Financial & Managerial Accounting Midterm

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fixed cost: Y = a

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

mixed costs: Y = a + bX

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

Is the selling price constant?

YES the price of a product will not change as volume changes

The situation that requires a departure from the cost basis of accounting to the lower of cost or market basis in valuing inventory is necessitated by

a decline in the value of the inventory

CVP Graph

a graphical representation of the relationships between an organization's rev, cost, and profits on the one hand an its sales volume on the other hand

Operating Leverage

a measure of how sensitive net operating income is to a given percentage change in dollars

degree of operating leverage

a measure, at a given level of sales, of how a percentage change in sales volume will affect profits

enterprise risk management (ERM)

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

Variable Expense Ratio

a ratio computed by dividing variable expense by dollar sales

committed fixed costs (capacity costs)

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

variable costs

increase in proportion to increases in activity cost drivers

What is the degree of operating leverage at the BEP?

infinity

strategic cost management

making decisions concerning specific cost drivers within a business strategy

Manufacturers usually classify inventory into all the following general categories except:

merchandise inventory

Goods held on consignment are

never owned by the consignee.

internal control systems

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

relevant range

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

Cost-Volume-Profit Analysis

powerful tool that helps managers understand the relationships among cost, volume, and profit

Cost structure

relative portion of fixed and variable costs in an organization

Unit CM calc

selling price per unit - variable expense per unit P - V

Discretionary fixed costs (managed fixed costs)

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

activity cost driver

specific activities performed to serve customer needs

cost driver analysis

study of factors that cause or influence costs

value chain analysis

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

What would happen if sales are zero?

the company's loss would equal its fixed expenses

cost estimation

the determination of the relationship between activity and cost

The LIFO reserve is

the difference between the value of the inventory under LIFO and the value under FIFO

The LIFO inventory method assumes that the cost of the latest units purchased are

the first to be allocated to cost of goods sold

ethics

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

cost behavior

the relationship between cost and quantity of cost driver

Sales Mix

the relative proportions in which a company's products are sold. sales mix is computed by expressing the sales of each product as a percentage of total sales

If goods in transit are shipped FOB destination

the seller has legal title to the goods until they are delivered.

corporate governance

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

marginal cost

the varying increment in total cost

fixed costs

total costs - variable costs

Liabilities and equities are both claims against the assets of a company

true / T

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

true / T

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

true / t

steps to preparing the CVP Graph

x axis=unit volume, y=dollars 1) draw a line parallel to volume axis to represent total fixed expense 2) choose sales volume and calc/plot total expenses 3) choose sales volume and calc/plot total rev

Break Even

Fixed expenses are covered -no profit or loss -profit = zero

Which one of the following is not correct?

For debt issued at a discount: interest expense reported on the income statement equals cash interest payment less amortization of the discount.

Irrelevant Costs

Future costs that DO NOT differ among competing decision alternatives

Relevant Costs

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

NPV Characteristics

Gives explicit consideration to investment size Assumes all net cash inflows are reinvested at the discount rate

IRR Characteristics

Gives no consideration to investment size Assumes all net cash inflows are reinvested at the project's internal rate of return

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

Greater than 0.9

Arizona Company currently has a current ratio of 0.9. The company decides to borrow $1,000,000 from First Granite Bank for a period of nine months. After the borrowing Arizona's current ratio will be

Greater than 0.9. Arizona's current liabilities are currently greater than current assets, however the short-term borrowing will result in a larger proportional increase in current assets than current liabilities

What does the CM ratio show?

How the contribution margin will be affected by a change in total sales

Interest expense appears in which financial statement?

Income Statement

Interest expense appears in which financial statement?

Income statement

How would cash collected on accounts receivable affect the balance sheet? Increase liabilities and decrease equity Decrease liabilities and increase equity Increase assets and increase equity Increase assets and decrease assets

Increase assets and decrease assets (When Cash is collected from Accounts receivable, it increases the Cash Balance and reduces the Accounts Receivable balance. Both the items comes under Current Assets.)

Alphabet Inc. (formerly Google) has a market beta of 0.94, if the market increases by 1.7% on a given day we would expect that Google's stock price would:

Increase by 1.60%

If a company issues 2,500 shares of common stock at a market price of $48 per share, which of the following is the correct balance sheet effect?

Increase cash by $120,000 and increase contributed capital by $120,000

Estimate increase in profit after BE point calc.

Increase in units times contribution margin per unit

An accrual of wages expense would produce what effect on the balance sheet?

Increase liabilities and decrease earned capital

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

Increase liabilities and decrease earned capital

Payback Period

Indicates the time required to recover the initial investment in a project from operations Acceptable projects must have less than some maximum payback period designated by management NOTE: Does not consider the time value of money.

The average borrowing rate for interest bearing debt is calculated as:

Interest Expense divided by Average Interest-bearing debt

Cost of Equity Capital Tidbit (Topic 13, Slide 20)

Investing in a project that has an IRR greater than the cost of capital should increase the market value of a firm's securities.

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

It exempts the borrowing from SEC regulation

Commercial paper is issued with maturities of less than 270 days because:

It exempts the borrowing from SEC regulation.

In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense?

LIFO

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

Liquidity

Assets are recorded in the balance sheet in order of:

Liquidity

The current ratio is used to assess:

Liquidity

The current ratio is used to assess:

Liquidity Rationale: The current ratio is one of two common ratios used to assess the degree of a company's liquidity.

Margin of Safety Formula: units

M of S divided by sales price per unit

Cost Structure Tidbit (Topic 10, Slide 5)

Many companies' cost structures are moving to a lower proportion of variable costs and a higher proportion of fixed costs.

Margin of Safety Formula: percentage

Margin of safety in dollars divided by total budgeted/actual sales in dollars

An example of a situation in which company needs credit for investing activities is

Mergers and acquisitions

variable cost: Y = bX

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

Interpretation of CVP Graph

-where profit and expense lines intersect=BE point -above BE point=profit area -below BE point=loss area

When calculating the cost of debt capital you must multiply the average borrowing rate by:

1 - Marginal income tax rate

Five Factors CVP Analysis looks at

1) selling prices 2) sales volume 3) unit variable costs 4) total fixed costs 5) mix of products sold

Incremental Analysis

An analytical approach that focuses only on those costs and rev and volume that change as a result of a decision

Which of the following statements is correct?

An increase in wages payable is deducted from wages expense to convert wages expense to cash paid to employees.

The first step in stock valuation requires:

Analyzing the business

What are concerns with Special Orders?

TIME SPAN CONCERNS: Future year cost increases should be considered in multiyear special orders VARIABLE NATURE OF LT FIXED COSTS: In the long-run, all costs, fixed and variable, should be considered relevant Because they are subject to change over time POSSIBLE SOLUTIONS: Include a cost escalation clause in multiyear agreements Use full costs regardless of cost behavior patterns to approximate long-run variable costs

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

TRUE

Companies that engage in long-term sales contracts such as construction projects often use the percentage of completion method to recognize revenue. This means that revenue is recognized in proportion to the project's completion.

