rsawyers/webpage/acc220/Classcoursepack.doc · Web viewContrast financial and managerial accounting...

Acc 220Coursepack

Fall 2005(all sections)

Handouts &Practice Exams

TABLE OF CONTENTS

Page #HANDOUTS/ASSIGNMENTS:

Chapter Objectives ----------------------------------------------------------- 3Comparison of Forms of Business Ownership ---------------------------- 8Transaction analysis steps worksheet -------------------------------------- 9Cash Basis of Accounting – transaction analysis worksheet ----------- 10Deferrals and Accruals notes ------------------------------------------------ 11Accrual Basis of Accounting – transaction analysis worksheet -------- 13Process Costing Problems & Solutions ------------------------------------ 14Chapter 6: Class Notes ------------------------------------------------------- 20Present Value Problems ------------------------------------------------------ 22

PRACTICE EXAM QUESTIONS:

Selecting a Form of Business Ownership --------------------------------- 24The Role of Accounting in Business --------------------------------------- 25The Cash Basis of Accounting ---------------------------------------------- 27The Accrual Basis of Accounting ------------------------------------------ 30Introduction to Taxation ----------------------------------------------------- 34Managerial Accounting – Ch 1 --------------------------------------------- 36Managerial Accounting – Ch 2 --------------------------------------------- 37Managerial Accounting – Ch 3 --------------------------------------------- 41Managerial Accounting – Ch 4 --------------------------------------------- 47Managerial Accounting – Ch 5 --------------------------------------------- 48Managerial Accounting – Ch 6 --------------------------------------------- 51Managerial Accounting – Ch 7 --------------------------------------------- 59Managerial Accounting – Ch 8 --------------------------------------------- 64Managerial Accounting – Ch 9 --------------------------------------------- 68Managerial Accounting – Ch 10 -------------------------------------------- 71Managerial Accounting – Ch 11 -------------------------------------------- 73

2

NC STATE UNIVERSITY - DEPARTMENT OF ACCOUNTING ACC 220

CHAPTER OBJECTIVES

Text: “Introduction to Financial Accounting and Income Tax for Business Entities”

Chapter 2 -- Selecting a Form of Business Ownership

Students should be able to:

1. Contrast the proprietorship, partnership (general, limited and limited liability) and corporate forms of business ownership (including S-corporations).

2. Describe the advantages and disadvantages of the sole proprietorship, partnership and corporate forms of business ownership,

3. Contrast C-corporations and S-corporations, and4. Describe methods of owning existing businesses.

Chapter 1-- The Role of Accounting in Business


1. Describe the types and forms of businesses, business strategies, value chains and stakeholders,2. Describe the three business activities of financing, investing and operating,3. Define accounting and its role in business,4. Describe and illustrate the basic financial statements and how they interrelate, and 5. Describe eight basic accounting concepts underlying financial reporting.

Chapter 2-- The Cash Basis of Accounting


1. Describe the basic elements of a financial accounting system,2. Describe the cash and accrual bases of accounting,3. Use the cash basis of accounting to analyze, record and summarize transactions for a business,4. Use the cash basis of accounting to prepare financial statements (income statement, balance sheet

and retained earnings statement) , and 5. Describe the advantages and disadvantages of the cash basis of accounting.

Chapter 3-- The Accrual Basis of Accounting


1. Describe the accrual basis of accounting, and2. Use the accrual basis of accounting to analyze, record, and summarize transactions.

3

Chapter 1-- Introduction to Taxation


1. Distinguish between progressive, proportional and regressive tax rates,2. Identify the various taxes affecting business enterprises including taxes on the production and

sale of goods, employment taxes, death taxes, gift taxes, property taxes, taxes on privileges and rights, and income taxes,

3. Distinguish between the basic tax formula for individuals and taxable business entities,4. Calculate the taxable income and income tax for an individual taxpayer,5. Calculate the taxable income and income tax for a corporate taxpayer, 6. Distinguish between the income taxation of proprietorships, partnerships, corporations and S-

corporations,7. Distinguish between and calculate marginal and average tax rates,8. Explain the concept of implicit taxes and the impact of taxes on investment decisions,9. Describe the taxation of capital gains and losses, and10. Recognize the economic, social, equity and political considerations that underlie the tax law.

Text: Managerial Accounting: A Focus on Decision Making by Jackson and Sawyers

Chapter 1 -- Accounting Information and Managerial Decisions


1. Describe the uses and users of accounting information,2. Contrast financial and managerial accounting and distinguish between the information needs of

external and internal users,3. Describe the three primary activities of managers and the three primary functional areas of an

organization4. Explain the role of the managerial accountant5. Describe and apply the decision-making role of managers,6. Apply a basic four-step decision-making model,7. Evaluate the role of relevant factors in decision making,8. Evaluate the role of risk in decision making, and9. Evaluate the role of ethics in decision making.

Chapter 2—Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows


1. Describe the production process in a traditional manufacturing environment and a just-in-time (JIT) environment,

2. Describe the components of manufacturing costs,3. Contrast manufacturing and nonmanufacturing costs,4. Describe cost flows in a manufacturing company,5. Calculate the cost of goods manufactured and cost of goods sold using the cost of goods sold

model, and6. Contrast product and period costs as they flow to the income statement.

4

Chapter 3 – Job Costing, Process Costing and Operations Costing


1. Describe, comprehend, and contrast job costing, operations costing and process costing,2. Analyze the issues related to the measurement of direct materials, direct labor and overhead costs

in job costing,3. Describe the necessity for allocating indirect product costs,4. Analyze the role of cost pools and cost drivers in overhead application5. Compute a predetermined overhead rate,6. Apply overhead to work in process (WIP),7. Evaluate the advantages and disadvantages of using plantwide versus departmental overhead

rates, 8. Calculate the cost of a product using job costing,9. Compute the amount of over or under applied overhead,10. Dispose of over or under applied overhead, 11. Describe the use of equivalent units in process costing,12. Calculate the equivalent units of production using the first-in-first-out (FIFO) method, and13. Calculate the cost of ending WIP and the cost of goods manufactured using process costing.

Chapter 4—Activity-Based Costing


1. Describe the need for activity-based costing (ABC),2. Describe ABC,3. Describe the process of instituting ABC,4. Compute the cost of a unit of product using ABC, 5. Compare traditional volume-based costing to ABC costing, and 6. Evaluate the benefits and limitations of ABC systems

Chapter 5—Cost Behavior and Relevant Costs


1. Describe and identify variable costs, fixed costs, mixed costs,2. Describe the relationship between activity level and per unit and total fixed and variable costs,3. Interpret the results of a regression analysis of a mixed cost,4. Analyze a mixed cost using high-low analysis,5. Apply a cost equation to the process of prediction, and6. Determine the impact of taxes on costs, revenue and income.

5

Chapter 6 – Cost-Volume-Profit Analysis and Variable Costing


1. Construct a contribution margin income statement and compare it to a traditional income statement,

2. Describe the relationship between activity level and contribution margin, fixed costs, and net income,

3. Describe and compute contribution margin per unit, contribution margin ratio, and operating leverage,

4. Use contribution margin and operating leverage in "what-if" analysis, 5. Calculate the breakeven point in both units and dollars,6. Compute the breakeven point in a multiple product environment,7. Compute the number of units and sales dollars to reach a target profit (both before and after-tax),8. Describe the assumptions of cost-volume-profit analysis,

Chapter 7—Short-Term Tactical Decision Making


1. Consider both quantitative and qualitative factors in:

Analyzing the pricing of a special order, Analyzing a decision involving the outsourcing of labor or making or buying a component, Analyzing a decision dealing with dropping a product, Analyzing a decision dealing with limited resources, and Analyzing a decision dealing with selling a product at the split-off point or processing it

further.

Chapter 8 -- Long-Term (Capital Investment) Decisions


1. Discuss the importance of focusing on cash flows in capital investment decisions,2. Understand the typical cash inflows and outflows associated with an investment project and how

they affect capital investment decisions,3. Evaluate capital investment decisions using net present value (NPV) and internal rate of return

(IRR),4. Discuss the key assumptions of the NPV and IRR methods,5. Compute the profitability index and rank investment projects using IRR and the profitability

index,6. Compute the payback period of an investment and understand the limitations of the method,7. Compute the after-tax cost and benefits of cash expenses and receipts, and8. Compute the after-tax NPV and IRR of an investment.

6

Chapter 9 -- The Use of Budgets in Planning and Decision Making


1. Evaluate the principal advantages of budgeting,2. Explain how budgets can influence behavior,3. Prepare a sales budget,4. Prepare a production budget,5. Prepare a direct materials budget,6. Prepare a cash budget, and7. Prepare a flexible budget and understand the advantages of a flexible budget over a static budget.

Chapter 10 – Variance Analysis: A Tool for Cost Control and Performance Evaluation


1. Apply and use standard costing in variance analysis,2. Distinguish between ideal standards and practical standards,3. Compute and interpret direct material price and quantity variances,4. Compute and interpret direct labor rate and efficiency variances,5. Compute and interpret variable overhead spending and efficiency variances,6. Explain how a manager would determine whether a variance constituted an "exception" that

would require his/her attention, and

Chapter 11 – Decentralization and Performance Evaluation


1. Evaluate the benefits and drawbacks of decentralization, 2. Explain the importance of decentralization in a responsibility accounting system,3. Differentiate between cost centers, revenue centers, profit centers and investment centers and

explain how performance could be measured in each,4. Compute ROI for an investment center,5. Break down ROI into its components of margin and turnover,6. Compute residual income for an investment center, and7. Identify and discuss the advantages and disadvantages of ROI vs. residual income.

