Group 4: Jansen Willis Danao, Ian Lemuel Mata, Jovette Tenorio Answers to Chapter 1 Questions: 3. What are two major uses of managerial accounting information? Managerial for managers’ use within organizations. Its major uses are for (1) decision-making and (2) performance evaluation. 4. What is meant by total quality management (TQM)? What performance measures are likely to be included under TQM? Total Quality Management (TQM) is one successful managerial innovation. It means the organization focuses on excelling in all dimensions. Under TQM, performance measures likely include product reliability and service delivery, as well as such traditional measures as profitability. 9. People often used expenses and costs interchangeably, yet the terms do not always mean the same thing. Distinguish between the two terms. Cost is a sacrifice of resources. The word cost has meaning only in context. One needs to know the context for the word cost to know its meaning. On the other hand, an expense measures the outflow of assets, not merely of cash, or the increase in liabilities, such as accounts payable. Expense may also be defined as the historical cost of goods or services used or simply, a cost charged against revenue in an accounting period. Timing distinguishes costs from expenses. Another distinction between cost and expense results from expenses, by definition, being recorded in accounting records, while not all costs appear in accounting records. 10. What do managerial accountants mean when they speak of cost behavior? Why is it important in managerial decision-making? Cost behavior is an indicator in which expenses are impacted by changes in business activity. In constructing annual budget, a business manager should be aware of cost behaviors to forestall whether any costs will spike or decline. For example, if the material usage of a production line has reached its maximum expenses or go beyond its maximum capacity, the relevant cost behavior would be to anticipate a large cost increase (to pay for an equipment expansion) if the incremental demand level increases by a small additional amount. Understanding cost behavior is an important aspect in examining cost-volume-profit analysis. 12. “The best management accounting system provides managers with all the information they would like to have.” Do you agree with this statement? Why or why not? Yes. Management accounting is a tool to help managers decide in terms of economics of operation and organization strategy. This means that management accounting system should be able provide the necessary information which are factors in coming up with decisions. An information needed which can’t be provided by the management accounting system will result to decisions/strategies without a concrete basis or foundation. 15. “Nonprofit organizations, such as agencies of the federal government and nonprofit hospital do not need managerial accounting because they do not have to earn a profit”. Do you agree with this statement? Why or why not? No. Even though that nonprofit organizations do not have to earn profit; they still have to manage cost and make sure that funds are received are being used optimally. Management accounting provides information that will aid in decisions where funds are going to be channeled. 19. “Fixed costs are really variable. The more you produce, the smaller the unit cost of production.” Is this statement correct? Why or why not? By definition, fixed costs do not change in total with changes in the level of activity within the relevant range. This means that even if production increases, the fixed cost remains the same. For example, a rent for warehouse will still remain the same no matter what the amount of inventory will be stored in it. However, there are some other measures such as fixed cost per unit which varies depending of the activity or production volume. 21. Opportunity cost analysis. Susan Ortiz operates a covered parking structure that can accommodate up to 600 cars. Susan charges $6 per hour for parking. Parking attendants cost $12 per hour each to staff the cashier’s booth at Susan’s Parking. The facility has two parking attendants who each work eight hours per day. Utilities and other fixed costs average $4,000 per month. Recently, the manager of a nearby Sheraton Hotel approached Susan concerning the reservation of 100 spots over an upcoming weekend for a lump sum of $3,600. This particular weekend will be a football weekend, and the structure would be full for only the six hours surrounding the game. Other than those six hours, the structure would have more than 100 empty spots available. The facility would have the same number of parking attendants whether or not Susan takes the offer from the Sheraton Hotel. What is the opportunity cost of accepting the offer? Forgone earnings for 100 spots in 6 hours: 100 slots x $6/hour/slot x 6 hours = $3,600 The opportunity cost of accepting the offer is the foregone earnings of $3,600. Whether Susan will accommodate Sheraton or not, it will still be the same for her financially. A benefit though of getting reserving for Sheraton is that the 100 slots are already guaranteed. 