TRUE

Increasing a company's net operating profit margin (NOPM) increases both RNOA and ROE.

TRUE

Target Profit Formula: dollar sales

Target Profit + FE divided by CMR

Target Profit Formula: unit sales

Target Profit + FE divided by Unit CM

What does degree of operating leverage of 4 mean?

That NOI grows four times as fast as its sales

What does a CMR of 40% mean?

That for each dollar increase in sales, total CM will increase by 40 cents -NOI will also increase by 40 cents assuming fixed costs are not affected by the sales increase

When considering the results of an Altman Z-Score analysis a score of 4.20 would suggest

The company is healthy and there is a low bankruptcy potential in the short-term. Scores above 3.000 suggest a company is healthy in the short-term

When using Altman's Z-Score a Type I error occurs when

The company's Z-score indicates the company is healthy, and the company goes bankrupt

Apple, Inc. reported research and development expense of $10,045 million on its 2016 income statement. This expense included many types of costs. Which of the following types of costs would not be included in the $10,045 million?

The correct answer is: Supplies and inventory related to R&D activities and new-product sales

Margin of Safety

The excess of budgeted or actual dollar sales over the break even dollar sales

Contingent Liabilities must have the following criteria - select all that apply.

The obligation will probably require payment at some point in the future. The obligation is estimable.

Outsourcing

The procurement of services, products, components from an external source.

Many companies have cyclical operating cash needs due to

The seasonality of sales

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

The seasonality of sales

Outsourcing Tidbit (Topic 9, Slide 33)

There are NO relevant revenues in outsourcing decisions.

The 2016 balance sheet of Whole Foods Market reports operating assets of $5,489 million, operating liabilities of $2,066 million, and total liabilities of $3,117 million. Whole Food's average net operating assets are:

There is not enough information to calculate the amount. Rationale: Average net operating assets requires two years of balance sheet data. The question only provided one year's data, thus, there is not enough information to calculate the amount.

Ticketmaster contracts with the producer of Blue Man Group to sell tickets online. Ticketmaster charges each customer a fee of $9 per ticket and receives $22 per ticket from the producer. Ticketmaster does not take control of the ticket inventory. Average ticket price for the event is $105. How much revenue should Ticketmaster recognize for each Blue Man Group ticket sold?

Ticketmaster should record $31 revenue each time it sells a ticket. Of that, $9 will be received in cash and $22 will be recorded as receivable from the Blue Man Group producers. The correct answer is: $31 because both the fee from the customer and the Blue Man Group producer are earned

The weighted average cost of capital is used when valuing the payoffs...

To both equity and debt holders

Total CM Ratio

Total CM divided by Total Sales

Margin of Safety Formula: dollars

Total budgeted/actual sales - break even sales

A typical example of a cash equivalent is an investment in

Treasury Bills, Commercial Paper, a money market fund

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

True

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

True

An increase in treasury stock would be reflected in the statement of stockholders' equity. -True -False

True

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

True

Assets must always equal liabilities plus equity. -True -False

True

Consider two companies (A and B) with equal ROA's of 15%. Company A has an asset turnover of 1.2 and Company B has an asset turnover of 1.5. If all else is equal, Company B with its higher asset turnover, is less profitable because it is expensive to turn assets over. -True -False

True

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

True

Financial statements are influenced by five important forces that determine a company's competitive intensity: (A) industry competition, (B) buyer power, (C) supplier power, (D) product substitutes, and (E) threat of entry. -True -False

True

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

True

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

True

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

True

Ratios provide one way to compare companies in the same industry regardless of their size

True

Return on Assets (ROA) = Net Income / Sales × Asset Turnover -True -False

True

Return on Assets (ROA) measures the profit the company makes on each dollar of total assets it uses. -True -False

True

Shareholders demand financial information primarily to assess profitability and risk whereas bankers demand information primarily to assess cash flows to repay loan interest and principal. -True -False

True

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

True

True/false: costs are linear and can be accurately divided into variable and fixed elements

True

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

True

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

True

The DuPont analysis disaggregates return on equity into profitability, productivity and leverage components. True or False

True Rationale: The DuPont disaggregation of return on equity is: ROE = Profit margin (PM) × Asset turnover (AT) × Financial leverage (FL). These three terms measure profitability, productivity, and leverage respectively.

Ratios provide one way to compare companies in the same industry regardless of their size. True or False

True Rationale: Ratios mitigate problems arising from different sizes of companies.

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

True / T

Preparing financial statements involves two steps: recording transactions during the period and adjusting records to ensure all events are properly recorded.

True / T

A statement of cash flows usually includes: Net income Increase in accounts receivable Contributed capital Depreciation expense

True / T / All of the above

Y = a + bx Total Cost Equation

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

total costs

Y = a + b(X)

variable costs per unit

difference in total costs/difference in activity

The 2017 Form 10-K of Oracle Corporation, for the May 31, 2017 year-end, included the following information relating to their allowance for doubtful accounts: Balance in allowance at the beginning of the year $327 million, accounts written off during the year of $137 million, balance in allowance at the end of the year $319 million. What did Oracle Corporation report as bad debt expense for the year?

$129 million

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

$16,245 million

A company reported annual sales revenue of $2,772,000. During the year, accounts receivable decreased from a $102,000 beginning balance to a $69,600 ending balance.

$2,804,400

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

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

Heller Company offers an unconditional return policy to its customers. During the current period, the company records total sales of $850,000, with a cost of merchandise to Heller of $340,000. Based on past experience, Heller Company expects 4% of sales to be returned. How much gross profit will Heller Company recognize for the current period?

$510,000

Aiello Inc. had the following inventory in fiscal 2016. The company uses the LIFO method of accounting for inventory. Beginning Inventory, January 1, 2016: 130 units @ $15.00 Purchase 200 units @ $18.00 Purchase 50 units @ $13.50 Purchase 110 units @ $15.75 Ending Inventory, December 31, 2016: 120 units The company's cost of goods sold for fiscal 2016 is:

$6,157.50

In 2016, Southwest Airlines had negative net working capital of $(2,346) million and current assets of $4,498 million.

$6,844 million

Ennis, Inc. has 35,000 common shares issued at a $2.25 par value of which 22,000 are outstanding. If Ennis has no other outstanding stock, what size dividend must be paid such that each share receives $3.20?