7

COMPARISON OF FORMS OF BUSINESS OWNERSHIPTYPE GEN’L INFORMATION ADVANTAGES DISADVANTAGES TAXES

Sole Proprietorship

Owned by a single owner Approx. 70% of all

business are this, but generates only 10% of the revenue

All earnings go to the sole prop. Easy organization Complete control Lower taxes

Sole prop. Incurs all losses Unlimited liability Limited funds Limited skills

Business pays taxes at the sole proprietor level (Schedule C on Form 1040)

Partnership Co-owned by two or more people

General Partnership: all owners have unlimited liability

Limited Partnership: Some owners have ltd liability

Limited partners usually do not work in the business

Additional funding Losses are shared More specialization

Control is shared Unlimited liability (or for general

partner if a LP) Profits are shared

Business files its own tax return (form 1065) in order to report income, but no taxes paid with this return. Each partner is given a form reporting their share of the business’ profits

Each partner reports his/her share on their own personal tax return and pays taxes accordingly

S-Corporation Has characteristics of both a partnership and a corporation

Many rules in order to qualify

75 or fewer shareholders

Owners have limited liability Owners are taxed as if it were a

partnership

Control is shared Profits are shared Strict eligibility requirements

Business files its own tax return (form 1120S) in order to report income, but no taxes paid with this return. Each shareholder is given a form reporting their share of the business’ profits

Each shareholder reports his/her share on their own personal tax return and pays taxes accordingly

Limited Liability Company (LLC)

Owned by 1 or more members

Offers limited liability Flexibility with respect to

tax

Owners have limited liability More flexible than an S-Corp.

Control is shared Profits are shared Uncertainty as to the tax

consequences in some states due to “newness” of this type of form

Members can choose. Usually taxed as a sole proprietorship if one member, and as a partnership if 2+ members.

C-Corporation Approx. 20% of all businesses are this type

Accounts for almost 90% of all business revenue

Privately-held vs. publicly-held

Limited liability Access to funds Transfer of ownership

High organizational expense Financial disclosure if a public

company SEC requirements for public

companies Agency problems Double taxation

Business files its own tax return (Form 1120) and pays taxes on its income.

If remaining profits are distributed as a dividend to shareholders, then the shareholder pays taxes on the dividend on their indiv. tax return

8

Transaction Analysis Steps

1. Enter beginning account balances (if applicable).

2. Enter new transactions. Show how each transaction affects the accounting equation (A = L + OE). Be specific – show which asset, liability, or owner’s equity account is being affected. If Retained Earnings (“RE”) is affected, detail the specific reason RE is affected (revenue, expense, or dividend).

3. Once all transactions have been entered, calculate new account balances.

4. Verify that the account balances “balance” the accounting equation.

ASSETS LIABILITIES OWNER’S EQUITY REVENUES EXPENSES DIVIDENDSAcct Name →

Beginning Bal.

Balances

Note: The various account balances (versus individual transactions) go on their respective financial statement. With retained earnings being the exception, each account balance will be used only once.

9

ABC Company (a service organization) had the following transactions occur during its first month of operations:

Jan 1 --- The ABC Company is formed when the owners contribute a total of $10,000 cash.Jan 3 --- The company purchases machinery costing $3,000.Jan 4 --- The company borrows $4,000 from the bank by signing a note payable.Jan 10 -- The company performed services for customers and received $1,000 cash.Jan 11 -- The company incurred expenses of $300 paid in cash.Jan 20 -- The company paid its owners a dividend of $100.

Required:

1. Enter each of the above transactions in the following worksheet. Use + and – signs to indicate whether the balance sheet account is going up or down. Remember to be specific regarding which account is affected. For numbers entered in the revenue, expense, or dividend columns, use their absolute value (no + or – signs).

2. At the bottom of the worksheet, compute account balances.

3. On a separate page, prepare the first three financial statements – Income Statement, Statement of Retained Earnings, and Balance Sheet.

ASSETS LIABILITIES OWNER’S EQUITY

REVENUES EXPENSES DIVIDENDS

Balances

10

Deferrals and Accruals

When cash is received at the same time as revenue is earned, or when cash is paid at the same time an expense is incurred, the transaction to be recorded is simply:

↑Cash and ↑RE (as revenue is increasing)

or

↓Cash and ↓RE (as expenses are increasing)

In accrual-based accounting, while the above two situations can still occur, there are two additional types of situations that can occur as well. These are called deferrals and accruals.

DEFERRAL:

A deferral is created when either one of these transactions occurs:

Cash is received before revenue is earned, or Cash is paid before an expense is incurred

A. Deferred Revenue: At the time of the deferral, a recordable transaction occurs.

↑Cash and ↑Unearned Revenue (a liability)

Assuming that the company eventually earns the revenue, an adjustment (also known as an “adjusting journal entry”) will be recorded at the end of the period recognizing the revenue now earned.

↓Unearned Revenue and ↑RE (as revenue is increasing)

Once this adjustment has been made, the balances on the financial statements are correctly stated and the revenue recognition principle has been adhered to.

B. Deferred Expense: At the time of the deferral, a recordable transaction occurs.

↓Cash and ↑Prepaid Expense (an asset)

Assuming the company eventually incurs the expense, an adjustment will be recorded at the end of the period recognizing the expense.

↓Prepaid Expense and ↓RE (as expenses are increasing)

11

Once this adjustment has been made, the balances on the financial statement are correctly stated and the matching principle has been adhered to.

12

ACCRUAL:

An accrual is created when either one of these transactions occurs:

Cash will be received after the revenue is earned, or Cash will be paid after the expense is incurred

Either at the time of the event leading to the accrual or, at the latest, the end of the accounting period, a recordable transaction occurs. If it is being recorded at the end of the accounting period, it is called an adjustment (also known as an “adjusting journal entry”).

A. Accrued Revenue: ↑AR and ↑RE (as revenue is increasing)

B. Accrued Expense: ↑_____ Payable and ↓RE (as expenses are increasing) (ex. AP, SP, IP)

Some time after the adjustment is made, there will be a subsequent receipt of cash from the customer (↑Cash and ↓AR) or a subsequent payment to the creditor (↓Cash and ↓AP).

Once these adjustments have been made, the financial statement balances are correctly stated and the revenue recognition and matching principles will have been adhered to.

13

Helen Ingersoll owns and operates an interior design studio called Ingersoll Interiors. The company began operations on January 1, 2003 and is organized as a corporation. After the first month of operations, the company’s accounts had the following beginning balances.

ASSETS LIABILITIES OWNER’S EQUITY

Detailof REeffect

Transaction Cash A/R Prepd Insur.

Inventory Equip. (net of

acc. dep)

Land Unearned Revenue

Notes Payable

Accounts Payable

Capital Stock

Retained Earnings

Jan 30 Bal 3,750 12,000 8,000 6,750 1,000ABCDEFGHIJFeb. 28 Bal

The following events occurred in February:A. On February 1, Ingersoll purchased $5,000 of inventory on account B. On February 1, Ingersoll paid $1,200 for an insurance policy for the next 24 months. C. On February 1, Ingersoll purchased depreciable office equipment for $6,000 on account. The equipment is depreciable over 5 years.D. On February 4, Ingersoll performed services for a client and billed the client for $8,000. E. On February 11, Ingersoll paid $2,500 of the amount she owed with respect to the purchase of inventory (see transaction A)F. On February 18, Ingersoll collected $4,000 cash from the client billed in transaction D.G. On February 19, Ingersoll performed services for a client and received cash of $1,000 as payment in full for the work performed.H. On February 20, Ingersoll received $1,000 as a downpayment from a client for work to be performed over the next year.I. On February 28, Ingersoll recognized depreciation for the month (see transaction C).J. On February 28, Ingersoll recognized insurance expense for the month (see transaction B).

Requirements:1. Complete the transaction analysis worksheet above2. Prepare the income statement and statement of retained earnings for the month of Feb as well as the balance sheet at Feb. 28

14

PROCESS COSTING PROBLEMS(FIFO Method)

STEP #1: From the information given, compute the following three items:

# of units in beginning inventory # of units started and completed in the current period # of units in ending inventory

For the beginning and ending inventories, you will need to note how complete they are.

STEP #2: Using the three items from step #1, compute the total number of equivalent units for the current period.

STEP #3 Compute the cost per equivalent unit. Do this by taking the current period’s costs ÷ total EU’s (from Step #2).

STEP #4: Calculate the cost of ending inventory by taking the number of EU’s in ending inventory (from Step #1) and multiplying it by the cost per EU (from step #3).

STEP #5: Solve for the CGM. Do this by taking the Beginning Costs + Current period’s costs – ending WIP

cost.

