporting purposes, it is important to remember that such allocations mingle controllable and noncontrollable costs with variable and fixed costs.

Unit 2 Summary

Lesson 1: How to Identify Variable and Fixed Costs We can use available financial data to estimate the profit of short-horizon decision options. To do so, we need to use this information to understand a company's cost structure. That is, a portion of a company's costs are likely fixed and therefore not controllable in the short term. These costs, including such capacity-related items such as property, plant, equipment, and salaried personnel, would not vary based on activities such as a company's sales volume. However, a portion of a company's costs are likely variable. These costs, which would vary based on activity levels such as sales volume, are often affected by short-horizon decisions. Thus, to make effective short-horizon decisions, we often need to separate out variable costs from fixed costs. We described two techniques to accomplish this objective. First, the account classification method involves systematically classifying a company's list of cost accounts into fixed and variable categories. The account classification method is detailed and can provide very accurate estimates if done correctly. However, it is time-consuming and subjective. Second, regression analysis is a statistical method for estimating fixed and variable costs. The regression method uses all available data to come up with a line that best fits the data. While this technique uses all available data to estimate the cost structure, it makes a number of assumptions about the structure of the data that may not be satisfied by accounting data. Lesson 2: Understand the Cross-Volume-Profit (CVP) Relation After using techniques such as the above to understand a company's cost structure, we can express a company's profit as a function of price, unit variable cost, sales volume, and fixed costs. This function, referred to as the Cost-Volume-Profit (CVP) equation, is expressed as follows: Profit before taxes = (Price - unit variable cost) × Sales volume in units - fixed costs Lesson 3: Using the CVP to Plan Profit and Make Short-Term Decisions Understanding the CVP relation can help in profit planning by answering such questions as "how many units need to be sold to break even?" The CVP relation can also help evaluate the profit impact of short-horizon decision alternatives.

Unit 8 Summary

Lesson 1: Overview of Recording Revenue and Expense Lesson 2: Accounting for Acquisition of Plant and Equipment Lesson 3: Accounting for Depreciation of Plant and Equipment Lesson 4: Accounting for Maintenance, Improvements, and Disposal of Plant and Equipment Lesson 5: Accounting for Liabilities This unit concludes our survey of accrual accounting and the balance sheet and income statement. We have seen that accrual accounting attempts to measure the wealth that investors have invested in a company and not just the cash position of the company. To do that, accrual accounting records revenue when the goods or services have been provided. Sometimes this means accruing revenue before cash is received if the goods and services are provided first and paid for later. In other cases, this means deferring revenue when the cash is received in advance and recording revenue later when the goods or services are provided. To the best of our ability, expense follows revenue. That means that expenses are recorded in the same period as the revenue they helped to generate. For some expenses, this means they are "matched" with the revenue they generate because they are directly related, like the cost of a book sold in a bookstore. For other expenses, this means they are expensed in the period in which they occur because they generally support the business in that period and the revenue that is generated in that period. For still other expenses, those that benefit multiple periods, they are allocated across the periods they benefit so that the revenue of each period benefited is charged proportionately. Finally, at some point in the life of the asset the company will dispose of the asset. At that time, it will eliminate (credit) the original cost from the asset account, eliminate (debit) the accumulated depreciation from that account, record the proceeds from the sale as a debit to cash (assuming a cash sale), and record a gain or loss to balance the entry. This gain or loss is the difference between the cash received and the net book value of the asset disposed of. In this unit, we also discussed accounting for notes payable and installment loans; these loans are one of the most common means by which companies pay for plant and equipment. The general rule to remember here is that at the end of the period we must record interest expense incurred on a loan, whether or not we are obligated to pay it now or at a later date. The amount of that interest expense for the period will always be the product of the rate of interest (scaled to the period, i.e. a quarter of the annual rate for a three-month period) times the amount we borrowed, which is the liability balance as of the last time we computed interest expense. This general rule applies regardless of the type of loan.