$70,400

How to Apply ABC - 4 Steps

(1) Form cost pools - based on activities (2) Choose the best cost driver for each pool (3) Compute activity rates ** Activity rate = cost in the activity cost pool / total number of cost driver units (4) Allocate overhead costs among cost objects (product lines, customers, etc.) ** Activity cost allocated to a cost object = activity rate * cost driver units for the cost object ** Total allocated overhead costs = the sum of allocated activity costs

ABC (Activity-Based Costing) General Idea

***A firm performs activities to make and deliver products/services to customers ***Costs arise because of resources used by activities ***Activities drive the consumption of resources

ABC Basic Concept

***An Activity refers to any event or operations that cause the consumption of overhead resources - e.g., maintaining machines, setting up equipment, placing purchase or customer orders, product design, research and development

Limitations of ABC

***Complete analysis requires consideration beyond manufacturing costs to include nonmanufacturing ***Activity can be measured on practical capacity, actual capacity, or other estimate > Practical capacity preferred over actual capacity because (1) Does not hide the cost of idle capacity within product costs (2) Gives a truer cost of activities used to produce the product

Traditional vs. Activity-Based Costing

***Traditional overhead allocations are used often where production of only one product occurs. Undercost Explosion Overcost Erruption ***Activity Based Costing (ABC) views operations of the company as activities and consider the consumption of resources by simple and complex product lines ***ABC is the most accurate costing method

Least-Squares Regression (aka Simple Regression)

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

Relevant Range

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

Managerial Acctg - Reporting

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

Financial Acctg - Reporting

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

Financial Acctg

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

Managerial Acctg

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

Financial Acctg - External Standards

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

Managerial Acctg - External Standards

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

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

-$25,521

The fiscal 2009 financial statements of BJ Services shows net operating profit margin (NOPM) of 5.18%, net operating asset turnover (NOAT) of 1.11, return on equity of 4.31%, and adjusted return on assets of 3.30%. What is the company's nonoperating return?

-1.44% ROE = RNOA + nonoperating return = 4.31% - (5.18% × 1.11) = -1.4398% = -1.44%

The 2011 balance sheet of The Washington Post Company shows net operating profit margin (NOPM) of 4.2%, net operating asset turnover (NOAT) of 1.75, return on equity of 4.3%, and adjusted return on assets of 3.4%. What is the company's nonoperating return?

-3.1% ROE = RNOA + nonoperating return = 4.3% - (4.2% × 1.75) = -3.05% = -3.1%

Which of the following items would not be found on a balance sheet? (Select all that apply) -Cost of Goods Sold -Stockholders' Equity -Nonowner financing -Sales -Property, plant and equipment

-Cost of Goods Sold -Sales

A company's return on assets (ROA) can be disaggregated to reveal which of the following: (Select all that apply) -Profit margin -Asset turnover -Financial leverage -Asset growth -Sales growth

-Profit margin -Asset turnover

Which of the following statements are correct? (Select all that apply) -The statement of equity reports on changes in the accounts that make up equity. -An income statement reports on financing activities. -A balance sheet reports on a company's assets and liabilities over a period of time. -The statement of cash flows reports on cash flows from operating, investing, and financing activities over a period of time. -A balance sheet reports on investing and financing activities.

-The statement of equity reports on changes in the accounts that make up equity. -The statement of cash flows reports on cash flows from operating, investing, and financing activities over a period of time. -A balance sheet reports on investing and financing activities.

Atom Company just began business and made the following four inventory purchases in June: June 1 150 units $825 June 10 200 units 1,120 June 15 200 units 1,140 June 28 150 units 885 $3,970 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is

1,105

A company just began business and made the following four inventory purchases in June: June 1 150 units $825 June 10 200 units 1,120 June 15 200 units 1,140 June 28 150 units 885 $3,970 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the average-cost method, the amount allocated to the ending inventory on June 30 is

1,134

Olympus Climbers Company has the following inventory data: July 1 Beginning inventory 20 units at $19 $380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $22 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is

1,340

Baker Bakery Company just began business and made the following four inventory purchases in June: June 1 150 units $780 June 10 200 units 1,170 June 15 200 units 1,260 June 28 150 units 990 $4,200 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is

1,368

Quiet Phones Company has the following inventory data: July 1 Beginning inventory 20 units at $19 $380 7 Purchases 70 units at $20 1,400 22 Purchases 10 units at $22 220 $2,000 A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is

1,380

Three cost drivers

1. Structural, 2. organizational, 3. activity

IMA's 4 standards of ethical conduct

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

3 themes of strategic cost management

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

four basic cost behavior patterns

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

The fiscal 2016 balance sheet for Whole Foods Market reports the following data (in millions). Cash and Cash Equivalents = $351 Marketable Securities = $379 Accounts Receivable = $242 Merchandise Inventories = $517 Current Assets = $1,975 Current Liabilities = $1,341 What is the company's current ratio?

1.47 Rationale: Current ratio = Current assets / Current liabilities = $1,975 / $1,341 = 1.47

The 2016 financial statements of BNSF Railway Company report total revenues of $19,829 million, accounts receivable of $1,272 million for 2016 and $1,198 million for 2015. The company's accounts receivable turnover for the year is:

16.1 times

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

166.7 Million

The fiscal year-end 2016 financial statements for Walt Disney Co. report revenues of $55,632 million, net operating profit after tax of $9,954 million, net operating assets of $58,603 million. The fiscal year-end 2015 balance sheet reports net operating assets of $59,079 million. Walt Disney's 2016 net operating profit margin is:

17.9%

In fiscal 2016, Snap-On Inc. reported a statutory tax rate of 35%, an effective tax rate of 30.5%. Income before income tax for 2016 was $801.4 million. What did Snap-On report as tax expense (on its income statement) in 2016?

184.7 million

Selected balance sheet data follow for Goodyear Tire & Rubber Company for the year ended December 31, 2016 (in millions): Total Operating Liabilities = $6,307 Total Nonoperating Liabilities = $5,479 Total CurrentLiabilities = $4,817 Total Liabilities = $11,786 Total Liabilities and Shareholders' Equity = $16,511 What is the company's liabilities-to-equity ratio?

2.49 Rationale: Times interest earned = $11,786 / ($16,511 - $11,786) = 2.49 The correct answer is: 2.49

Mattel Inc.'s 2011 financial statements show operating profit before tax of $1,041,101 thousand, net income of $768,508 thousand, provision for income taxes of $202,165 thousand and net nonoperating expense before tax of $70,428 thousand. Mattel's statutory tax rate for 2011 is 35.5%. Mattel's 2011 effective tax rate is

20.8% Effective tax rate = Provision for income taxes / Income before tax = $202,165 / ($768,508 + $202,165) = 20.8%

The 2016 income statements of Leggett & Platt, Inc., reports net sales of $3,749.9 million in 2016 and $3,917.2 million in 2015. The balance sheet reports accounts and other receivables, net of $486.6 million at December 31, 2016, $520.5 million at December 31, 2015, and $523.3 million at December 31, 2014. Calculate the average number of days that receivables were outstanding for both years. Explain in layman's terms, what this ratio means.

2016 DSO = 49.0 days 2015 DSO = 48.6 Days

In June 2017, Newcastle Inc. announced a 3-for-1 stock split. On the split date, Newcastle had about 81.9 million shares outstanding. After the split the number of shares outstanding was:

245.7 million

The 2016 balance sheet of E.I. du Pont de Nemours and Company shows average DuPont shareholders' equity attributable to controlling interest of $9,996 million, net operating profit after tax of $2,308 million, net income attributable to DuPont of $2,513 million, and common shares issued of 950.044 million. Assume the company has no preferred shares issued. DuPont's return on equity (ROE) for the year is:

25.1%

Nelson Corporation sells three different products. The following information is available on December 31: Inventory item Units Cost per unit Market value per unit X 150 $4.00 $3.50 Y 300 $2.00 $1.50 Z 750 $3.00 $4.00 When applying the lower of cost or market rule to each item, what will Nelson's total ending inventory balance be?