PRACTICE PROBLEM #1:

Linus Inc. manufactures a product that goes through three departments. Information relating to activity in the first department is as follows:

# units Costs (DM and CC)

Work-in-process – Beginning (20% complete) 50,000 units $40,000Started in current period 200,000 units $340,000Work-in-process – Ending (60% complete) 30,000 units

STEP #1:

STEP #2:

STEP #3:

STEP #4:

STEP #5

15


Abby Corp. manufactures a product that goes through one processing department. Information relating to activity in this department is as follows:


Work-in-process – Beginning (80% complete) 3,000 $10,000Started in current period 35,000 225,000Work-in-process – Ending (20% complete) 10,000

STEP #1:

STEP #2:

STEP #3:

STEP #4:

STEP #5:

16


Wolfpack Inc. manufactures a product that goes through various departments. Information relating to activity in one of the departments is as follows:


Work-in-process – Beginning (90% complete) 200,000 $300,000Started in current period 800,000 1,000,000Work-in-process – Ending (90% complete) 90,000

STEP #1:

STEP #2:

STEP #3:

STEP #4:

STEP #5:

17


Williams & Company manufactures a single product and uses process costing. The following information was recorded in one of the processing departments for the month of August:

Production Data:Units in Process, August 1: 80% complete for DM and CC 60,000 unitsUnits started into production in August 510,000 unitsUnits in Process: August 31: 70% complete for DM and CC 30,000 units

Cost Data:Beg WIP (DM and CC) $40,000Costs added in August 900,000

QUESTION: What was the cost of goods transferred out (CGM) during August?

18

SOLUTION TO PROCESS COSTING PROBLEMSPRACTICE PROBLEM #1:

Step #1: Beginning units 50,000

+ units started 200,000- Ending units (30,000)Units completed 220,000 → of which 50,000 were from the beginning units, and

→170,000 were started and completed in current period

Step #2: 50,000 units X 80% = 40,000 eu’s170,000 X 100% = 170,000 eu’s30,000 X 60% = 18,000 eu’sTotal Equivalent Units 228,000 eu’s

Step #3 Current Period Costs $340,000÷ Total EU’s ÷ 228,000 eu’sCost per EU $1.49 Per EU

Step #4 18,000 EU’s in ending inventory X $1.49 per EU = $26,820 Cost of Ending Inventory

Step #5 Beginning WIP costs $40,000+ Current Period Costs 340,000Total Avail. Costs 380,000- Ending WIP Costs (step #3) (26,820)CGM $353,180


Step #1: Beginning units 3,000+ units started 35,000- Ending units (10,000)Units completed 28,000 → of which 3,000 were from the beginning units, and


Step #2: 3,000 units X 20% = 600 eu’s25,000 X 100% = 25,000 eu’s10,000 X 20% = 2,000 eu’sTotal Equivalent Units 27,600 eu’s




19





Step #3 Current Period Costs $1,000,000÷ Total EU’s ÷ 811,000 eu’sCost per EU $1.23 Per EU


Step #5 Beginning WIP costs $300,000+ Current Period Costs 1,000,000Total Avail. Costs 1,300,000- Ending WIP Costs (step #3) (99,630)CGM $1,200,370








20

Chapter 6(Class Notes)

TRADITIONAL INCOME STATEMENT VS. CONTRIBUTION MARGIN FORMAT

The ABC Company has the following information available:

Variable selling & admin. costs ------------ $10.00 per unitDirect materials ------------------------------- $15.00 per unitVariable manufacturing overhead ---------- $8.50 per unitDirect Labor ----------------------------------- $2.00 per unit

Fixed selling & administrative costs ------- $60,000Fixed manufacturing overhead ------------- $35,000

Assume that the company produced and sold 50,000 units at a sales price of $70 per unit.

Part I: Prepare a traditional format income statement.

Part II: Prepare a contribution margin format (a.k.a. variable costing) income statement.

21

Answer the following questions using your contribution margin format income statement:

1. What is the contribution margin per unit? What does this number mean?

2. What is the contribution margin ratio? What does this ratio mean?

3. What does the contribution margin need to be in order for the company to break-even?

4. How many units need to be sold in order for the company to break-even?

5. All else being equal, if the variable costs per unit increase, what happens to the break-even point?

6. All else being equal, if the variable costs per unit decrease, what happens to the break-even point?

7. All else being equal, if fixed costs increase, what happens to the break-even point?

8. All else being equal, if fixed costs decrease, what happens to the break-even point?

9. If the company wishes to have net income of $2,000,000, what does the contribution margin need to be?

10. Continuing with #10, how many units would need to be sold?

11. If the company believes they can only sell 55,000 units, what should be the price per unit in order to have net income of $2,000,000?

22

Chapter 8(Class Notes)

PRESENT VALUE PROBLEMS

1. You invested in a savings account at the beginning of the year that pays 12% compounded monthly. If you expect to withdraw $11,000 at the end of the year, how much did you originally deposit?

Solution:

You must solve for the present value (PV) where the future value (FV) = $11,000, the interest rate per compounding period (r) = .01 (12% annual rate / 12 compounding periods per year), and the number of compounding periods per year (n) = 12.

Using the present value formula,

PV = FV X DF12, .01

PV = $11,000 x .889 = $9,757

Mathematically, PV = $11,000/ (1+.01)12 = $9,757

2. Barron deposits $2,000 in a mutual fund and 5 years later has $3,221 in the investment account. At what rate of interest (assuming annual compounding) did the investment appreciate?

Solution:

You must solve for the interest rate (r) where PV = $2,000, FV = $3,221 and n = 5.

Using the present value formula,

PV = FV x DF5, r%?

$2,000 = $3,221 x DF5, r%?

DF5, r% = .6209

Looking across the present value of an annuity table (see page 276 in your book) for an “n” of 5, you will find .6209 in the 10% column.

23

PRESENT VALUE OF ANNUITY PROBLEMS

1. A grateful alumnus of the NCSU Accounting Department wants to establish an award of $2,000 to be given to the top accounting student each year for the next thirty years. How much must the endowment for the award be if the fund will earn 9% compounded annually and the first award will be given one year from now?

Solution:

You must solve for the present value of an annuity (PVA) where the interest rate (r) = 9%, the number of compounding periods (n) = 30 and the amount of the periodic annuity or rent (R) is $2,000.

Using the PVA formula,

PVA = R x DFA30, .09

PVA = $2,000 x 10.274 = $20,548

2. For an investment of $100,000, your CPA promises that you will get back $29,831 a year for the next five years (beginning one year after the initial investment). What rate of interest does the investment provide?

Solution:

You must solve for the interest rate (r) where the PVA = $100,000, n = 5 and R = $29,831.

Using the present value of an annuity formula,

PVA = R x DFA5, r%?

$100,000 = $29,831 x DFA5, r%?

DFA5, r%? = 3.3522

Looking across the present value of an annuity table for an “n” of 5, you will find 3.3522 in the 15% column.

24

Selecting a Form of Business Ownership(from Supplement)

1. The owners of a(n) _________________ are subject to limited liability as in a corporation, but are taxed as if the firm was a partnership.A. Sole proprietorshipB. S-CorporationC. C-CorporationD. General partnershipE. None of the above

2. Compared to sole proprietorships and partnerships, a major advantage of corporations is that they:A. are easier to form.B. have greater access to funds.C. receive more favorable tax treatment.D. avoid agency problems.

3. “Double taxation” is a disadvantage to which type of organization?A. Sole proprietorshipB. General partnershipC. Limited partnershipD. S-CorporationE. C-Corporation

4. Which type of organization is required to follow generally accepted accounting principles (GAAP)?A. Sole proprietorshipB. General partnershipC. S-CorporationD. Publicly-held corporationE. Privately-held corporation

5. The XYZ Corporation has total earnings of $20 million and decides to pay its stockholders a dividend of $8 million. If the corporate tax rate is 30% and the personal tax rate on individual stockholders is 25%, the total amount of taxes paid on XYZ’s earnings would be:A. $11 millionB. $8 millionC. $6 millionD. $5 millionE. $3 million

6. A major advantage of franchise arrangements is that they:A. Are very inexpensive to set up.B. Allow the franchises to keep all of the profit.C. Give the franchisee total control over how the business is run.D. Are not subject to state or federal income taxes.E. Offer the franchises a proven management style.

SOLUTIONS: 1. B 2. B 3. E 4. D 5. B 6. E

25

The Role of Accounting in Business(from Supplement)

PROBLEM I:

The following information is available for the ABC Company.

Beginning of year:Assets $500,000Liabilities 300,000Owner’s Equity ?

End of year:Assets 700,000Liabilities ?Owner’s Equity 450,000

During the year, the following occurred:Additional issue of capital stock 15,000Revenues 600,000Expenses ?Dividends 50,000

REQUIRED: Solve for the three question marks above. Put your answers in the blanks below:

Beginning of year Owner’s Equity = ________________End of year Liabilities = ________________Expenses during the year = ________________

MULTIPLE CHOICE:

1. Which financial statement is normally prepared first?

A. Statement of retained earningsB. Balance sheetC. Statement of cash flowsD. Income statement

2. Which accounting concept is being applied in the following statement:

“Material litigation involving the corporation is described in a footnote.”

A. Cost ConceptB. Objectivity ConceptC. Adequate Disclosure ConceptD. Going Concern ConceptE. Matching Concept

26


“Equipment currently valued at $20,000 is reported at its original purchase price of $30,000.”



“If this concept was ignored, the confidence of users in the financial statements could not be maintained.”


