Cost Accounting 12/13/2015rd1. 12/13/20152 Assets Resources ~ owned by or owned to the company such...

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Cost Accounting Cost Accounting 06/27/22 06/27/22 rd rd 1

Transcript of Cost Accounting 12/13/2015rd1. 12/13/20152 Assets Resources ~ owned by or owned to the company such...

Page 1: Cost Accounting 12/13/2015rd1. 12/13/20152 Assets Resources ~ owned by or owned to the company such as property with monetary value, cash, inventory,

Cost Accounting Cost Accounting

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AssetsAssets

Resources ~ owned by or owned to the company such Resources ~ owned by or owned to the company such as property with monetary value, cash, inventory, as property with monetary value, cash, inventory, buildings, and equipment.buildings, and equipment.

Long term or fixed assets ~ investments in operating Long term or fixed assets ~ investments in operating properties with costs consumed over extended period of properties with costs consumed over extended period of time (land, equipment, buildings, etc.)time (land, equipment, buildings, etc.)

Intangible assets ~ long term assets having value but no Intangible assets ~ long term assets having value but no physical existencephysical existence

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LiabilitiesLiabilities

All financial obligations ~ Owed to outsiders like notes payable, accounts payable, bonds payable.

Long term liabilities – payable in more than a year

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Owner Equity or Net WorthOwner Equity or Net Worth

Equity capital- Charter specifies the number of authorized shares of stock can be issued. Un-issued stock can also be sold. Own part of company.

Corporate bonds – funds from investors (not owners)

General revenue bonds – Finance public works (toll bridges, sewerage treatment). Usually tax exempt.

Owner’s interest (assets minus liabilities) in an enterprise.

Assets = liabilities + equity

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Financial FunctionsFinancial Functions

Maximize value of business to its owners

Value often based on market price of common stock, which is based on investment policies, methods of financing, and dividend decisions

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Delta Corporation Balance SheetDelta Corporation Balance SheetDecember 31, 2008December 31, 2008

Assets Liabilities

Current

Cash $10,500 Accounts payable $19,700

Accounts receivable 18,700 Dividends payable 7,000

Interest accrued receivable 500 Long-term notes payable 16,000

Inventories 52,000 Bonds payable 20,000

Total current assets $81,700 Total liabilities $62,700

Fixed Net Worth

Land $25,000 Common Stock $275,000

Buildings and equipment 438,000 Preferred stock 100,000

Less: Depreciation Retained earnings 25,000

allowance $82,000 356,000

Total fixed assets 381,000 Total net worth 400,000

Total assets $462,700 Total liabilities and net worth $462,700

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Delta Corporation Income Statement Delta Corporation Income Statement Year ending December 31, 2008Year ending December 31, 2008

Revenues

Sales $505,000

Interest revenue 3,500

Total revenues $508,500

Expenses

Cost of goods sold $290,000

Selling 28,000

Administrative 35,000

Other 12,000

Total expenses 365,000

Income before taxes 143,500

Taxes for year 64,575

Net profit for year $78,925

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Statement of Cost of Goods SoldStatement of Cost of Goods SoldYear Ended December 31, 2008Year Ended December 31, 2008

Materials

Inventory, January 1, 2008 $ 54,000

Purchases during year 174,500

Total 228,500

Less: Inventory December 31, 2008 50,000

Cost of materials $178,500

Direct labor 110,000

Prime cost 285,500

Indirect cost 7,000

Factory cost 295,500

Less: Increase in finished goods inventory during year 5,500

Cost of goods sold $290,000

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Business RatiosBusiness Ratios

Used to evaluate the financial health of a company over time and in relation to industry norms.

Median ratios are published by firms such as Dunn and Bradstreet in Industry Norms and Key Business Ratios.

Solvency ratios ~ assess ability to meet short/long debts

Efficiency ratios ~ measure managers ability to use assets

Profitability ratios ~ rate ability to earn a return for owners

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Current RatioCurrent Ratio

Current Ratio = Current Assets Current Liabilities

= 81,700 26,700

= 3.06

2 to 3 is considered the norm

Assumes that inventory can be converted to cash quickly.

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Quick RatioQuick Ratio

Quick Ratio = Current Assets - InventoriesCurrent Liabilities

= 81,700 - 52,000 26,700

= 1.11

Indicates how well a company can meet its obligations without having to liquidate inventory.

Ratio of 1 is considered strong.

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Debt RatioDebt Ratio

Debt ratio = Total liabilities / Total assets

= 62,700/462,700

= 13.6%

Creditors have supplied 13.6% of Engineered Industries financing. Thus company is 86.4% stockholder-owned.

20% or less is considered sound financially.