Unit 7 Summary

Lesson 1: Overview of the Accounting Cycle and Worksheet Lesson 2: Closing the Accounts Lesson 3: Post-Closing Trial Balance and Preparing Financial Statements In this unit, we complete the accounting cycle by "closing" the accounts and preparing financial statements. To close out the accounts, we zero out the temporary owners' equity accounts by transferring their balances into a permanent owners' equity account (retained earnings). To do this, we debit all revenue accounts for their end-of-period balance (leaving zero balances in these accounts) and credit either income summary or retained earnings directly. Similarly, we credit all expense accounts (leaving zero balances in these accounts) and debit either income summary or retained earnings directly. If in the previous entries we debited and credited income summary, this account will now have a balance equal to net income for the period, a credit balance if the company had positive net income for the period, and a debit balance if the company had negative net income (a loss) for the period. Assuming positive net income, the final step is to close out income summary to retained earnings by debiting income summary and crediting retained earnings. If the company declared a dividend during the year, they may have debited either retained earnings directly, or a temporary dividend account. If they did the latter, when closing the revenue and expense accounts they must also close this account to retained earnings by debiting retained earnings and crediting the dividend account for its balance (leaving a zero balance in this account). Once these closing entries are all made and recorded to the general ledger, the company can prepare a post-closing trial balance, which has balances only for balance sheet accounts. This process once again provides a check that certain types of errors were not made in the closing process. To place these last steps in context, recall that all of the steps in the accounting cycle include the following: Analyze business transactions Journalize the transactions Post to ledge accounts Prepare a trial balance Journalize and post adjusting entries: deferrals/accruals Prepare an adjusted trial balance Prepare financial statements: Income Statement, Retained Earnings Statement, and Balance Sheet Journalize and post closing entries Prepare a post-closing trial balance Finally, in this unit we also reviewed the main financial statements that we have discussed so far. In particular, note that the Retained Earnings Statement in practice is part of a larger statement that is usually called the Statement of Owners' Equity or the Statement of Changes in Stockholders' Equity. This statement provides information about not only why retained earnings changed, but why all Owners' Equity accounts changed during the most recent accounting period. With respect to the balance sheet, we saw that this statement is well-organized into sections to make it easier to use across different companies. In general, the asset section is divided into current assets and non-current assets, and the non-current assets section is divided into property, plant and equipment, long-term investments, and intangible assets. The liability section is divided into current and non-current sections, and the owners' equity section is set apart in some way from the liability section.

Unit 5 Summary

Lesson 1: Overview of the Record Keeping Process Lesson 2: Recording Journal Entries and Posting to the General Ledger Lesson 3: The Trial Balance In this unit, we learned that within the elements of the accounting equation (assets, liabilities, owners' equity, revenue, and expense) there are subdivisions called accounts. Companies have as many or as few accounts as they wish, depending on their need for detailed information to manage the company and to report to creditors and investors. As the company engages in economic transactions, it must keep track of the effects of these transactions on the accounting equation in terms of the accounts just discussed. Debits and credits play a critical role in this process by helping the company to keep track of these changes in such a way that the accounting equation remains in balance at all times. Debits and credits are just increases and decreases in the various types of accounts as follows: Debits: increase assets and expenses and decrease liabilities, owners' equity and revenue Credits: decrease assets and expenses and increase liabilities, owners' equity and revenue Using debits and credits, we record journal entries for every economic transaction that is recorded in the accounting system. A journal entry tells how the two affected accounts were changed by a transaction. Journal entries are recorded in the general journal in chronological order. Journal entries are then posted to the general ledger, where exactly the same information that is in the journal entries is organized by account, so that we can see the effect of the transaction on the affected accounts. After all of the transactions for the period have been recorded in the general journal and posted to the general ledger, the company prepares a trial balance, which is a list of all of the accounts in the general ledger along with their debit and credit balance. The trial balance allows the company to confirm that certain kinds of errors have not been made in the recording process. The company is now almost ready to complete the accounting cycle and prepare financial statements, but there is another very important step before doing that: making adjusting entries. Adjusting entries are journal entries that record important economic events for which there are no transactions to trigger the accountant to record them. We will see how these economic events arise and what to do about them in the next unit.