-----------------------------------------------------------------------------------------------------------------------

SOLUTIONS:

PROBLEM I: Beg OE = $200,000End Liab = $250,000Expenses = $315,000

1. D2. C3. A4. B

27

The Cash Basis of Accounting(from Supplement)

PROBLEM I:

After recording all of it’s transactions for the first month of operations, the Tarheel Corporation had the following account balances (listed in alphabetical order):

Cash 39,000Contributed Capital 10,000Dividends 1,000Equipment 75,000Land 18,000Miscellaneous expense 52,000Notes Payable 8,000Rent expense 15,000Salaries expense 8,000Sales Revenue 190,000

HINT: Before answering the following questions, label which financial statement each of the above accounts would go on. There is only one place for each of the above. Also note that since this is a brand new company, the beginning retained earnings balance is zero.

A. What is net income? CIRCLE ANSWER.

B. What are total assets? CIRCLE ANSWER.

C. What are total liabilities? CIRCLE ANSWER.

D. What is the ending retained earnings balance? CIRCLE ANSWER.

E. What is total owner’s equity? CIRCLE ANSWER.

MULTIPLE CHOICE

28

1. During 2005, Thomas Inc. earned fees of $150,000, of which $100,000 was collected in cash. The company also incurred $65,000 in expenses, of which $35,000 was paid.

If Thomas Inc. uses the cash basis of accounting, what was net income for 2005?

A. $100,000B. $65,000C. $85,000D. $280,000

2. During 2005, Jagger Inc. earned revenue totaling $1,000,000, of which $700,000 was collected in cash in 2003. The company also incurred $200,000 in expenses, of which $100,000 was paid in 2005.

If Jagger uses the cash basis of accounting, net income for 2005 would be:

A. $600,000B. $500,000C. $800,000D. $900,000E. $700,000

3. Stager Co. uses the cash basis of accounting. Which of the following transactions by Stager would cause stockholder’s equity to immediately increase?

A. Purchase of store equipmentB. Borrowing money from a bankC. Payment of dividendsD. Cash sale to customerE. Payment of store rent

4. Rivers Inc. uses the cash basis of accounting. The company began business in September of 2004 and had the following transactions occur in its first month of operations:

Sept 1 The company was started by the owners investing $5,000 cash in the business.Sept 3 Borrowed $10,000 from the bank.Sept 4 Purchased equipment costing $3,000.Sept 5 Received cash from fees earned totaling $2,000.Sept 7 Paid advertising, $100.Sept 20 Paid salaries, $800.Sept 25 Paid dividends, $100.

After doing transaction analysis on the above information, what would be the cash balance at the end of September?A. $16,000B. $13,000C. $10,000D. $3,000E. $17,900

29

5. After doing transaction analysis on the information, what would be the ending retained earnings balance at the end of September?

A. $1,100B. $18,000C. $5,900D. $6,000E. $1,000

------------------------------------------------------------------------------------------------------------

SOLUTIONS:

PROBLEM I:

A. $115,000B. $132,000C. $8,000D. $114,000E. $124,000

MULTIPLE CHOICE:

1. B2. A3. D4. B5. E

30

The Accrual Basis of Accounting(from Supplement)

PROBLEM I: Wolfpack, Inc. sells inventory. The company uses the accrual basis of accounting. Below are transactions that Wolfpack incurred during its first month of operations:

A. Wolfpack, Inc. was created when the owners deposited $25,000 in the cash account.B. The company purchased inventory for $7,000 cash.C. The company paid for one-year’s worth of insurance totaling 1,200.D. The company collected $500 from a customer for services to be provided in the future.E. The company sold inventory which cost $200 for $600 cash.F. The company paid salaries totaling $1,000.G. The company paid a dividend of $500 to the owners.

REQUIRED: Enter each of the above transactions into the worksheet below. You do not need to do end of month adjustments. Remember to do the following:

Write the column headings for the accounts affected in the above transactions. All of the columns in the worksheet may not necessarily be used.

Put the amount and whether it is increasing or decreasing in the correct column If your transaction affects retained earnings, also show which particular component of retained earnings is affected. After recorded all the above transactions, total up your column headings.

= +A.B.C.D.E.

F.G.

31

1. “Prepaid Insurance” is an example of which type of account?

A. AssetB. LiabilityC. Stockholder’s EquityD. RevenueE. Expense

2. As prepaid insurance expires over time, which of the following statements is true? (Assume the company uses accrual-basis accounting)

A. Assets will increaseB. Liabilities will decreaseC. Revenues will increaseD. Retained earnings will decreaseE. Contributed capital will decrease

3. On 1/1/2003, a company (accrual-basis) collected $6,000 from a customer to be earned over the next six month. At the end of the first month, to properly reflect revenues, which account should be increased?

A. CashB. Unearned RevenueC. Retained EarningsD. Accounts ReceivableE. Accounts Payable

4. True or False: All public corporations must use the cash basis of accounting.

5. A company sold inventory costing $2,000 for $5,000 cash. What is the overall net effect on the accounting equation?

Assets Liabilities Owner’s EquityA. Increase Increase No effectB. Increase No effect IncreaseC. Decrease No effect DecreaseD. Decrease Decrease No effectE. No effect Decrease Increase

6. Which of the following transactions would cause an increase in owner’s equity?

A. The company pays dividends.B. The company purchases a machine by signing a note payable.C. The company issued stock to new stockholders.D. The company paid off an account payable.E. The company receives cash for services to be provided in the future.

32

7. Which of the following accounts is an asset?

A. Prepaid InsuranceB. Unearned RevenueC. Capital StockD. Retained EarningsE. Sales Revenue

8. During 2005, Jagger Inc. earned revenue totaling $1,000,000, of which $700,000 was collected in cash in

2005. The company also incurred $200,000 in expenses, of which $100,000 was paid in 2005.

If Jagger uses the accrual basis of accounting, net income for 2005 would be:

A. $600,000B. $500,000C. $800,000D. $900,000E. $700,000

9. As “Unearned Revenue” is earned over time, which of the following statements is TRUE? (assume accrual basis accounting)

A. Assets will increaseB. Assets will decreaseC. Liabilities will increaseD. Liabilities will decreaseE. Owner’s Equity will decrease

33

10. During 2005, Thomas Inc. earned fees of $150,000, of which $100,000 was collected in cash. The company also incurred $65,000 in expenses, of which $35,000 was paid.

If Thomas Inc. uses the accrual basis of accounting, what is net income for 2005?

A. $100,000B. $65,000C. $85,000D. $150,000E. $280,000

SOLUTIONS:

PROBLEM I:

Cash Inventory

Prepaid Ins

= Unearned Revenue

+ CC RE Rev Exp Divid

A. + 25,000 + 25,000B. - 7,000 + 7,000C. - 1,200 + 1,200D. + 500 + 500E. + 600 + 600 600

- 200 - 200 200F. - 1,000 - 1,000 1,000G. - 500 - 500 500

Bal 16,400 6,800 1,200 500 25,000 -1,100 600 1,200 500

MULTIPLE CHOICE:

1. A2. D3. C4. FALSE5. B6. C7. A8. C9. D10. C

34

Introduction to Taxation(from supplement)

PROBLEM I:

Caroline is a single individual. In 2004, she has gross income of $60,000. Her total itemized deductions are $15,000, her standard deduction is $4,850. She can claim one personal exemption equal to $3,100.

A. Using the tax tables provided at the back of the supplement, what is her tax liability for 2004?

B. If Caroline has already had $8,000 withheld from her paycheck, does she need to send in additional money to the IRS, or is she owed a refund?

PROBLEM II:

Thayer Enterprises ( a corporation) reports total income of $100,000. The corporation’s taxable income is $80,000.

B. What is the company’s marginal tax rate?

C. What is the company’s average tax rate?

D. What is the company’s effective tax rate?

PROBLEM III:

You would like to buy a $1,000 bond. Your marginal tax rate is 15%. You have narrowed it down to two choices: Buy a 5% taxable bond or a 4% municipal bond.

Based on your circumstances, which bond would be the better financial choice and why? Clearly show your calculations and explain your answer.

35

MULTIPLE CHOICE:

1. Which of the following would be an example of a progressive tax?

A. Federal Income TaxB. Sales TaxesC. FICA taxD. Excise tax on gasolineE. All of the above

2. True or False: The FICA tax is always a proportional tax.

3. True or False: Typically, only people who rent their homes qualify for the itemized tax deduction.

4. You would like to buy a $10,000 bond. Your marginal tax rate is 30%. You have narrowed it down to two choices: A 6% taxable bond or a 5% municipal bond.

Taking into account taxes, which of the following statements is TRUE?

A. You would be $100 better off by buying the municipal bond.B. You would be $30 better off by buying the taxable bond.C. You would be $320 better off by buying the municipal bond.D. You would be $80 better off by buying the municipal bond.E. You would be $100 better off by buying the taxable bond.

-----------------------------------------------------------------------------------------------------------SOLUTIONS:

PROBLEM I:

A. $7,212.50B. $787.50 refund due

PROBLEM II:

A. 34%B. 19.31%C. 15.45%

PROBLEM III: You would be better of by $2.50 if you buy the taxable bond.