3,225

Which of the following statements is correct with respect to inventories?

Under FIFO, the ending inventory is based on the latest units purchased

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

3.4%

The 2016 financial statements of The New York Times Company reveal average shareholders' equity attributable to controlling interest of $837,283 thousand, net operating profit after tax of $48,032 thousand, net income attributable to The New York Times Company of $29,068 thousand, and average net operating assets of $354,414 thousand. The company's return on equity (ROE) for the year is:

3.5%

The fiscal 2008 financial statements for Staples, Inc report revenues of $23,083,775 thousand, net operating profit after tax of $894,749 thousand, net operating assets of $9,064,607 thousand. The fiscal 2007 balance sheet reports net operating assets of $6,067,193 thousand. Staples' 2008 net operating profit margin is:

3.9% NOPM = NOPAT / Revenues = $894,749 / $23,083,775 = 3.9%

Selected ratios follow for Nike, Inc., for the year ended December 31, 2013 (in millions): Return on Net Operating Assets (RNOA) = 43.6% Profit Margin (PM)= 11.6% Net Operating Profit Margin (NOPM) = 11.4% Asset Turnover (AT) = 1.51 Financial Leverage (FL) = 1.72 What is the company's return on equity (ROE) for the year?

30.1% Rationale: ROE = PM × AT × FL = 11.6% × 1.51 × 1.72 = 30.1%

The following information was available for Bowyer Company at December 31, 2014: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $880,000; and sales $1,200,000. Bowyer's days in inventory in 2014 was

33.2 days

Selected income statement data follow for Harley Davidson, Inc., for the year ended December 31, 2016 (in thousands): Income before Provision for Income Taxes = $1,023,911 Interest Expense = $29,670 Statutory Tax Rate = 37% Provision for Income Taxes = $331,747 Net Income = $692,164 What is the company's times interest earned ratio?

35.5 Rationale: Times interest earned = ($1,023,911 + $29,670) / $29,670 = 35.5 The correct answer is: 35.5

The fiscal 2008 financial statements for Walgreen, Inc report net sales of $59,034 million, net operating profit after tax of $2,164 million, net operating assets of $14,289 million. The 2007 balance sheet reports net operating assets of $12,033 million. Walgreen's 2008 net operating asset turnover is

4.49 NOAT = Net sales / Average NOA = $59,034 / [($14,289 + $12,033) / 2] = 4.49

In its 2013 annual report, Mattel Inc. reported the following (in millions): Total liabilities $3,188 Total shareholders' equity $3,252 What proportion of Mattel is financed by non-owners? -54.6% -53.0% -88.6% -49.50% -None of the above

49.50%

In 2016, Kohl's Corporation had net working capital of $2,273 million and current liabilities of $2,974 million.

5,247 million

The following information was available for Camara Company at December 31, 2014: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $560,000; and sales $800,000. Camara's inventory turnover ratio in 2014 was

5.6 times

On its 2017 balance sheet, Walgreens Boot Alliance, Inc., reports treasury stock at cost of $4,934 million. The company has a total of 1,172,513,618 shares issued and 1,082,986,591 shares outstanding. What average price did Walgreen pay for treasury shares?

55.11

Pinto Corp. sells $300,000 of bonds to private investors. The bonds have a 4% coupon rate and interest is paid semiannually. The bonds were sold to yield 5%. What periodic interest payment does Pinto make to its investors?

6,000

Kroger's 2016 financial statements show net operating profit after tax of $2,286 million, net income of $1,975 million, sales of $115,337 million, and average net operating assets of $18,616 million.

6.20

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

6.31%

the 2011 balance sheet of The Washington Post Company shows average shareholders' equity of $2,726,277 thousand, net operating profit after tax of $176,109 thousand, net income of $117,157 thousand, and average net operating assets of $2,414,864 thousand. The company's return on net operating assets (RNOA) for the year is:

7.3% RNOA = NOPAT / average NOA = $176,109 / $2,414,864 = 7.3%

Chang, Inc. issued a 120-day note in the amount of $360,000 on 12/16/17 with an annual rate of 5%. What amount of interest has accrued as of 12/31/17?

739.73

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

8.7%

Payback Period Formula

= Initial Investment / Annual Operating Cash Flows

Primary Reasons to Outsource

>Reduce & control operating costs >Improve company focus >Gain access to world-class capabilities >Free resources for other purposes >Resources not available internally >Take advantage of offshore capabilities >Reduce time to market

Examples of Relevant Revenues or Expenses

>Sales Revenue >Variable Production Costs >Additional Costs to be incurred

An accrual of wages expense would produce what effect on the balance sheet? a. increase liabilities and decrease earned capital b. decrease liabilities and increase earned capital c. increase expenses and increase liabilities d. decrease assets and decrease liabilities

If a company issues 2,500 shares of common stock at a market price of $32 per share, which of the following is the correct balance sheet effect? a. increase cash by $80,000 and increase contributed capital by $80,000 b. increase cash by $80,000 and increase earned capital by $80,000 c. increase stock revenues by $80,000 d. stock issuances are not reported on the balance sheet

The advantage of the dividend discount model is that: a. it is simple b. dividends are easily observable c. capital gains can be earned instead of dividends d. firms publish their dividend policies

The cost of making or purchasing inventory that is sold to customers is a. cost of goods sold b. inventory expenses c. gross profit d. operating income

Which best describes par value for a stock? a. an arbitrary amount set by the company for each share of stock b. the value of the stock if it is not sold for a premium or discount c. the current market value of the stock d. the value at which stock shares were originally issued

Which of the following are included in current assets? a. prepaid rent b. taxes payable c. automobiles d. common stock e. none of the above

Activity Cost Pool

A collection of costs which are incurred when certain activities are performed within the organization

Liquidity refers to:

A company's cash availability Rationale: Liquidity refers to cash, the amount on hand, the amount generated from operating activities, and the amount that can be raised on relatively short notice.

Degree of Operating Leverage

A measure, at a given level of sales, of how a percentage change in sales will affect profits. The degree of operating leverage is computed by dividing contribution margin by net income

Contribution Margin Ratio

A ratio computed by dividing contribution margin by dollar sales

What happens if operating leverage is high?