Unit 3 Summary

Lesson 1: Understand the Factors that Trigger Short-Horizon Decisions Lesson 2: Evaluate Decision Alternatives That Can Help Fill an Idle Resource Lesson 3: Determine the Best Use of a Resource in Short Supply Lesson 4: Consider the Qualitative and Longer-term Aspects of Short-horizon Decisions We discussed the nature of short-term decisions. Specifically, managers choose capacity levels to match long-term expected demand and supply. However, demand realizations rarely match expectations, creating an imbalance between supply of capacity and the demand for capacity. Short-term decisions attempt to close this gap. That is, short-term decisions frequently either attempt to fill idle capacity or ration scarce capacity across competing demand. During demand downturns, capacity utilization goes down. Thus, managers may respond by reducing prices to stimulate demand or accepting special orders to increase capacity utilization. Such actions may be profitable because the opportunity cost of temporarily idle capacity is zero. During demand upturns, there is a shortage of available capacity. Thus, managers may respond by increasing prices to reduce demand, or they may adjust by outsourcing work. If demand continues to exceed capacity, then managers can increase short-term profitability by ranking this competing demand by the contribution margin per unit of the scarce resource. While we examined short-horizon decisions in this unit, many of these decisions have longer-term implications. These implications arise because people outside the firm, such as customers, suppliers, and competitors, respond to the firm's decisions and actions. While quantifying longer-term implications of short-term decisions is difficult, it is something that effective managers should consider before making decisions.

The Southeast Company makes three products in one manufacturing facility. Data regarding these products are as follows: A B C Direct Materials $5.70 $6.20 $8.90 Direct Labor 2.05 1.90 2.20 Variable Overhead .70 .80 .90 Fixed Overhead 1.10 1.40 1.60 Unit Product Cost $9.55 $10.30 $13.60 Machine Hours Per Unit .5 1 .25 Selling Price per Unit $16.00 $18.00 $20.00 Demand (units) 1,200 1,400 800 If there are only 2,000 machine hours available, the production of which product will result in the most income per machine hour?

Product C

Which of the following would NOT be a good benchmark for evaluating the Return on Equity of the Ford Motor Company for their most recent year

Return on Equity for Microsoft for the current year

A company shows a balance in Salaries and Wages Payable of $38,000 at the end of the month. The next payroll amounting to $48,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries?

Salaries and Wages Expense 10,000 Salaries and Wages Payable 38,000 Cash 48,000 $48,000 - $38,000 = $10,000

Which of the following is not a part of the initial outlay for a capital expenditure?

Salvage value

Handi-Tool Company manufactures and sells lawn and garden tools. Handi manufactures three kinds of pruning shears: Snip-It, Deluxe Clipper, and Limb-Away. The demand for the pruning shears is highest in April. Expecting this trend to continue, Handi is interested in how to best utilize available capacity. Given the following information, what combination of pruning shears should Handi-Tool produce? Snip-It Deluxe Clipper LimbAway Demand 200,000 100,000 60,000 Unit Price $20 $30 $50 Unit variable cost $10 $15 $20 Unit contribution margin $10 $15 $30 Production rate (units per hour) 50 25 15 Available production hours 8,000 hrs Total fixed costs $400,000

Snip-It 200,000 units / 50 unit per hour = 4000 hours needed Limb-Away 60,000 units / 15 unit per hour = 4,000 hours needed Use up all 8,000 hours for both products, cannot produce Deluxe Clipper. 200,000 Snip-It; 60,000 Limb-Away; 0 Deluxe Clipper

Outdoor Flames manufactures 5,000 outdoor gas fireplaces each period. The company has been manufacturing the ignition system for the fireplaces. The unit cost of each ignition is as follows: - Direct Material $12 - Direct Labor $5 - Variable manufacturing overhead $2 - Fixed manufacturing overhead $70,000 in total, or $14 per unit o Thus, unit product cost is $33 A local supplier has offered to sell the company the ignition system for $30 each. If the ignition systems are purchased from the outside supplier, the facilities now being used to make them can be used to make other units of a product that is in high demand. The additional contribution margin on the other unit would be $42,000 per year. If the ignition systems are purchased from an outside supplier, all the direct labor would be avoided, but $8 of the fixed cost would continue and be applied to the remaining products even if the part is purchased. Required: a. How much of the unit product cost of $33 is relevant to the decision to make or buy the ignition systems? b. What is the net total dollar advantage or disadvantage of purchasing the ignition systems rather than making them?