MULTIPLE CHOICE:1. A2. FALSE3. TRUE4. D

36

Ch 1: Accounting Information and Managerial Decisions

1. In the past 10-20 years, the role of the managerial accountant has:

A. not changed much.B. been almost entirely eliminated.C. adapted to changes in the environment of business.D. replaced the role of the financial accountant.E. taken on the role of a tax accountant.

2. Operational planning:

A. is the same as strategic planning.B. addresses long-terms goals and objectives.C. involves the development of short-term objectives and goals.D. all of the above

3. When comparing financial and managerial accounting, which of the following statements is true?

A. Financial accounting is more flexible than managerial accounting.B. Managerial accounting is more forward looking, often emphasizing the future rather than the past.C. Financial accounting is more timely, often sacrificing accuracy in the process.D. Managerial accounting reports are required to follow generally accepted accounting principles.E. Financial accounting often emphasizes segments of an organization rather than the company as a

whole.

4. Sunk costs:

A. have already been incurred.B. can not be avoidedC. are not relevant.D. all of the above.

SOLUTIONS:

1. C2. C3. B4. D

37

Ch 2: Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows

PROBLEM I:

Wolfpack Inc. had the following information available for the month of September:

Beginning EndingRaw materials inventory $3,000 $1,000Work-in-process inventory 35,000 40,000Finished goods inventory 12,000 10,000

During the month of September:Raw materials purchased $20,000Direct Labor 10,000Overhead 7,000

A. How much raw material was used in September? CIRCLE ANSWER.

B. What was cost of goods manufactured in September? CIRCLE ANSWER.

C. What was cost of goods sold in September? CIRCLE ANSWER.

38

MULTIPLE CHOICE:

Use the following information to answer the next 10 questions.

A company uses job-order costing. Use the following key to indicate the best cost classification for each of the following costs:

A = Direct materials (Product cost)B = Direct labor (Product cost)C = Manufacturing Overhead (Product cost)D = Period Cost

1. Factory utilities

2. Advertising

3. Machine operator salaries

4. Administrative building rent

5. Indirect materials used in the factory

6. Direct materials used in the factory

7. Supplies used in the administrative building

8. Shipping charges

9. Factory maintenance worker salaries

10. Insurance on factory equipment

11. The account called “Work-in-Process” would be found on which financial statement?

A. Income StatementB. Statement of Retained EarningsC. Balance SheetD. All of the aboveE. None of the above

12. The account called “Cost of Goods Sold” would be found on which financial statement?

A. Income StatementB. Statement of Retained EarningsC. Balance SheetD. All of the aboveE. None of the above

39

13. During 2005, the Happy Face Co. manufactured a product that had a product cost of $20 per unit. Total non-manufacturing costs for 2005 were $50,000. If 50,000 units were produced in 2005, of which 40,000 units were sold for $50 each, what would be net income?

A. $1,200,000B. $1,450,000C. $1,650,000D. $1,949,950E. $1,150,000

14. It is imperative that companies using a just-in-time (JIT) system:

A. be willing to accept a higher level of defects.B. have the ability to manufacture products quickly and efficiently.C. keep a lot of raw materials on hand.D. have employees who refuse to work overtime.E. all of the above

15. Wolfpack Inc. had the following information available for the month of August:

Beginning EndingRaw materials inventory --------------- $10,000 $20,000Work-in-process inventory ------------ 80,000 70,000Finished goods inventory -------------- 20,000 25,000

During the month of August:Raw material purchased --------------- $70,000Direct labor incurred ------------------ 200,000Overhead incurred -------------------- 50,000

What would be cost of goods sold for August?

A. $255,000B. $320,000C. $380,000D. $340,000E. $315,000

40

SOLUTIONS:

PROBLEM I:

A. $22,000B. $34,000C. $36,000

MULTIPLE CHOICE:

1. C2. D3. B4. D5. C6. A7. D8. D9. C10. C11. C12. A13. E14. B15. E

41

Ch 3: Job Costing, Process Costing, and Operations Costing

PROBLEM I:

NYC Inc. is a legal firm. The company allocated overhead based on direct labor hours. At the beginning of 2002, the company estimated total overhead will be $100,000 based on an estimated 20,000 direct labor hours worked.

At the end of the year, actual overhead costs totaled $115,000 and actual direct labor hours worked were 22,000.

A. What was the predetermined overhead rate? CIRCLE ANSWER.

B. Assume that during the year, a particular job took 115 direct labor hours to complete. How much overhead should be assigned to that job? CIRCLE ANSWER.

C. At the end of the year, by how much was total overhead under or over-applied? Also, indicate whether it was over or under-applied. CIRCLE ANSWER.

42

PROBLEM II:

Watkins Inc. manufactures a product that goes through two departments. The company applies the FIFO method to process costing. Information relating to activity in the first department is as follows:

# units Costs (DM and CC)Work-in-process – Beginning (30% complete) 10,000 units $20,000Started in current period 200,000 units $400,000Work-in-process – Ending (80% complete) 25,000 units

A. What are the total equivalent units for the period? CIRCLE ANSWER.

B. What is the cost per equivalent unit for the period? Round to nearest penny. CIRCLE ANSWER.

C. What is the cost of ending work-in-process inventory at the end of the period? CIRCLE ANSWER.

D. What is the cost of goods manufactured for the period? CIRCLE ANSWER.

43

MULTIPLE CHOICE

1. “Conversion Costs” are made up of which types of costs?

A. Direct materials onlyB. Direct labor onlyC. Direct materials and overheadD. Direct labor and overheadE. Direct materials, direct labor, and overhead

USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT TWO QUESTIONS:

Gaddy Inc. manufactures a product that goes through three departments. The company applies the FIFO method to process costing. Information relating to activity in the first department is as follows:


Work-in-process – Beginning (40% complete) 5,000 units $30,000Started in current period 100,000 units $400,000Work-in-process – Ending (30% complete) 8,000 units

2. What are the total equivalent units for the period?

A. 97,400 eu’sB. 102,400 eu’sC. 100,600 eu’sD. 96,400 eu’sE. 113,000 eu’s

3. Assume that the total equivalent units for the period were 100,000 eu’s, what would be the cost per equivalent unit?

A. $25B. $.25C. $4D. $.23E. $4.30

44

4. The ABC Company under-applied overhead in 2004 by $4,000. At the end of 2004, they had the following account balances before the end of year adjustment to dispense of this under-applied overhead:

Ending direct materials --------------------- $ 6,000Ending work-in-process -------------------- 0Ending finished goods ---------------------- 0Cost of goods sold -------------------------- 28,000Sales revenue -------------------------------- 60,000Selling and administrative expenses ----- 12,000

After correctly adjusting for the under-applied overhead of $4,000, which of the following statements is true regarding the balances that should be shown on either the balance sheet or income statement for 2004?A. Direct materials should have a balance of $10,000.B. Selling and administrative expenses should have a balance of $8,000.C. Sales revenue should have a balance of $64,000.D. Cost of goods sold should have a balance of $32,000.E. Cost of goods sold should have a balance of $24,000.

5. In a traditional manufacturing environment, applied overhead is first accumulated in the ___________ account.A. cost of goods sold accountB. direct materials accountC. finished goods accountD. work-in-process accountE. sales revenue account

6. In its initial year of operation, Maple Inc. started 4,000 units of a particular product. At the end of the period, 800 of these units were only 25% complete. How many equivalent units were produced in the period?A. 3,000B. 4,200C. 3,800D. 3,200E. 3,400

7. When using process costing, which of the following statements is true regarding the FIFO method?A. It assumes that all units in beginning and ending inventory are the same percentage complete.B. It assumes that of the units completed in the current period, the first ones completed were beginning

inventory units.C. It assumes that of the units completed in the current period, the first ones completed were ending

inventory units.D. It assumes that of the units completed in the current period, one-half were from the beginning

inventory and the other half were from units started in the current period.E. It assumes that all the units completed in the current period were started in the current period.

45

8. Hammond Inc. has the following information available for 2004:

Work-in-process - beginning (25% complete) 40,000 unitsStarted in current period 60,000 unitsWork-in-process – ending ( 30% complete) 10,000 units

Using the FIFO method of process costing, how many units were both started and completed in 2004?

A. 70,000 units B. 60,000 unitsC. 110,000 unitsD. 40,000 unitsE. 50,000 units SOLUTIONS:

PROBLEM I:

A. $5 per direct labor hourB. $575C. $5,000 underapplied

PROBLEM II:

A. Step #1: Compute number of EU’s started and completed in current period:

Beginning units 10,000 unitsAdd: started in current period 200,000Less: Ending units (25,000)Finished 185,000 (10,000 from beg and 175,000 started

and completed in current period)

Step #2: Compute total EU’s for the period.