23. Direct and indirect costs. Starbucks is a well-known retail and service company that provides coffee and coffee-related products. Find its most recent annual report or 10-K report (filed with the federal government) on the Internet (http://www.sec.gov/edgar/searchedgar/companysearch.html) and review its financial statements. Which costs are likely to be direct and which are likely to be indirect (assuming that each retail store is the cost object)? Direct Cost Store operating expenses Product and distribution costs Indirect Cost Other operating expenses General and administrative expenses Depreciation and amortization expenses Restructuring and impairments 33. Identify value-added and non-value-added activities. Consider a plan producing widgets and dyes. The raw materials are purchased in bulk and delivered from the supplier to be placed in a warehouse until requested by the production departments. The warehouse has 24-hour security guards and one full-time maintenance person. The materials are then delivered to the departments three miles away by truck, where they are used in the production of widgets and dyes. During production, the pieces are inspected twice. After production, the finished product is stored in another warehouse until it is shipped to customers. Identify the value-added and non-value-added activities. Value-added Non-value-added Purchasing of raw materials Bulk inventory of raw materials Production of widgets and dyes Waiting time of raw materials before being Inspections and quality control consumed by production departments 24-hour security guards Transportation from warehouse to production Full-time maintenance person Inventory for the finished product Answers to Chapter 2 Questions: 2. Compare and contrast job costing and process costing systems. Under a job-costing system, costs are accumulated by job. Thus, allocation of these "costs" to output is relatively simple since the product is a well-defined, specific customer order. Under process costing, costs are accumulated by department or production processes. Costs are then spread evenly over the units produced. 4. What is a production operation? Production operation is the management of processes and operations used by businesses turning an organization’s sources into goods and services. Production and operations turn raw materials, human resources and capital into products and services that is repeatedly performed to sell to the customers. 8. Management of a company that manufactures small appliances is trying to decide whether to install a job or process costing system. The manufacturing vice-president has stated that job costing gives the best control. The controller, however, has stated that job costing would require too much record-keeping. What do you think of the manufacturing vice-president’s suggestion and why? We agree on how manufacturing vice-president’s suggested with the controller in this situation. Often, job costing is too detailed and expensive to operate for routine batches of homogeneous goods. 9. What operating conditions of companies make just-in-time methods feasible? For JIT to succeed, a company should have reliable suppliers of production inputs, customers who are predictable in placing orders, quality and steady production, workers skilled to perform multiple tasks, a high quality work ethic and glitch-free plant machinery. 11. Compare and contrast the problem of providing quality service in a service company to that of providing quality goods in a manufacturing company. Quality is about how well a product performs, or the standard to which a service is provided. Both service and manufacturing companies need good managerial accounting information; the difference in providing quality is in the timing. Service organizations do not produce inventory but deliver the service directly to the customer so that defects are harder to prevent. Manufacturing companies can check the quality of products before they are shipped to customers so errors can be detected and corrected. 13. What types of savings can firms achieve with just-in-time methods compared with traditional production methods? JIT can save inventory carrying costs and accounting record-keeping costs. It also may reduce costs of production problems such as poor quality that can be hidden by keeping inventories and buffer stocks between production work stations. 