Solution: a. Relevant costs include: $12 in direct materials, $5 in direct labor, variable overhead of $2, and $6 of the $14 in fixed manufacturing overhead, totaling $25 of $33. b. Net total dollar advantage (disadvantage) of purchase: Relevant cost: $125,000 ($25 x 5,000 units) Additional contribution margin: $ 42,000 Cost to purchase: ($150,000) ($30 x 5,000 units) Net advantage: $ 17,000

A gain or loss on disposal of a plant asset is determined by comparing：

The book value of the asset with the proceeds received from its sale The gain or loss on disposal is the difference between the proceeds received from sale and the book value of assets. The books value of assets equals to the difference between original cost and accumulated depreciation.

Which of the following statements is correct? The costs associated with getting products and services ready for sale are known as costs of goods sold. The matching principle in GAAP requires that we separate conversion costs and overhead. The matching principle in GAAP requires that we separate selling and administrative costs. The costs associated with getting products and services ready for sale are known as opportunity costs. The matching principle in GAAP requires that we separate product costs and period costs

The matching principle in GAAP requires that we separate product costs and period costs

The term "contribution margin" denotes:

The value attained by subtracting variable costs from revenues.

The opportunity cost of any decision option is:

The value to the decision maker of the next best option.

Which of the following statements is true when describing a make-or-buy decision?

The variable costs assigned to the item when made and the cost to buy are both relevant

An investor may sometimes compute Return on Equity with "Adjusted Net Income" in the numerator because he or she

To remove nonrecurring revenues or expenses from Net Income

Suppose fixed costs are $600 and the unit variable costs are $7. What is the total cost of producing 43 units? What is the total cost of producing 112 units?

Total cost = Fixed costs + Variable costs (VC x units) $600 + ($7 x 43 units) = 901 $600 + ($7 x 112) = $1384

Direct and Indirect Benefits

Traceability Traceability is the degree to which we can directly relate a cost or revenue to a decision option. A cost or revenue that we can uniquely relate (trace) to a decision option is a direct cost or a direct benefit. If only a portion of the cost or revenue pertains to a particular decision option, then it is an indirect cost or an indirect benefit. Organizations frequently refer to indirect costs as common costs and to indirect manufacturing costs as manufacturing overhead. Direct and indirect benefits Assume that Frigidaire, a leading manufacturer of kitchen appliances, is determining whether to continue making a particular model of refrigerator. In this case, the company can directly identify the revenues received from sales of the refrigerator. However, the product might also provide indirect benefits. For example, buyers of the Frigidaire refrigerator might be more likely to purchase other Frigidaire appliances in the future, thereby increasing overall revenues.

The regression analysis method of estimating fixed and variable costs uses all available observations to come up with a line that best "fits" the data.

True

Trisha Hardin owns Ice Flavors, a small business selling fruit-flavored slush drinks. Each drink sells for $2.50. Trisha derived her price as follows: -Drink mixture and crushed ice $0.60 -Labor per drink ($8 per hour ÷ 20 drinks per hour) $0.40 -Variable overhead per drink (cups, etc) $0.35 -Fixed overhead allocated to each drink $0.40 -Total cost per drink $1.75 Trisha is considering a special order for a sale of 100 drinks for a local birthday party. The hostess is willing to pay $1.50 per drink. The party will be in the evening, which is not during Trisha's regular business hours. Trisha will provide the drink mixture, ice, and labor. Her only additional expense will be one employee for two hours ($8 per hour), travel to and from the party location (estimated to be $15). Since the party is not at Trisha's business, her fixed overhead will not change. The party hostess will furnish all cups, napkins and other variable cost items. Required: a. List the costs that are not relevant to the decision.