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Return of Sales RatioReturn of Sales Ratio

Return on sales = net profit / net sales

= 78,925 / 505,000

= 15.6%

Income ratio of 3% is quite healthy for relatively large-volume, high turnover businesses.

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Return on AssetsReturn on Assets

Return on assets = net profit / total assets

= 79,925/462,700

= 17.1%

Net income + interest expense x (1 – tax rate)

Divided by Average total assets

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Inventory Turnover RatioInventory Turnover Ratio

Net sales to inventory = net sales / average inventory

= 505,000 / 52,000

= 9.71

Ratio indicates the number of times the average inventory value passes through the operations of the company.

The average value of the inventory has been sold 9.71 times during the year.

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Methods of FinancingMethods of Financing

Short Term—loans that mature in a year

raise funds for seasonal variations or special funding from trade credits, bank loans, commercial notes.

Long Term– 5 years or more for fixed assets.

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Financial ManagementFinancial Management

Current Ratio ~ assets / liabilities

Earnings per share – earnings / # shares

net earnings = profit – preferred dividends

Debt-to-equity ratio – long term debt + current liabilities

total stockholders equity

Profitability ratio (sales) = net profit after taxes total sales

(investment) = net profit after taxes

total tangible assets

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General AccountingGeneral Accounting

General – Balance sheet (snapshot of finances)

profit and loss statement (yearly)

Five classifications of accounting are:

Assets, liabilities, net accounts (balance sheet)

assets = liabilities + equity

revenue, expenses (income statement)

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Cost AccountingCost Accounting

Cost of goods and soldDirect Material –directly charged to projectDirect labor – hours * wage rate

Indirect or factory overhead – all costs not charged to directFactory cost – sum of direct material, direct labor and factory overhead.Administrative costs – executive salaries, clerical, supplies.Selling costs – incurred in disposing of the products and services produced

(commissions, office space and supplies, rentals market surveys, entertainment of customers)

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Problem 18-12Problem 18-12Cash $ 90KNet Accounts and notes receivable 175KRetailer's inventories 210KPrepaid expenses 6KAccounts and notes payable (short term) 322KAccumulated liabilities 87K

From the balance sheet above, determinea) working capital, b) current ratio, and c) acid-test ratio.

a) (90 + 175 + 210)K - (322 + 87)K = 475K - 409K = $66Kb) current ratio = 475/409 = 1.161c) acid-test ratio = (475-210)/409 = 0.648

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Depreciation AccountingDepreciation Accounting

Book Value of an asset

MACRS

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Business PapersBusiness Papers

Original documents from transactions such as sales invoices, cash register tapes, purchase invoices, debit or credit memorandum, check stubs, etc.

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JournalsJournals

Books of original, chronological entry used for classifying and recording transactions

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LedgersLedgers

Complete set of accounts for the business that is used to classify and summarize data according to function.

Entry items are know as posting.

Summarize increases and decreases in the firm’s assets, liabilities and capital.

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Operating ExpensesOperating Expenses

Selling Expenses

General and Administrative Expenses

Other incomes and expenses (miscellaneous)

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Income StatementIncome Statement

Summary of the revenues, expenses and net income of a business entity for a specified period of time.

Also called profit and loss statement, operating statement, or a statement of operations.

Revenues from sales, cost of goods sold, gross profit on sales, operating expenses.

Net income = Gross Profit – Operating expenses

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Income StatementIncome Statement

Revenue $300,000Operating Expenses 250,000 Gross Profit 50,000Administrative Costs 10,000Other Income 5,000

Net Income Before Tax 45,000Tax 20,000Net Income of Net Profit After tax 25,000Dividends 10,000Retained Earnings 15,000

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Balance SheetBalance Sheet

Statement of financial position

Presents the assets, liabilities and capital

of a business at a specified date

Assets in order of liquidity

Liabilities in order of expected payments

Capital or Stockholders’ Equity – emphasizing current solvency.

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Balance SheetBalance SheetAssets Liabilities and Owners EquityCash $50,000 Accounts Payable

$30,000Securities 5,000 Note Payable 20,000Accounts Receivable 5,000 Taxes Payable 10,000Inventory 90,000 Common Stock 300,000Equipment 200,000 Retained Earnings 90,000Buildings 100,000 ______

Total Assets $450,000 Total Liability andOwners Equity $450,000

Current Assets

Long-term Assets=

Current Liabilities

Long-term Liabilities

Equity 1. Owner's Contributions

2. Retained Earnings

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Balance Sheet Engineered Industries KBalance Sheet Engineered Industries K

Assets LiabilitiesCurrent assets Current liabilities Cash 1940 Accounts Payable 1150 Accounts Receivable 950 Notes Payable 80 Securities 4100 Inventories 1860 Accrued expense 950 (-) Bad debt provision -80 Total current liabilities 2180

Fixed assets Long-term liabilities 1200 Land 335 Plant & Equipment 6500(-) Accumulated depr -2350 Equity

Preferred stock 110 Other assets Common stock 650 Prepays/deferred charges 140 Capital Surplus 930 Intangibles 420 Retained earnings 8745 Total other assets 560 Total equity 10,435

Total assets 13,815 Total liabilities and equity 13,815

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Analysis by RatiosAnalysis by Ratios

Ratios that determine solvency by looking at current assets and current liabilities.

