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