Variable overhead of $.35 per drink. Since cups, napkins, etc. will be provided by the customer, this cost is no longer relevant to Trisha's decisions. Fixed overhead allocated to each drink of $.40 per drink. Trisha's total fixed overhead costs will not change whether she takes this job or not, so those costs are irrelevant to her decision. b. Should Trisha accept the special order? Why? Solution: Yes, since Trisha's costs ($91) exceed her revenue ($150), and she has extra capacity to take the order, it's advantageous for her to accept this special order. See calculations: Trisha's revenue: 100 drinks for $1.50 each = $150 Trisha's costs: - Drink mix and crushed ice: $.60 x 100 drinks = $60 - Labor: $8 per hour for 2 hours = $16 - Travel: $15 - Total: $91

Which of the following statements is correct? For most organizations, a budget is the benchmark for evaluating cost efficiency An unfavorable (U) variance means that performance fell short of expectations— budgeted revenue was less than actual revenue or budgeted cost exceeded actual cost Variance analysis is a technique used for determining the profit effect due to differences between the actual and budgeted size of the market for a product Variance analysis is a technique for determining why actual revenues, costs, and profit differ from their budgeted amounts

Variance analysis is a technique for determining why actual revenues, costs, and profit differ from their budgeted amounts

Which of the following statements is false? A. Actual sales exceeded budgeted sales indicating an favorable variance B. Actual expenses exceeded budgeted expenses indicating an unfavorable variance C. Variance means that performance fell short of expectations D. Small variance probably indicate random factors at work.

Variance means that performance fell short of expectations Unfavorable variance means that performance fell short of expectations. Favorable variance means performance exceeded expectations.

Unit 10 Summary

We discussed the benefits and construction of master budget components. The primary benefits of budgeting are that it (a) requires management to plan ahead, (b) provides definite objectives for evaluating performance, (c) creates an early warning system for potential problems, (d) facilitates coordination of activities, (e) results in greater management awareness, and (f) motivates personnel to meet planned objectives. The master budget consists of the following budgets: (a) sales, (b) production, (c) direct materials, (d) direct labor, (e) manufacturing overhead, and (f) selling and administration expense. We can then use these budgets to help construct a forecasted set of financial statements, including an income statement, a balance sheet, and a cash flow statement.

Unit 11 Summary

We studied how firms evaluate expenditures on long-lived resources using the tools of capital budgeting. These capital budgeting techniques help organizations determine how much and which type of capacity to acquire. Most of these techniques take into account not only the amount of cash flows but also the timing of cash flows. The cash flows of a project (such as a long-lived asset) typically consists of four elements: (1) the initial outlay, (2) the useful life and salvage value, (3) the timing and amount of operating cash flows, and (4) the cost of capital. The initial outlay includes all costs incurred to ready the asset for its intended use. Using a reasonable and realistic estimate of life expectancy is important, as the estimate significantly influences the profitability of the investment. The salvage value is the residual value from selling the asset at the end of its useful life. Operating cash inflows come in the form of revenue increases or cost reductions. Operating cash outflows typically include increases in variable costs and increases in controllable fixed costs. The cost of capital is the opportunity cost of foregone monetary returns. The cost of capital is higher for riskier projects and can be difficult to estimate. The time value of money (a dollar today is worth more than a dollar tomorrow) is an important consideration when evaluating capital expenditures. By discounting future cash flows, we place all cash inflows and outflows on equal footing. The net present value (NPV) of a project is the sum of all discounted future cash flows less the initial outlay. A profitable project has a positive NPV, and an unprofitable project has a negative NPV. Though not a cash flow, depreciation expense is tax deductible. The reduction in taxes payable due to depreciation is the depreciation tax shield. Salvage value is the proceeds received from disposing of the asset. The gain or loss due to the sale, which is the salvage value less the book value, is taxable and therefore also affects cash flows. When assessing long-lived resources, good managers also consider more qualitative factors. It is difficult to estimate cash flows due to intangible benefits such as reputation. However, ignoring these nonfinancial costs and benefits, such as the fit with overall strategy, can distort a project's value.

The income statement for the month of June, 2015 of Camera Obscura Enterprises contains the following information: Revenues $7,000 Expenses: Salaries and Wages Expense $3,000 Rent Expense 1,500 Advertising Expense 800 Supplies Expense 300 Insurance Expense 100 Total expenses 5,700 Net income $1,300 The entry to close Income Summary to Retained Earnings includes

a credit to Retained Earnings for $1,300

Unearned revenue is classified as

a liability account.