34. Job costing for the movies. Movies and television shows are jobs. Some are successful, some are not. Studios must decide what to do with the cost of unsuccessful shows (“flops”). Some studios have been criticized for assigning the cost of flops to successful shows, which in turn reduces profits available under profit-sharing agreements with actors, actresses, directors, and other associated with the successful show. One studio was criticized for carrying the cost of flops in inventory instead of writing the off, thereby overstating both assets and profits. Studios point out that flops have to be paid for out of the profits from successful shows. a. How does carrying “flops” in inventory overstate assets and profits? Adding cost of “flops” in inventory is a misrepresentation of cost and will give a wrong picture of the current financial position. Inventory is purchased by a company to generate profits, however, the “flops” are “loss profit” which can not be used in the future for profit generation. This will overstate assets and profits because the “loss” is spread out as cost and distributed among other movies. b. When do you think the cost of a movie that turns out to be a flop should be written off (that is, expensed)? The cost of movie that turned out to be flop should be written off as soon as the movie is taken out from the cinemas or when it has no capacity to generate further revenue. Netflix Financial Analysis 1. Return on equity ROE = Net income/ Total equity adjusted for cash dividends = (5,116,228/15,849,248)*100 = 32.3% A return of between 15-20% is considered good. The higher the ROE, the better a company is at converting its equity financing into profits. 2. Current ratio Current ratio = total current assets/total current liabilities = 8,069,825/8,488,966 = 0.95 A good current ratio is between 1.5 to 2, which means that the business has 2 times more current assets than liabilities to covers its debts. A current ratio below 1 means that the company doesn't have enough liquid assets to cover its short-term liabilities. 3. Leverage Debt ratio = liabilities/assets = 28,735,415/44,584,663 = 0.64 This is something the banks are very interested in. A debt ratio below 30% is excellent. Above 40% is critical. Lenders could deny you a loan. Debt equity ratio = debt/equity = 28,735,415/15,849,248 = 1.81 A “good” debt-to-equity (D/E) ratio will depend on the nature of the business and its industry. Generally speaking, a D/E ratio below 1 would be seen as relatively safe, whereas values of 2 or higher might be considered risky. Equity multiplier ratio = assets/equity = 44,584,663/15,849,248 = 2.81 This means the company's assets are worth 2.8 times its stockholders' equity, which suggests the company may be using too much leverage, depending on its industry. But, there is no ideal equity multiplier. In general, equity multipliers at or below the industry average are considered better. Interest coverage ratio = EBIT/interest expense = (6,194,509+411,214)/765,620 = 8.63 A ratio above one indicates that a company can service the interest on its debts using its earnings or has shown the ability to maintain revenues at a fairly consistent level. While an interest coverage ratio of 1.5 may be the minimum acceptable level, two or better is preferred for analysts and investors. For companies with historically more volatile revenues, the interest coverage ratio may not be considered good unless it is well above three. 4. Profitability ratios Operating margin = operating profit/total revenues = 6,194,509/29,697,844 = 0.21 A higher operating margin indicates that the company is earning enough money from business operations to pay for all of the associated costs involved in maintaining that business. For most businesses, an operating margin higher than 15% is considered good. Gross Profit Percentage = [(total sales – cost of sale)/total sales]*100 = [(29,697,844-17,332,683)/ 29,697,844]*100 = 41.6% A gross profit margin ratio of 50 to 70% would be considered healthy. Operating profit percentage = (operating profit/total sales)*100 = (6,194,509/29,697,844)*100 = 20.9% For most businesses, an operating margin higher than 15% is considered good. It also helps to look at trends in operating margin to see if past years indicate that operating margin is going up or down. Return on assets = net income/average total assets = 5,116,228/[(44,584,663+39,280,359)/2] = 0.12 or 12.2% A ROA of over 5% is generally considered good and over 20% excellent. 5. Efficiency ratios Inventory turnover = COGS/Inventory (No inventory data) Receivables Turnover = Credit sales/accounts receivables (No accounts receivables data) Fixed asset turnover = revenue/total fixed assets = 29,697,844/[(1,323,453+960,183)/2] = 26.0 In the retail sector, an asset turnover ratio of 2.5 or more could be considered good, while a company in the utilities sector is more likely to aim for an asset turnover ratio that's between 0.25 and 0.5. Conclusion about the financial performance of Netflix Parameters ROE Current ratio Debt ratio D/E Equity multiplier Interest coverage ratio Operating margin GPP OPP ROA Fixed asset turnover EBIT 2021 32.3 0.95 0.64 1.81 2.81 8.63 2020 25.0 1.25 0.72 2.55 3.55 5.17 0.21 0.18 41.6% 20.9 12.2% 26.0 38.9 18.3 6.59% 21.9 6605723 3966848 Revenue of Netflix from 2020 to 2021 has increased to more than 50% that equates to a gross profit margin of 41%. These all show that Netflix remains in a strong growth phase. Netflix pretty much had growth in all the financial ratios with significant growth in their return on assets and return on equity ratios, meanwhile they managed to reduce their debt ratio. Moreover, they managed to reduce their equity ratio meaning Netflix is using more equity and less debt to finance the purchase of assets. With their higher EBIT in 2021 than 2020 means they generate more money on its operation.