Beginning EU’s (10,000 X 70%) 7,000 EUStarted and Completed in current period 175,000Ending EU’s (25,000 X 80%) 20,000Total EU’s 202,000

B. Cost per EU: $400,000/202,000 = $1.98 per EU

C. Cost of Ending WIP: 20,000 EU’s in ending WIP X $1.98 per EU = $39,600

46

D. Beginning WIP $20,000Add: Current Costs 400,000Less: Ending WIP (39,600)CGM $380,400

MULTIPLE CHOICE:

1. D2. A3. C4. D5. D6. E7. B8. E

47

Ch 4: Activity-Based Costing

PROBLEM I:

The following overhead information is available for the Columbus Corporation for the year ended June 30, 2002:

Activity Allocation Base Overhead CostPurchasing Number of purchase orders $300,000Receiving Number of shipments received 100,000Machine Setups Number of setups 500,000

The activities were as follows:

Purchase orders ------------ 30,000Shipments received ------- 20,000Machine setups ------------ 2,500

A. What is the overhead rate for purchasing?

B. What is the overhead rate for receiving?

C. What is the overhead rate for machine setups?

MULTIPLE CHOICE:

1. Which of the following statements comparing traditional and activity-based costing (ABC) systems is TRUE?

A. ABC and traditional costing systems often produce similar product-cost information.B. ABC systems are generally more accurate than traditional costing systems.C. Traditional costing systems are generally more accurate than ABC systems.D. ABC systems are usually less expensive to implement than traditional costing systems.E. ABC systems usually result in a plant-wide overhead application rate.

SOLUTIONS:PROBLEM I:

A. $10 per purchase orderB. $5 per shipment receivedC. $200 per setup

Multiple Choice:

1. B

48

Ch 5: Cost Behavior and Relevant Costs

PROBLEM I:

Carter Company plans to double its advertising budget next year, which will increase its fixed costs by 20%. Variable costs per unit will remain the same. The current year costs are as follows:

- Variable costs per unit $10- Fixed costs $8,000

If next year’s production is 30,000 units, estimated total costs would be: CIRCLE ANSWER.

PROBLEM II:

The administrator of Wake Hospital would like a cost formula to help predict overhead costs for the number of patients admitted during a month. The following data for the past five months has been collected. The activity base is number of patients admitted.

Month# of patients

admittedOverhead

CostsMay -------------- 1,800 $14,700June -------------- 1,900 15,200July --------------- 1,700 13,700August ----------- 1,600 14,000September ------- 1,500 14,300

A. Using the high-low method, what is the variable cost per patient? Round to nearest penny. CIRCLE ANSWER.

B. Using the high-low method, what are the fixed costs per month? CIRCLE ANSWER.

C. Using the high-low method, write the equation to predict total overhead costs for the month. CIRCLE ANSWER. (Answer should be in the format of Y = a + bx)

D. If management expects 2,000 patients to be admitted in October, what are the total expected overhead costs for the month? CIRCLE ANSWER.

49

MULTIPLE CHOICE:

1. You are given the following cost and volume information for a product:Volume Total Cost

1 unit $255 units 125

10 units 250What type of cost is given?

A. Variable costB. Fixed costC. Step costD. Mixed costE. Can not be determined

2. Yang Mfg. makes a product called Yin. The company incurs three cost types (Type I, II, and III) in the production of Yin. The relevant range of operations is between 2,500 units and 10,000 units of Yin per month. Per unit costs at two activity levels for each cost type are presented below.

Type I Type II Type III

5,000 units $4.00 $9.00 $4.00 7,500 units $4.00 $6.00 $3.00

Refer to the above information. Identify the cost behavior of each type.

Type I Type II Type III A. Fixed Variable Mixed

B. Fixed Mixed VariableC. Variable Mixed FixedD. Variable Fixed Mixed

E. Mixed Variable Fixed

3. Within the relevant range, which of the following statements is true with respect to fixed costs?A. Fixed costs per unit increase as the activity level increases.B. Fixed costs per unit remain constant as the activity level changes.C. Fixed costs per unit decreases as the activity level increases. D. Fixed costs in total dollar amount will decrease as the activity level decreases.

4. A mixed cost is one which:A. Arises from annual decisions by management to spend in certain areas such as research.B. Contains both variable and fixed cost elements. C. Varies in direct proportion to changes in a particular activity.D. Remains constant in total dollar amount within the relevant range.

50

5. The Ritter Company plans on making a tax-deductible contribution of $2,000 to a local charity. If the company’s tax rate is 30%, what would be the after-tax cost?

A. $2,000B. $1,400C. $600D. $2,600E. $3,400

SOLUTIONS:

PROBLEM I: $309,600

PROBLEM II:

A. $2.25B. $10,925C. Y=10,925 + 2.25xD. $15,425

MULTIPLE CHOICE:

1. A2. D3. C4. B5. B

51

Ch 6: Cost-Volume-Profit Analysis and Variable Costing

PROBLEM I

Use the following information to answers questions “A” through “E” below:

The ABC Company sells one product. The following information is available for this product:

Sales price $60 per unit

Variable Costs:Variable product costs 12 per unitVariable period costs 6 per unit

Fixed Costs:Fixed product costs $60,000Fixed period costs $140,000

A. What would be the contribution margin per unit in terms of dollars?

B. What would be the contribution margin ratio expressed as a percentage?

C. What is the break-even point in terms of units? Round to nearest whole unit.

D. Fill in the blank: “For each additional dollar in sales, net income will go up by $ _____.”

E. Assume that total sales are currently totaling $900,000. If sales go up by 10%, what will be the increase in net income?

52

PROBLEM II:

Jasper, Inc. produces one type of machine with the following costs and revenues for the year:

Total revenues $5,000,000Total fixed costs $1,600,000Total variable costs $2,000,000

Total units produced and sold 100,000 units

A. What is the selling price per unit?

B. What is the break-even point in terms of sales dollars? Round to nearest whole dollar.

C. What is the company’s operating leverage? Round to nearest hundredth.

D. How many units must be sold in order to earn an operating profit of $1,500,000 (ignore income taxes)? Round to nearest whole unit.

E. If the company is in a 40% tax bracket, what would sales have to be for an after-tax net income of $1,000,000?

53

PROBLEM III:

Wolfpack Inc. plans to sell 15,000 special Peach Bowl t-shirts with fixed costs of $20,000 and variable expenses at 60 percent of sales.

QUESTION: In order to have net income of $100,000, the sales price of each t-shirt must be set at what? Ignore taxes.

PROBLEM IV: (worth 4 points)

Compton Company produces two products, A and B. 60% of sales are of product A, while 40%are of product B.

Other information is as follows:

Product A Product BSales price per unit $200 $160Variable costs per unit 120 100

In addition, the company incurs $50,000 in fixed costs per year.

QUESTION: In order to earn a profit of $200,000, how many units of Product A need to be sold? Round to nearest whole unit. Ignore income taxes.

54

MULTIPLE CHOICE:

1. Which of the following would normally be classified as a “variable cost”?

A. Direct materialsB. Direct laborC. Variable overheadD. Both “B” and “C”E. “A”, “B”, and “C”

2. Company A has a lower operating leverage ratio than Company B. Which of the following statements is TRUE?

A. Company A’s net income is lower than Company B’s net income.B. Given the same percentage increase in sales, Company A’s net income would increase less than

Company B’s.C. Company A’s sales revenue must be less than Company B’s.D. Company A has few assets than Company B.E. All of the above are true.

3. Sales of gizmos are down, and management has planned to increase salespersons’ commissions on the sales of this product by 10%. If sales revenue goes up by more than 10% as a result of this change, which of the following statements is TRUE (all else being equal)?

A. Contribution margin will increaseB. Variable costs will decreaseC. Fixed costs will increaseD. Net income will decrease

4. Decision makers should consider:

A. quantitative factorsB. qualitative factorsC. both quantitative and qualitative factorsD. none of the above

55

USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT FOUR QUESTIONS:

The ABC Company sells one product. The following information is available for this product:

Sales price $100 per unit

Variable costs:Variable product costs $20 per unitVariable period costs $10 per unit

Fixed costs:Fixed product costs $50,000Fixed period costs $30,000

5. Fill in the blank: “For each additional unit sold, net income will go up by $ ______.”

A. $70B. $.70C. $100D. $30E. $79,970

6. Fill in the blank: “For each additional dollar in sales, net income will go up by $______.”

A. $70B. $.70C. $100D. $30E. $79,970

7. What is the break-even point in terms of units? Round to nearest whole unit.

A. 114,286 unitsB. 70 unitsC. 80,000 unitsD. 1,143 unitsE. 800 units

8. Assume that sales are currently totaling $500,000. If sales go up by 20%, what will be the increase in net income (ignore taxes)?

A. $350,000B. $100,000C. $520,000D. $600,000E. $70,000

56

USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT THREE QUESTIONS:

Casper, Inc. produced one type of product with the following costs and revenues for the year:

Total revenues $600,000Total variable costs $300,000Total fixed costs $150,000

Total # of units produced and sold 20,000 units

9. What is the company’s operating leverage? Round to nearest hundredth.

A. .5B. 2.0C. 4.0D. 30.0E. .25

10. How many units must be sold in order to earn a profit of $800,000? Ignore income taxes and round to nearest whole unit.

A. 63,334 unitsB. 10,000 unitsC. 1,900,000 unitsD. 53,333 unitsE. 93,333 units

11. If the company is in a 40% tax bracket, what would sales have to be to generate an after-tax net income of $900,000? Round to nearest whole dollar.

A. $3,300,000B. $2,250,000C. $4,800,000D. $1,020,000E. $5,800,000

12. Tarheel Corp plans to sell 10,000 special t-shirts with fixed costs of $30,000 and variable expenses at 70% of sales. In order to generate net income of $100,000, the sales price of each t-shirt must be set at what? Ignore taxes.

A. $18,57B. $23.33C. $43.33D. $13.00E. $30.33

57

13. Marshall Inc. produces three products, A, B, and C. 50% of sales are of product A, 30% are of product B, and 20% are of Product C.