River Toys manufactures Angler's Choice kayaks. River Toys believes that the demand during the current year's fishing season will be 4,000 units. Additional cost data follows: -Selling Price $800 per unit -Variable manufacturing costs $300 per unit -Fixed manufacturing overhead $100,000 -Variable selling costs $20 per unit -Fixed selling and administrative costs $500,000 Required: a. What is RiverToys' breakeven point in units? b. What is River Toys' breakeven point in revenue?

a. Breakeven point in units = Fixed costs / Contribution margin = $600,000 / ($800 - $300 - $20) = $600,000 / $480 =1250 units b. Breakeven point in revenue = Breakeven units x Selling price = 1250 units x $800 per unit = $1,000,000 in revenue

Bubba's Bait Shop sells spinner, top water, diving and tube baits. Bubba estimates that his variable costs are $0.20 per sales dollar and fixed costs total $4,500 per month. Required: a. How much revenue does Bubba need to break even each month? b. How much revenue does Bubba need to generate in order to realize a profit of $3,000 each month? c. If Bubba expects his vendors to increase the price of baits by 40%, what will be his break-even revenue per month?

a. Breakeven point in units = Fixed costs / Contribution margin = $4500 / ($1 - $.20) = $4500 / $.80 = 5625 units Breakeven point in revenue = Breakeven units x Selling price = 5625 units x $1 = $5625 b. To generate $3000 in profit every month, we need to earn $3000 above breakeven. Based on our contribution margin calculation in part a, we know the contribution margin per dollar earned is $.80. Therefore, we need: $3000 / $.80 =$3750 above breakeven. In total, $3750 + $5625 = $9375 in profit. c. If the price of bait, a variable cost, will increase by 40%, then variable cost will become $.28 per sales dollar ($.20 x 1.4). Then, we need to calculate breakeven point based on this new variable cost: Breakeven point = Fixed costs / Contribution margin = $4500 / ($1 - $.28) = $4500 / $.72 = 6250 units or $6250 in revenue

Sarah is not currently using the fitness loft, a special area of the gym that houses state-of-the-art cardio and strength training equipment. Based on a visit as a friend's guest, Sarah has decided to enroll in the loft. She is deciding between buying a pass to the fitness loft (cost: $120 per semester) and buying a pass for each use (cost: $4 per visit). She wants to work out at least three times a week, which translates to 45 times for the semester. Towel rental at the loft is $0.50 per use. Sarah pays a facilities fee of $175 per semester with her tuition; this fee entitles her to "free" use of one locker. Required: a. Is the facilities fee of $175 relevant or controllable for Sarah's decision? b. Is the towel rental of $0.50 per visit controllable or relevant for this decision? c. Is the per-use fee controllable or relevant for this decision?

a. The amount is not controllable or relevant. This is a past expenditure and nothing Sarah could do now will change this sunk cost. b. The amount is controllable. This is an additional expenditure relative to the status quo of not using the fitness loft. However, the amount is not relevant. The amount spent on this item will be the same whether Sarah decides to buy a semester or per-use pass. c. The amount is controllable. This is an additional expenditure relative to the status quo of not using the fitness loft. The amount also is relevant. The amount spent on this item will differ based on whether Sarah decides to buy a semester or per-use pass.

Toys Ahoy! has 1,000 action figures in inventory that cost $6.25 per unit to produce. Due to changing consumer preferences, the sales department is having great difficulty selling the action figures, and Toys Ahoy! must choose between two options. Option 1—scrap (dispose of) the action figures at a total cost of$1,000 (for landfill fees); Option 2—rework all of the action figures, at a total cost of $1,200 in labor and materials, and sell them to a local toy store for a total of $750. Required: a. What is the value of scrapping the action figures? b. What is the value of reworking the action figures and selling them to the toy store? c. Is the fact that Toys Ahoy! spent $6.25 to produce each action figure relevant to your value computations?