A small percentage increase in sales can produce a much larger percentage increase in net operating income

Caterpillar Inc. reports a net loss for 2016 of $(67) million, retained earnings at the end of the year of $27,377 million, and dividends during the year of $1,802 million. What was the company's retained earnings balance at the start of 2016? A) $29,246 million B) $30,361 million C) $28,065 million D) $26,572 million

A) $29,246 million

The 2013 balance sheet of The New York Times Company shows net operating profit margin (NOPM) of 6.2%, net operating asset turnover (NOAT) of 3.35, return on equity of 8.7%, and adjusted return on assets of 2.4%. What is the company's nonoperating return? A) -12.1% B) 0.7% C) -1.8% D) 2.5%

A) -12.1%

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

A) Greater than 0.9

During fiscal 2016, Shoe Productions recorded inventory purchases on credit of $337.8 million. The financial statement effect of these purchase transactions would be to: A) Increase liabilities (Accounts payable) by $337.8 million B) Decrease cash by $337.8 million C) Increase expenses (Cost of goods sold) by $337.8 million D) Decrease noncash assets (Inventory) by $337.8 million

A) Increase liabilities (Accounts payable) by $337.8 million

Accumulated depreciation should be shown on the statement of financial position: a. as a deduction from current assets b. as part of owner's equity c. as a deduction from the cost of corresponding fixed assets d. as a current liability

On its 2016 income statement, Abbott Laboratories reported research and development expense of $1,422,000,000. Which of the following statements must be true?

A. Abbott Laboratories spent $1,422,000,000 in cash to develop new products and improve old products. B. Research and development expense reduced Abbott Laboratories 2016 net income by $1,422,000,000. C. Abbott Laboratories capitalized at least $1,422,000,000 of research and development costs in 2016. D. The $1,422,000,000 included amortized research and development costs from prior years that were not previously expensed, because Abbott Laboratories incurs such expenses each year. E. None of the above Abbott Laboratories included in research and development expense certain non-cash expenses such as depreciation on related assets, thus (A) is not correct. Abbott Laboratories recorded deferred tax expense on the product development expense, thus net income was affected on an after-tax basis and (B) is therefore not correct. Under US GAAP, firms may not capitalize R&D costs, thus (C) is not correct. All R&D expenses must be included in the income statement in the period, thus (D) is wrong. The correct answer is: None of the above

Which of the following items creates complications related to revenue recognition?

A. Bonuses tied to sales goals B. Long-term construction contracts C. Multiple element sales contracts D. Consignment goods E. All of the above Each of these types of revenue or business conditions creates risk associated with revenue recognition. Each requires good internal controls to prevent and detect inappropriate revenue recognition, as well as extra management vigilance and auditor care. The correct answer is: All of the above

Why ABC (Activity-Based Costing)?

ABC (activity-based costing) is much more accurate than "traditional" allocations => By 1990-s, firms realized that "traditional" cost allocations often are way off: • underestimate overhead costs of low-volume premium products • overestimate overhead costs of high-volume basic products => bad decisions: reduce sales of profitable products, increase sales of unprofitable products => many firms switched from traditional allocations to ABC - For instance, Citigroup, Lowe's, Coca-Cola, General Motors, etc.

Which of the following is not one of Porter's five forces that determine a company's competitive intensity?

Ability to obtain financing

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

Ability to obtain financing

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

All of the Above

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

All of the Above

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

All of the above

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

All of the above are dilutive

What is Internal Rate of Return (IRR)

Also called the time-adjusted rate of return The discount rate that equates the present value of the cash inflows with the present value of the cash outflows The minimum rate that could be paid for the money invested in a project without losing money The discount rate that results in a project's net present value equaling zero

Contribution Margin

Amount remaining from sales rev. after variable expenses have been deducted -Amount available to cover fixed expenses

Cost Driver

An Activity measure that triggers the cost in the activity cost pool (ideally, a cause-and-effect relation between an activity's cost and its driver)

Profit calc 2

Unit CM X Q - FE

How would cash collected on accounts receivable affect the balance sheet? a. increase liabilities and decrease equity b. decrease liabilities and increase equity c. increase assets and decrease assets d. increase assets and increase equity

CM Ratio Per Unit

Unit CM divided by unit selling price

On a classified balance sheet, allowance for uncollectible accounts would be classified among: a. non-current assets b. current liabilities c. current assets. d. non-current liabilities

The average borrowing rate for interest bearing debt is calculated as a. Interest Expense divided by Average Liabilities b. interest paid divided by average liabilities c. interest expense divided by average interest-bearing debt d. interest expense divided by average long-term debt

Opportunity Costs

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

A mortgage bond differs from a debenture in that mortgage bonds

Are secured by property

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

Are secured by property

... refers to the concept that financial statements are linked to each other and linked across time.

Articulation

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

As an expense on the income statement

As inventory and property plant and equipment on the balance sheet are consumed, they are reflected:

As an expense on the income statement

Accounting rate of return on initial investment

Average annual increase in net income / Initial investment

Accounting Rate of Return (Topic 13, Slide 25)

Average annual increase in net income that results from acceptance of a capital expenditure proposal divided by the initial investment or the average investment in the project Focuses on net income, not cash flows Determining Net Income: Annual net cash inflow from operations LESS: Average annual depreciation ----------------------------------------- EQUALS: Average annual increase in net income

Accounting rate of return on average investment:

Avg. annual increase in net income / Avg. investment

High-Low Cost Estimation

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

A company can increase free cash flows to the firm (FCFF) by doing which of the following? a. increasing investments in receivable, inventories, and plant assets b. decreasing investments in receivable, inventories, and plan assets c. maintaining a steady level of net operating profit after tax d. decreasing the level of net operating profit after tax

A company's intrinsic value is its: a. market value b. economic value assuming actual payoffs are known c. carrying value of debt d. stock price

A contra asset account has what type of balance? A. debit b. credit

An accrued expense amounting to $18,000 was overlooked when ascertaining the profit for the year. The effect of this error is that: a. net profit as well as liability are understated b. net profit is overstated and liability understated c. net profit as well as liability are overstated d. net profit is not affected but liability is understated

Cocoa Beach Surf Shop receives information that requires the company to increase its expectations of uncollectible accounts receivable. Which of the following does not occur on the company's financial statements? a. bad debt expense is increased b. accounts receivables (gross) is reduced c. net income is reduced d. the allowance account is increased

Expenses relevant to the accounting period which remain unpaid by period end should be: a. included with expenses paid and shown as an asset at the period end b. included in with expenses paid and shown as a liability at the period end c. ignored until they are paid for in the next period d. deducted form amount already paid and shown as a liability at the period end

In accounting for sales on consignment, sales revenue and the related cost of goods sold should be recognized by the a. consignor when the goods are shipped to the consignee b. consignor when the consignee has sold the goods c. consignee when the goods are shipped to the third party d. consignee when cash is received from the customer

The capital asset pricing model states that the expected return on a particular asset relates to all of the following components except: a. the risk-free rate b. the alpha risk c. the beta risk d. stock specific risk

Which of the following describes the balance in the accumulated depreciation account: a/ depreciation expense written off in an accounting period b. the cumulative sum of all depreciation expenses from the date of asset's acquisition to the present date c. liabiltiy account d. none of the above

Which one of the following items is not a component of contributed capital? a. preferred stock b. retained earnings c. common stock d. additional paid-in capital

Contingent liabilities must have the following criteria- select all that apply. a. the obligation is certain to require payment at some point in the future b. the obligation will probably require payment at some point in the future. c. the obligation is estimable d. the obligation will possibly require payment at some point in the future