Other information is as follows:

Product A Product B Product CSales price per unit $100 $80 $70Variable costs per unit 60 50 40

**In addition, the company incurs $40,000 in fixed costs per year.

In order to earn a profit of $200,000, how many units of Product A need to be sold? Round to nearest whole unit. Ignore income taxes.

A. 3,429 unitsB. 2,728 unitsC. 3,600 unitsD. 1,200 unitsE. 2,857 units

14. Which of the following is least likely to be a variable cost?

A. RentB. Direct materialC. Direct laborD. Factory supplies

58

SOLUTIONS:

PROBLEM I: A. $42B. 70%C. 4,762 unitsD. 70 centsE. $63,000

PROBLEM II:

A. $50B. $2,666,667C. 2.14D. 103,333 unitsE. $5,444,445

PROBLEM III: $20 per unit

PROBLEM IV: 2,083 units of product A

MULTIPLE CHOICE:

1. E2. B3. A4. C5. A6. B7. D8. E9. B10. A11. A12. C13. A14. A

59

Ch 7: Short-Term Tactical Decision Making

PROBLEM I:

Pleasant Creations has the following three product lines:

Product A Product B Product C TotalSales $130,000 $130,000 $250,000 $510,000Variable Costs 38,000 50,000 60,000 148,000CM 92,000 80,000 190,000 362,000Fixed Costs 85,000 90,000 100,000 275,000Net Income $7,000 ($10,000) $90,000 $87,000

The company is considering the discontinuation of Product B. If they do discontinue Product B, one-half of Product B’s fixed costs would go away.

QUESTION: By how much would net income increase or decrease if Product B were discontinued? Indicate whether an increase or decrease.

PROBLEM II:

Bakery Creations has a particular pastry it makes that can be sold immediately after baking or decorated and then sold for a higher price. The following information is available regarding the sales prices and costs if it is sold immediately after baking or processed further:

Initial sales price -------------------- $2.00Initial cost ---------------------------- .50Sales Price after decorating -------- 2.30Cost of decorating ------------------ .40

Regardless of whether the pastries are decorated or not, the bakery can sell as many as 75 pastries per day.

QUESTION: If Bakery Creations does process the pastries further, what would be the increase or decrease in contribution margin? Indicate in your answer whether it is an increase or decrease.

60

PROBLEM III:

Soft Mattress Inc. produces both a queen and a king size bed. Selected data related to each product is as follows:

Queen KingSales price per unit --------------- $800 $1,200Variable costs per unit ----------- 300 450 Stuffing hours required ---------- 1 2

**In addition, fixed costs total $300,000 per year.

The company employs three employees who are trained to stuff the mattresses. There are a total of 7,000 stuffing hours available per year.

The company believes that it could sell a maximum of 3,000 queen-size and 4,000 king-size mattresses per year.

QUESTION: If the company maximizes profits, but stuffing hours are a constraint, what is the maximum amount of net income for the year (ignore income taxes)?

PROBLEM IV:

The Southwest Desk Company needs 20,000 doorknobs annually to complete their desk drawers. Currently, the company makes the doorknobs internally with the following costs:

Direct materials $.90 per unit Direct labor .20 per unit Variable overhead .25 per unit Fixed overhead .10 per unit

Southwest is considering purchasing the doorknobs externally from a supplier. The supplier would charge $1.20 per doorknob. If Southwest purchases the doorknobs from the supplier, 50% of the fixed overhead costs would go away.

QUESTION: If Southwest purchases the doorknobs from the supplier, what will be the increase or decrease in net income (ignore income taxes)? Indicate whether it is an increase or decrease.

61

PROBLEM V:

Championship T-Shirts Ltd. has the following cost information at the expected production level of 30,000 shirts:

Direct Materials $4 per shirt Direct Labor $4 per shirt Variable overhead $2 per shirt Fixed overhead $1 per shirt

The company has the capacity to produce as many as 25,000 shirts. Normally, the company sells each shirt for $18.00.

A local charity has contacted the company requesting 400 t-shirts. The charity would like Championship to monogram each shirt. The cost to monogram each t-shirt would be $3.00 per shirt.

The charity wishes to pay $12 per shirt.

QUESTION: If Championship accepts this special order, and sells the shirts to the charity for $12.00 each, by how much would the company’s net income increase or decrease? Indicate whether it is an increase or decrease.

QUESTION: What would be a qualitative reason for Championship to make the t-shirts? (one sentence)

MULTIPLE CHOICE:

1. When are fixed costs relevant to a make or buy decision?

A. Fixed costs are never relevant to a make or buy decision.B. Fixed costs are always relevant to a make or buy decision.C. Fixed costs are relevant when they differ among alternatives.D. Fixed costs are relevant when they do not differ among alternatives.

62

2. The Optimum Computer Company produces and sells computers. Each of the computers that it makes needs a keyboard. Currently, the company is making 10,000 keyboards internally with the following costs:

Direct materials $10 per unit Direct labor $4 per unit Variable overhead $2 per unit Fixed overhead $1 per unit

The company is considering purchasing the keyboards externally from a supplier. The supplier would charge $20 per keyboard. If the company purchases the keyboard from a supplier, 70% of the fixed costs would go away.

Assuming the company does decide to purchase the keyboards externally, what would be the increase or decrease in net income (ignore taxes)?

A. net income would increase $33,000B. net income would decrease $33,000C. net income would increase $30,000D. net income would decrease $30,000E. net income would increase $37,000

3. Extra Balance Company manufactures hockey sticks. The company’s capacity is 5,000 sticks per month; however, it is currently only selling 4,000 sticks per month. The company normally asks a selling price of $130 per stick. A local team has asked Extra Balance to sell it 500 sticks for $100 per stick.

When they produce 4,000 sticks, Extra Balance records the variable cost of each stick to be $40 and the fixed costs of each stick to be $10. If Extra Balance were to accept this special order, what would be effect on net income?

A net income would increase $45,000B. net income would increase $30,000C. net income would increase $25,000D. net income would decrease $15,000E. net income would decrease $45,000

63

4. Treehouses, Inc. produces two types of custom-crafted treehouses – the “Standard” and the “Deluxe”. Selected data related to each product is as follows:

Standard DeluxeSales price per unit ------- $2,000 $3,000Variable costs per unit --- 500 1,000

Assembly hours required 6 10

The company employs four employees who are trained to assemble these treehouses. There are a total of 8,000 assembly hours available per year.

The company believes it could sell a maximum of 700 standard and 500 deluxe treehouses per year.

If the company maximizes profits, but assembly hours are a constraint, what is the maximum contribution margin for the year? (ignore income taxes)

A. $2,316,000B. $1,150,000C. $1,810,000D. $2,050,000E. $251,000

SOLUTIONS:

PROBLEM I: Overall decrease in net income of $35,000

PROBLEM II: Overall contribution margin would decrease $7.50

PROBLEM III: maximum net income would be $2,700,000

PROBLEM IV: $4,000 increase in net income

PROBLEM V:

A. $400 overall decrease in net incomeB. Gesture of goodwill, future sales contact

MULTIPLE CHOICE:

1. C2. B3. B4. C

64

Ch 8: Long-Term (Capital Investment) Decisions

1. You purchased a certificate of deposit at the beginning of the year which pays 4% compounded semi-annually. If you expect to withdraw $8,000 at the end of two years, how much did you originally deposit? Round to nearest whole dollar.

A. $7,390B. $7,541C. $7,360D. $4,322E. $5,880

2. On 1/1/2005, Sullivan Inc. purchased a machine costing $40,000 by making a down-payment of $8,000 and financing (borrowing) the rest at 10% compounded annually. The loan will be paid off in equal payments over the next ten years, with the first payment beginning on 12/31/2005. What will be the amount of each of the annual payments? Round to nearest whole dollar.

A. $24,578B. $6,510C. $12,336D. $83,009E. $5,208

3. Crazy Inc. purchased a machine for $9,533 on 1/1/2005. The machine will generate annual cash inflows of $2,000 for the next six years. Assuming these cash inflows occur at the end of each year, what rate of return did the company earn on this machine?

A. 7%B. 21%C. 26%D. 5%E. 4%

4. Candice will be buying a car costing $30,000 by borrowing the money at 12% interest compounded quarterly. She will be paying off her loan by making equal quarterly payments of $2,016.47. How many quarterly payments will she need to make in order to pay back the loan?

A. 23B. 15C. 14D. 20E. 17

65


On 1/1/2005, RET Inc. purchased an asset at a cost of $300,000. Annual operating cash flows are expected to be $80,000 for five years. The salvage value at the end of the asset’s life is expected to be $5,000. The cost of capital is 12%.

5. What is the net present value (ignore taxes)? Round to nearest whole dollar.

A. $56,400B. ($8,779)C. $6,408D. $105,000E. ($251,771)

6. What is the payback period of this investment?

A. .75 yearsB. 5 yearsC. 1.33 yearsD. 3.53 yearsE. 3.75 years

7. The Unique Gardner Company is considering the purchase of a customized delivery van costing approximately $40,000. Using a discount rate of 15%, you estimate the present value of future cost savings at $50,000. To yield the 15% return, the actual cost of the van should not exceed the $40,000 estimate by more than:

A. $10,000B. $50,000C. $7,500D. $6,000E. $13,500

8. A company is considering investing in an asset which cost $17,000. The cash flows are expected to be as follows:

- $5,000 in year 1- $4,000 in year 2 and 3- $2,000 in years 4 through 7

Approximately how long is the payback period?