a. The value associated with scrapping the action figures is the cost associated with disposing of them. Because scrapping the action figures will cost $1,000, the value of this option is ($1,000). b. Reworking the action figures will cost Toys Ahoy! $1,200, but selling them to the toy store will bring in $750 in revenues. Thus, the value of reworking the action figures and selling them to the toy store is $750 -$1,200 = ($450). Unfortunately, the value of both options is negative. However, relative to scrapping the toys, reworking them increase's Toys Ahoy!'s profit by ($450) -($1,000) = $550. Thus, reworking the action figures is the preferred option. c. Intuitively, the fact that Toys Ahoy! spent $6.25 to produce each action figure is not relevant to the decision at hand because Toys Ahoy! has already incurred the expenditure -it is a sunk cost. That is, this cost does not change relative to the status quo. Value is forward looking and involves measuring future sacrifices and future benefits.

Casting Company manufactures ultra-lite fishing rods called Catch'ums. The rods are sold exclusively via Internet. Each Catch'um sells for $18 ($15 plus $3 shipping and handling.) Casting's contribution margin ratio is 60%. Casting calculates breakeven units to be 5,000 per month. Required: a. What is the unit variable cost of a Catch'um rod? b. What is Casting's monthly fixed cost? c. Suppose Casting introduces an offer for "free" shipping and handling. How many additional rods will Casting have to sell each month to break even?.

a. Unit Variable Cost = $18 (selling price) - (.60 x $18) = $7.20 b. $18(5,000) =($7.20 x 5,000) - Fixed Costs FC = $90,000 - 36,000 = $54,000 c. $15x - $7.20x - $54,000 = 0 $7.80x = $54,000 x = 6,923

If prepaid expenses are initially recorded in expense accounts and have not all been used at the end of the accounting period, the failure to make an adjusting entry will cause

assets to be understated

The income statement for the month of June, 2015 of Camera Obscura Enterprises contains the following information: Revenues $7,000 Expenses: Salaries and Wages Expense $3,000 Rent Expense 1,500 Advertising Expense 800 Supplies Expense 300 Insurance Expense 100 Total expenses 5,700 Net income $1,300 The entry to close the revenue account includes a

credit to Income Summary for $7,000.

At March 1, 2015, Minutemen Corp. had supplies on hand of $500. During the month, Minutemen purchased supplies of $1,200 and used supplies of $1,500. The March 31 adjusting journal entry should include a

credit to the supplies account for $1,500.

A business pays weekly salaries of $30,000 on Friday for a five-day week ending on that day. The adjusting entry necessary at the end of the fiscal period ending on a Thursday is

debit Salaries and Wages Expense, $24,000; credit Salaries and Wages Payable, $24,000. $30,000 × 4/5 = $24,000 salaries and wages payable

Husker Du Supplies Inc. purchased a 12-month insurance policy on March 1, 2015 for $1,800. At March 31, 2015, the adjusting journal entry to record expiration of this asset will include a

debit to Insurance Expense and a credit to Prepaid Insurance for $150. $1,800 ÷ 12 = $150

Matador Company purchases $1,300 of equipment from Danger Mouse Inc. for cash. The effect on the components of the basic accounting equation of Matador Company is

no change in total assets.

Pare Company reported a net loss of $30,000 for the year ended December 31, 2014. During the year, accounts receivable decreased $15,000, merchandise inventory increased $25,000, accounts payable increased by $30,000, and depreciation expense of $20,000 was recorded. During 2014, operating activities

provided net cash of $10,000. ($30,000) + $15,000 + ($25,000) + $30,000 + $20,000 = $10,000

If unearned revenues are initially recorded in revenue accounts and not all the related services been performed at the end of the accounting period, the failure to make an adjusting entry will cause

revenues to be overstated.

Adama Company reported a net loss of $6,000 for the year ended December 31, 2014. During the year, accounts receivable increased $15,000, merchandise inventory decreased $12,000, accounts payable decreased by $20,000, and depreciation expense of $12,000 was recorded. During 2014, operating activities

used net cash of $17,000. ($6,000) + ($15,000) + $12,000 +($20,000) + $12,000 = ($17,000)