B and C

McKinnon Enterprises owns a professional ice hockey team, the Rockford Penguins. The company sells season tickets for its upcoming season and receives $960,000 cash. The season starts January 1, 2018, with five home games occurring monthly over the next six months. How much revenue will McKinnon Enterprises recognize from its season ticket sales through the end of April 2 2018? A) $480,000 B) $640,000 C) $960,000 D) $320,000

B) $640,000

Thomas Company receives information that requires the company to increase its expectations of uncollectible accounts receivable. Which of the following items will not be affected by this change? A) Bad debt expense B) Accounts receivables C) Net income D) Allowance account

B) Accounts receivables

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

Both A and B, above happen simultaneously

Boston Consulting Group (BCG) is a management consulting, technology services and outsourcing organization. Which of the following actions should managers take when there is evidence that a fixed-rate contract is over budget and will generate a loss for the firm? A) Use the percentage of completion method to recognize the loss over the remaining term of the engagement. B) Recognize the loss in the current period rather than over the remaining term of the engagement. C) Restate the financial statements and recognize the loss in the earliest period of the engagement. D) Use the percentage of completion method and pro rate the loss over the entire term of the engagement. E) None of the above is an appropriate action.

B) Recognize the loss in the current period rather than over the remaining term of the engagement.

Life Technologies Corporation reported research and development expense of $377,924 thousand on its 2011 income statement. This expense included many types of costs. Which of the following types of costs would not be included in the $377,924 thousand? A) Salaries and wages for R&D personnel B) Supplies and inventory related to new-product sales C) Depreciation on equipment used in experiments D) Costs of applying for FDA approval

B) Supplies and inventory related to new-product sales

A list of assets, liabilities and equity can be found on which of the following? -Balance Sheet -Income Statement -Statement of Assets and Liabilities -Statement of Cash Flows -Statement of Stockholders' Equity

Balance sheet

To qualify as a cash equivalent, an investment must:

Be easily convertible into a known cash amount

Which of the following does not represent a current liability?

Bond issue

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

Both A and B, above happen simultaneously

A statement of cash flows usually does not include which of the following? a. net income b. increase in accounts receivable c. contributed capital d. depreciation expense e. none of the above

The dividend discount valuation model equates the current stock price to: a. all suture expected dividends b. all future expected dividends discounted by weighted average cost of capital c. all future expected dividends discounted by the cost of equity capital d. the current dividend divided by current earnings per share

The most compelling reason for accounting for depreciation is: a. because that is a requirement of company law b. to write down the non-current assets to that it is worth by the end of the period c. to match a portion of the depreciable cost of the asset against the income generated by it d. to build up resources for the purpose of replacing the non-current assets

The wighted average cost of capital is used when valuing the payoffs. a. to equity holders b. to debt holders c. to both equity and debt holders d. to equity holders less the payoff to debt holders

There are many types of equity valuation models. They differ mainly in: a. the choice of length of horizon periods b. the treatment of the terminal period c. the choice of what is forecast d. the interaction of income statement and balance sheet items

Which of the following would not require the company to record an accrual on the balance sheet? a. the company owes $67,000 in wages to its employees for the previous two weeks. b. interest will be paid when a note payable matures in the following accounting period. c. management believes a lawsuit against the company is meritless because they have never had a single complaint about dangerous side effects of their drug in two years. d. the company knows that they will be fined for pollution as a result of their manufacturing process and can estimate the amount of the obligation.

Which of the following are not one of the five forces that determine a company's competitive intensity? (select all that ally) a. bargaining power of suppliers b. threat of substitution c. ability to obtain financing d. threat of entry e. threat of regulatory intervention

C and E

Tickets Today contracts with the producer of Riverdance to sell tickets online. Tickets Today charges each customer a fee of $6 per ticket and receives $15 per ticket from the producer. Tickets Today does not take control of the ticket inventory. Average ticket price for the event is $150. How much revenue should Tickets Today recognize for each Riverdance ticket sold? A) $6 because the $15 from the producer is similar to a negative cost of goods sold B) $150 because the $135 is cost of goods sold paid to the Riverdance producer C) $21 because both the fee from the customer and the producer are earned D) $156 because the $135 is cost of goods sold paid to the Riverdance producer

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

Heller Company offers an unconditional return policy to its customers. During the current period, the company records total sales of $850,000, with a cost of merchandise to Heller of $340,000. Based on past experience, Heller Company expects 4% of sales to be returned. How much in net sales will Heller Company recognize for the current period? A) $850,000 B) $360,400 C) $816,000 D) $489,600

C) $816,000

Selected ratios follow for Mattel Inc. for the year ended December 31, 2013 (in millions). What is the company's return on equity (ROE) for the year? Return on net operating assets (RNOA) 5.94% Profit margin (PM): 4.90% Net operating profit margin (NOPM): 5.59% Asset turnover (A T): .82 Financial leverage (FL): 1.57 A) 7.20% B) 7.65% C) 6.31% D) 3.83%

C) 6.31%

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

C) Ability to obtain financing

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

C) Chance of default X Loss given default.

Assets are recorded in the balance sheet in order of: A) Market Value B) Historic Value C) Liquidity D) Maturity

C) Liquidity

Which of the following are NOT included in current assets? A) Prepaid rent B) Cash C) Taxes payable D) Marketable securities

C) Taxes payable

Profit calc using CM Ratio

CM Ratio * Sales - FE

Degree of Operating Leverage Formula

CM divided by NOI

CM Ratio Calc Using VER

CMR= 1 - VER

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

COGS Sales

Indirect Costs (Topic 10, Slide 10)

Can't be traced to individual product lines. Also known as overhead.

The statement of cash flows explains changes in a firm's:

Cash and cash equivalents

During the year, a company had the cash flows listed below. What was the total net cash flow for the year? PPT. 12

Cash outflow of $9,600

A firm's net cash flow from operating activities includes which of the following:

Cash received from sale of merchandise

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

Chance of default X Loss given default.

Equation For Effect of a Change in Sales on CM

Change in CM= CM Ration times Change in sales

Variable Costs

Change in total cost in direct proportion to changes in volume

Step Costs

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

Mixed Costs

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

In periods of rising prices, which is an advantage of using the LIFO inventory costing method?

Cost of goods sold will include latest (most recent) costs and thus will be more realistic

Costco Wholesale Corporation collects annual non-refundable membership fees from customers. When should Costco recognize revenue for these membership fees?

Costco should record membership fees evenly over the year even if the fee is nonrefundable because Sam's has an obligation to stay open for business for a year to honor the customer's membership. The correct answer is: Evenly over the membership year

Net Working Capital (NWC) =

Current Assets (CA) - Current Liabilities (CL)

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

Current level of leverage

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

Current level of net operating assets

Variable Expense Calc

VE per unit X Quantity sold V X Q

Variable Expense Ratio Calc.

Variable Expenses divided by sales

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

Current level of profitability

The variable EBIT divided by Total Assets in the Altman Z-Score measures which of the following concepts?