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Working CapitalWorking Capital

Dollar excess of current assets over current liabilities ~ measures short-run solvency

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Current RatioCurrent Ratio

Current Assets Current Liabilities

Accepted minimum is at least 2 to 1.

Better indicator than working capital

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Quick or Acid Test RatioQuick or Acid Test Ratio

Exclude from current assets inventories and prepaid expenses divided by current liabilities

Measure of a company’s ability to pay its debt quickly.

Inventories are subject to decline in market value and it takes time to convert inventory to cash.

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Balance SheetBalance Sheet

Given partial data from a balance sheet, compute working capital, current ratio and acid test ratio.

Cash $200,000Marketable securities 90,000Accounts receivable 300,000Retailers inventories 400,000Prepaid expenses 16,000Accounts payable 630,000Other liabilities to date 180,000

Total assets = 200,000 + 90,000 + 300,000 + 400,000 + 16,000 = $1,006,000Total liabilities = 630,000 + 180,000 = $810,000Working capital = (1,006,000 – 16,000) – 810,000 = $180,000Current ratio = 990,000/810,000 = 1.22Acid test ratio = (200,000 + 90,000 + 300,000)/810,000 = 0.73.

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Financial RatiosFinancial Ratios

Debt RatioTimes-Interest-Earned RatioCurrent RatioQuick RatioInventory Turnover = sales/average inventoryDay's Sales Outstanding = receivables/avg salesTotal Assets Turnover = sales/total assets

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Balance Sheet Engineered Industries ($K)Balance Sheet Engineered Industries ($K)

Assets LiabilitiesCurrent assets Current liabilities Cash 1940 Accounts Payable 150 Accounts Receivable 950 Notes Payable 80 Securities 4100 Inventories 1860 Accrued expense 950 (-) Bad debt provision -80 Total current liabilities 2180

Fixed assets Land 335 Plant & Equipment 6500(-) Accumulated depr -2350 Equity

Preferred stock 110 Other assets Common stock 650 Prepays/deferred charges 140 Capital Surplus 930 Intangibles 420 Retained earnings 8745 Total other assets 560 Total equity 10,435Total assets 13,815 Total liabilities and equity 13,815

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Income StatementIncome Statement

Revenue $300,000Operating Expenses 250,000 Gross Profit 50,000Administrative Costs 10,000Other Income 5,000

Net Income Before Tax 45,000Tax 20,000Net Income of Net Profit After tax 25,000Dividends 10,000Retained Earnings 15,000

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Inventory turnover ratioInventory turnover ratio

Inventory turnover ratio = sales average inventory balance

= 300,000/1860

= 161.29 times

Measures how many times the company sold and replaced its inventory over a specific period. The average is usually calculated over 2 years.

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Times-Interest-Earned RatioTimes-Interest-Earned Ratio

Times-interest– earned ratio = net income + interest Interest

is earnings before interest and incomes taxes

Times-interest– earned ratio = 45,000 + interestinterest paid

The ratio indicates the extent to which operating income can decline before firm is unable to meet annual interest costs.

A lower times interest earned ratio means less earnings are available to meet interest payments and that the business is more vulnerable to increases in interest rates. 

  

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Day's Sales Outstanding (DSO)Day's Sales Outstanding (DSO)

DSO = Receivables/average sales per day

= 950,000/45,000

= 21.11 days

On average it takes 21.11 days to collect on a credit sale. If 30 days credit it extended, company is doing good but customers are not enjoying the float as long as offered.

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Total Assets TurnoverTotal Assets Turnover

Total Assets Turnover = Sales / Total assets

Indicates how company is using its total assets compared with other companies.

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Profit Margin on SalesProfit Margin on Sales

Profit margin on sales = net income available to stockholders / Sales

e.g., a 5.76 ratio indicates that the profit margin of 5.76 cents is made for each sales dollar generated.

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Return on common equity (ROCE)Return on common equity (ROCE)

ROCE = net income / average common equity

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Price-to-Earnings RatioPrice-to-Earnings Ratio

P/E ratio = Price per share / Earnings per share

30 => stock was selling for about 30 times its current earnings per share => high growth rate expected.

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Book Value per ShareBook Value per Share

Book value per share =

total stockholder's equity – preferred stockShares outstanding

More historical than future expections.