A. 5 yearsB. 4 yearsC. 1.5 yearsD. 7 yearsE. 3 years

66

9. Shaeffer Inc. invested $70,000 in a new machine. The machine will generate cash flows at year-end of $50,000, $40,000, and $30,000 for the next three years, respectively. The company uses a 15% cost of capital. What is the net present value (ignore income taxes)?

A. $107,004B. $203,984C. $23,449D. $19,207E. $50,000

10. The Tiger Golf Club is considering an investment into golf carts that requires $60,000 and promises to return $108,637 in four years. The company’s internal rate of return is: (ignore taxes)

A. 14%B. 12%C. 16%D. 1.81%E. .55%

11. Waller, Inc. purchased an asset at a cost of $102,000. Annual operating cash flows are expected to be $30,000 each year for six years. At the end of the asset’s life, there will be a $10,000 residual (salvage) value. The income tax rate is 30%, and the company uses straight-line depreciation with no half-year convention. Taking into account income tax effects, what is the net present value if the cost of capital is 12%? Round to nearest whole dollar.

A. $26,408B. $8,853C. $57,779D. $36,811E. $10,373

12. Which of the following statements is TRUE regarding depreciation expense?

A. It generates an after-tax cash outflow.B. It generates a before-tax cash outflow.C. It generates an after-tax cash inflow.D. It generates a before-tax cash inflow.E. It will always cause the net present value of an asset to be positive.

67

13. The ABC Company only invests in assets which generate a return of 20%. The company is considering the purchase of an asset costing $100,000, whose net present value is ($5,000). Based on these facts, which of the following statements is TRUE?

A. The present value of the cash inflows is greater than the present value of the cash outflows.B. The actual return the asset generates is more than 20%.C. The actual return the asset generates is equal to 20%.D. The actual return the asset generates is negative.E. The actual return the asset generates is less than 20%.

---------------------------------------------------------------------------------------------------------

SOLUTIONS:

1. A2. E3. A4. D5. B6. E7. A8. A9. C10. C11. B12. C13. E

68

Ch 9: The Use of Budgets in Planning and Decision Making


Portman Inc. produces and sells a specialty product. The production department prepared the following second quarter sales forecast:

April ----- 20,000 unitsMay ----- 24,000 unitsJune ----- 30,000 units

Inventory at March 31 was budgeted at 2,000 units. Sales for July are expected to be 35,000 units. The desired quantity of finished-goods inventory at the end of each month is to be equal to 10% of the next month’s budgeted unit sales.

Each completed unit of finished product required 5 ounces of material. The cost per ounce is $1.25 per ounce. The company has determined that it needs 20% of next month’s raw material needs on hand at the end of each month.

1. What is the total projected production for the second quarter?

A. 81,400 unitsB. 73,400 unitsC. 75,500 unitsD. 74,000 unitsE. 72,500 units

2. How much should the company plan on spending on direct material for the month of May?

A. $161,125B. $153,750C. $166,375D. $142,063E. $128,900

69

3. Brown Inc. sells high-end bicycles. The price of each bicycle is $600. All sales are on account. Brown collects 40% of a month’s sales in the month of sale, 50% in the month following sale, and 10% in the second month following sale. Budgeted sales (in units) for the first six months of 2006 are as follows:

January --------- 3,000 unitsFebruary ------- 4,000 unitsMarch ---------- 6,000 unitsApril ------------ 8,000 unitsMay ------------ 9,000 unitsJune ------------ 9,000 units

How much cash will be collected in the month of April?

A. $10,800,000B. $3,060,000C. $4,800,000D. $8,040,000E. none of the above

4. One advantage of the budgeting process is that it:

A. reduces communication throughout the organization.B. forces management to focus on the past and not be distracted by daily crisis in the organization.C. can help management identify and deal with potential bottlenecks before they become major

problems.D. can decrease the coordination of organizational activities.E. all of the above

5. Mulligan Inc. has the following purchases budget for the last half of 2005:

July ------------------ $200,000August --------------- 190,000September ----------- 150,000October ------------- 210,000November ----------- 230,000December ----------- 200,000

Historically, the company pays one-third at the time of purchase and the remainder in the month following purchase. What are the expected cash disbursements for October?

A. $150,000B. $210,000C. $170,000D. $223,333E. $70,000

70

6. The usual starting point in the budget process is:

A. the direct materials purchases budget.B. the sales budget.C. the production budget.D. the cash receipts budget.E. the cash disbursements budget.

------------------------------------------------------------------------------------------------------------------

SOLUTIONS:

1. C2. A3. E (3,960,000)4. C5. C6. B

71

Ch 10: Variance Analysis- A Tool for Cost Control and Performance Evaluation


Gibson Inc. produces hand-crafted office desks. The direct materials and direct labor standard costs for one desk are as follows:

Direct Material: 5 sheets of lumber at $10 per piece Direct Labor: 16 hours at $15 per hour

In July, 400 sheets of lumber were purchased for $12 per piece. Of that number, 350 pieces of material were used to produce 65 desks.

Labor costs for July were $14,000 for 1,000 hours.

1. What would be the direct materials price variance?

A. $1,300 UB. $1,300 FC. $1,550 UD. $800 UE. $800 F

2. What would be the direct materials usage variance?

A. $750 UB. $750 FC. $250 UD. $250 FE. none of the above

3. What would be the direct labor rate variance?

A. $1,000 FB. $1,000 UC. $1,600 FD. $1,600 UE. $600 F

4. What would be the direct labor efficiency variance?

A. $1,000 FB. $1,000 UC. $1,600 FD. $1,600 UE. $600 F

72

5. The advantage of a flexible budget over a static budget is that, in a flexible budget, actual costs are compared to the costs that should be incurred for the:

A. Planned level of activityB. Actual level of activityC. Average level of activity of competitorsD. Optimum level of activity

6. As a hobby, Denise makes and sells clay pottery bowls for sale at local art festivals. Her budget for the production and sale of 100 sculptures is as follows:

@ 100 sculpturesSales Revenue $7,000Variable Costs 1,500Fixed Costs 2,000Net Income $3,500

Due to an increased interest in handmade pottery, Denise was able to actually make and sell 180 sculptures. If she prepares a flexible budget for 180 sculptures, what would be net income?

A. $6,300B. $9,100C. $3,500D. $9,900E. $7,900

----------------------------------------------------------------------------------------------------------------

SOLUTIONS:

1. D2. C3. A4. E5. B6. E

73

Ch 11: Decentralization and Performance Evaluation

1. Which of the following statements about segment costs is FALSE?

A. A good test for deciding whether to allocate indirect fixed costs is to determine whether the cost would be reduced or eliminated if the segment were eliminated.

B. Segment costs should include all costs attributable to that segment but only those costs that are actually caused by the segment.

C. In general, all common costs should be allocated to segments.D. Common costs are indirect costs that are incurred to benefit more than one segment and cannot be

directly traced to a particular segment.

2. Grayson Toy Company had sales of $550,000 and net operating income of $275,000. Beginning of the year operating assets were valued at $125,000 and end of the year operating assets were valued at $175,000. Grayson’s return on investment (ROI) was:

A. 91.7%B. 157%C. 183.3%D. 220%E. 54.55%

3. A certain division of company has $5,000,000 in sales, operating profit of $400,000, and investment of $1,500,000. Assuming a 12% cost of capital, what is the division’s residual income?

A. $220,000B. $4,820,000C. $420,000D. $200,000E. none of the above

74

4. Lovely, Inc. has two types of product lines – skin care and hair care. The following is a segmented income statement for the most recent year:

Total Skin Care Hair CareSales revenue ----------------- $2,000,000 $1,100,000 $900,000Variable expenses ------------- 1,245,000 660,000 585,000Contribution margin ---------- $755,000 $440,000 $315,000Traceable fixed costs --------- 200,000 140,000 60,000Segment margin --------------- $555,000 $300,000 $255,000Common fixed costs ---------- 200,000Net Income ------------------- $355,000

Lovely, Inc. plans on having an aggressive advertising campaign, but the company can only afford to advertise for one of it’s products. The cost of the advertising will be $40,000. Marketing studies have indicated that such a campaign would increase sales of the Skin Care division by $300,000 and increase sales of the Hair Care division by $400,000.

Which of the following statements is TRUE about the division they should select for the campaign, and the overall effect on net income of the campaign?

A. They should select the Skin Division because the incremental effect on net income will be $120,000.B. They should select the Skin Division because the incremental effect on net income will be $20,000.C. They should select the Hair Division because the incremental effect on net income will be $100,000.D. They should select the Hair Division because the incremental effect on net income will be $140,000.E. It does not matter which division they select. Incremental net income will go up by the same amount

for each division.

-----------------------------------------------------------------------------------------------------------SOLUTIONS:

1. C2. C3. A4. C

75

rsawyers/webpage/acc220/Classcoursepack.doc · Web viewContrast financial and managerial accounting...

Documents

Transcript of rsawyers/webpage/acc220/Classcoursepack.doc · Web viewContrast financial and managerial accounting...