Current level of profitability. EBIT represents earning before interest and tax

Estimating a company's cost of capital requires: a. applying a risk estimation model b. applying valuation model c. adjustment for the time value of money and intrinsic value d. adjustment for the time value of money and risk

Revenues and gains are generally recognized when a. cash has been received b. cash has been received and they have been earned through substantial completion c. they are realized or realizable and a contract has been signed d. they are realized or realizable and have been earned through substantial completion

What do you understand when one refers to as "net book value" of a non current asset? a. the cost of the asset less amount expensed as depreciation in the current period b. the cost of the asset c. the current worth of the asset d. the cost less accumulated depreciation up the date of reporting

Which of the following does not affect the current liabilities section of the balance sheet? a. purchase of inventory on credit b. wages owning to employees but not yet paid c. insurance bill to be paid next month d. sale of goods on credit e. a probable legal obligation, due within 12 months

On December 31, 2014, State Construction Inc. signs a contract with the state of West Virginia Department of Transportation to manufacture a bridge over the New River. State Construction anticipates the construction will take three years. The company's accountants provide the following contract details relating to the project: Contract price: $520 million Estimated construction costs: $400 million Estimated total profit: $220 million During the three-year construction period, State Construction incurred costs as follows: 2015: $ 40 million 2016: $240 million 2017: $120 million State Construction uses the percentage of completion method to recognize revenue. Which of the following represent the revenue recognized in 2015, 2016, and 2017? A) $150 million, $200 million, $170 million B) $40 million, $240 million, $120 million C) $22 million, $132 million, $66 million D) $52 million, $312 million, $156 million

D )$52 million, $312 million, $156 million

Which of the following items would not be found on a balance sheet? (select all that apply) a. stockholders' equity b. property, plant and equipment c. non-owner financing d. sales e. cost of goods sold

D and E

The fiscal 2016 balance sheet for Whole Foods Market reports the following data (in millions). What is the company's current ratio? Cash and cash equivalents: $351 Marketable Securities: $379 Accounts receivable: $242 Merchandise inventories: $517 Current assets: $1, 975 Current Liabilities: $1,341 A) 0.69 B) 1.38 C) 0.72 D) 1.47

D) 1.47

Selected income statement data follow for Harley Davidson, Inc., for the year ended December 31, 2016 (in thousands). What is the company's times interest earned ratio? Income before provision for income taxes: $1,023,911 Interest expense: $29,670 Statutory tax rate: 37% Provision for income taxes: $331,747 Net income: $692,164 A) 34.5 B) 24.3 C) 17.8 D) 35.5

D) 35.5

Life Technologies Corporation and Affymetrix Inc. are competitors in the life sciences and clinical healthcare industry. Following is a table of Total revenue and R&D expenses for both companies. Which of the following is true? A) Life Technologies Corporation is the more R&D intensive company of the two. B) Life Technologies Corporation has become more R&D intensive over the three years. C) Affymetrix is more R&D intensive in 2012 than in 2011. D) Affymetrix is less R&D intensive in 2012 than in 2011.

D) Affymetrix is less R&D intensive in 2012 than in 2011.

As inventory and property plant and equipment on the balance sheet are consumed, they are reflected: A) As a revenue on the income statement B) As a use of cash on the statement of cash flows C) On the balance sheet because assets are never consumed D) As an expense on the income statement

D) As an expense on the income statement

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

D) It exempts the borrowing from SEC regulation.

How would a purchase $400 of inventory on credit affect the income statement? A) It would increase liabilities by $400. B) It would decrease liabilities by $400. C) It would increase noncash assets by $400. D) None of the above

D) None of the above

In its fiscal 2016 balance sheet, JetBlue Airways Corporation, reported cash of $443 million at year-end. The statement of cash flows reports that cash increased by $115 million during the year and that net cash flow from operating activities was $1,632 million. What was the cash flow from investing activities during the year? A) $533 million cash outflow B) $715 million cash inflow C) $533 million cash inflow D) There is not enough information to determine the amount.

D) There is not enough information to determine the amount.

Disposal Value vs. Salvage Value

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

As a result of using accelerated depreciation for tax purposes, The Amin Corporation reported $651 million income tax expense in its income statement, while the actual amount of taxes paid by the company was $721 million. How did these tax transactions affect the company's balance sheet?

Decrease retained earnings by $651 million (additional note on PPT 36)

Disadvantages of Payback Period Evaluation

Disadvantages when used solely to evaluate investments Ignores time value of money Ignores profit Ignores cash flows after the payback period

For stockholders one source of future cash flows is:

Dividends

Fixed Costs

Do not change in response to a change in activity volume

How would a purchase of $300 of inventory on credit affect the income statement? a. it would increase liabilities by $300 b. it would decrease retained earnings by $300 c. it would increase assets by $300 d. both a and c e. none of the above

All else equal, when investors consider a firm's return on equity (ROE) they consider riskier a firm that earns proportionately more of that return from operating activities as opposed to nonoperating activities.

FALSE

Barrington Corporation reported net revenues of $50,139 million and $46,859 million for fiscal years 2017 and 2016 respectively. The company reported a gross profit margin of 52.5% in 2017. Forecast sales and cost of goods sold for Barrington Corporation for 2018.

Estimated growth rate = ($50,139 / $46,859) - 1 = 1.07 - 1= 7.0%. 2018 Sales = $50,139 ×1.07 = $53,649 million 2018 Cost of goods sold = $53,649 × (1 - 52.5%) = $25,483 million

Target Profit Analysis

Estimating what sales volume is needed to achieve a specific target profit

Net operating profit after tax (NOPAT) includes operating revenues less expenses such as: a. cost of goods sold (COGS) b. taxes on operating income c. selling, general and administrative expenses (SG&A) d. after-tax earnings from investments and interest expenses e. all of the above f. a, b, and c

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

FALSE

Break Even Formula: dollar sales

FE divided by CMR

Break Even Formula: unit sales

FE divided by unit CM

In a period of declining prices, which of the following inventory methods generally results in the lowest balance sheet figure for inventory?

FIFO method

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

False

A statement of cash flows reports on cash flows for operating, investing and financing activities at a point in time. -True -False

False

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

False

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

False

Publicly traded companies are required to provide quarterly financial reports directly to the public. -True -False

False

Publicly traded companies must provide to the Securities Exchange Commission annual audited financial statements (10K reports) and quarterly audited financial statements (10Q reports). -True -False

False

Publicly traded companies provide financial information primarily to satisfy the SEC and the tax authorities (that is, the Internal Revenue Service). -True -False

False

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

False

The income statement reports net income which is defined as the company's profit after all expenses and dividends have been paid. -True -False

False

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

False

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

False -Net Working Capital = Current assets- current liabilities

The book value of stockholders' equity (the amount reported on the balance sheet) is most typically equal to the market value of the equity of a company.

False / F

The statement of cash flows has two main sections: cash flows from operating activities and cash flows from investing activities

False / F (3 Sections; Operating, Investing, and Financing cash flows)

Assets are reported on the balance sheet at their current market value.

False / F (Assets are generally reported at historical costs. An exception is marketable securities.)

The income statements of the prior and current year are linked via the balance sheet.

False / F (Balance sheets are linked)

Retained earnings articulate across time which means that last period's retained earnings plus current period net income (or loss) is equal to the current period's retained earnings.

False / F (Last period's retained earnings plus current period net income (or loss) less any dividends paid, is equal to the current period's retained earnings)

False / f (...)

Apple Inc. and Microsoft Corporation are competitors in the computer industry. Following is a table of Total revenue and R&D expenses for both companies. Apple Inc. Total revenue 2016 = $215,639 2015 = $233,715 2014 = $182,795 R&D expenses 2016 = $10,045 2015 = $8,067 2014 = $6,041 Microsoft Corporation (in millions) Total revenue 2016 = $85,320 2015 = $93,580 2014 = $86,833 R&D expenses 2016 = $11,988 2015 = $12,046 2014 = $11,381 Which of the following is true?

Microsoft Corporation is more R&D intensive in 2016 than in 2015. take the r&d expense and divide by total revenue to get the Common size R&D ex...10,045/215,639 = 4.66%

Time Value of Money

Money is worth more if received today rather than received in the future Two reasons: The time value of money & RISK If invested, money will earn interest and grow in value over time

Is degree of operating leverage a constant?

NO. it is greatest at sales near BEP and decreases as sales and profits rise

Net operating profit after tax (NOPAT) includes operating revenues less expenses such as

NOPAT is net operating profit after tax. After-tax earnings from investments and interest expenses are not included because they are nonoperating items.

What happens once the break even point is reached?

Net operating income will increase by the amount of the unit contribution margin for each additional unit sold

In manufacturing companies, do the inventories change?

No: number of units produced is equal to the number of units sold

A statement of cash flows usually does not include which of the following?Net income Increase in accounts receivable Contributed capital Depreciation expense None of the above

None of the Above

A firm's net cash flow from operating activities is not affected by:

None of the above

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

None of the above

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

None of the above

How would a purchase of $300 of inventory on credit affect the income statement? Answers: It would increase liabilities by $300 It would decrease retained earnings by $300 It would increase assets by $300 Both A and C, above None of the above

None of the above (The purchase on credit increases both accounts payable and inventory, which are balance sheet accounts. It would, therefore, have no effect on the income statement. )

Special Orders

Occurs when a customer wants to buy merchandise or obtain services on a "one time" basis at a price less than prices charged to other customers. Usually involves a proposed purchase of a large volume of units.

In a statement of cash flows, interest received from loans made as investments is classified as a cash flow from:

Operating Activities

In a statement of cash flows, interest received from loans made as investments is classified as a cash flow from:

Operating activities

Companies normally have a demand for credit due to the operating, investing and financing activities that they engage. For each activity provide a specific reason why a company would need credit

Operating activities - normally need credit due to cyclical or seasonal operating cash needs. Investing activities - normally need credit to invest in plant, property and equipment or for Financing activity - normally need credit to refinance debt, quarterly dividend payment where cash flow is seasonal

Profit calc

P X Q - V X Q - FE

Present Value Formula

PV = FV / (1 + i)^n

Net Present Value (NPV)

PV of Project's Net Cash Flows + PV of Disinvestment Cash Flows - Initial Investment ***Cash flows are adjusted for time value of money, using a discount rate (the minimum rate of return required for the project to be acceptable).

Which of the following are included in current assets?

Prepaid rent

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

Prepaid rent

Contribution Format Profit Calculation

Profit = (sales - VE) - (FE)

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

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

The overarching purpose of credit risk analysis is to

Quantify potential credit losses

The overarching purpose of credit risk analysis is to:

Quantify potential credit losses

Which of the following is a measure of liquidity?

Quick ratio = (Cash + Marketable securities + Accounts receivable) / Current liabilities Rationale: The only measure of liquidity listed above is Quick Ratio which is simply a variation of the Current Ratio (Current ratio = Current assets / Current liabilities) to focus on quick assets (cash, securities, and receivables).

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

Rarely

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

Rarely

The 2016 financial statements of Leggett & Platt include the accounts receivable footnote: Total accounts and other receivables at December 31 consisted of the following: Total accounts and other receivables 2016 =$493.8 2015 = $529.5 Allowance for doubtful accounts 2016 = (7.2) 2015 = (9.3) Total accounts and other receivables, net 2016 = $486.6 2015 = $520.2 The balance sheet reports total assets of $2,984.1 million at December 31, 2016. The common-size amount for gross accounts and other receivables are:

Rationale: $493.8 / $2,984.1 = 16.5% The correct answer is: 16.5%

Rationale: Balance in allowance at the beginning of the year + bad debt expense - accounts written off during the year = balance in allowance at the end of the year. Bad debt expense = $319 million - $327 million + $137 million = $129 million. The correct answer is: $129 million

Rationale: Deferred revenue recognized: ($960,000 / 6 months) x 4 months = $640,000 The correct answer is: $640,000

Rationale: Receivables turnover = Sales / Average AR = $19,829 / [($1,272 + $1,198) / 2] = 16.1 times per year. The correct answer is: 16.1 times

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

Reliable number that are predicted

Sunk Costs

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

Which of the following is included as a component of stockholders' equity? Buildings Retained earnings Prepaid property taxes Accounts payable Dividends

Retained Earnings

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

Retained earnings

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

Return on Equity

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

Return on equity

Which of the following does not affect the current liabilities section of the balance sheet?

Sale of goods on credit

The SEC adopted Regulation FD, to curb public companies' practice of: -Selectively disclosing information -Reporting pro forma (non-GAAP) numbers -Hiring auditors for non-audit services such as consulting -None of the above

Selectively disclosing information

Sales calc

Selling price per unit time quantity sold P X Q

Name the three Steps of ABC Customer Profitability Analysis

Step 1: Identify the activities related to serving customers. Step 2: Prepare a customer profitability analysis. Step 3: Take proactive steps to increase profit.

Accounting Rate of Return Characteristics

Superior to payback period method for total life evaluations as it considers the proposals' profitability Fails to consider the timing of cash flows: Treats all cash flows equally and Early period cash flows are worth more than later cash flows

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

a) Greater than 0.9

strategic position analysis

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

What is a letter of credit?

an importer's bank's conditional guarantee of payment for the goods shipped by an exporter.

structural cost drivers

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

organizational cost drivers

choices concerning the organization of activities and the involvement of persons

What is the sales mix like in multi-product companies?

constant

What is the fixed element?

constant in total over the entire relevant range

step costs

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

Step cost: Y = a(i)

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

What is the variable element?

constant per unit

mixed costs

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

fixed costs

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

Covenants represent: a) The property that a company pledges to guarantee repayment b) The maximum that a creditor will allow a customer to owe at any point in time c) Promises the company makes to the creditor d) Terms and conditions set forth in a lending agreement to reduce the probability of nonpayment

d) Terms and conditions set forth in a lending agreement to reduce the probability of nonpayment

Financial & Managerial Accounting Midterm

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