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Chapter Summary
Chapter 11 extends the coverage of accounting issues related to property, plant, and equipment. This includes accountin
subsequent to acquisition. A distinction is made between costs that are expensed as incurred (i.e., "revenue expenditures
many possible scenarios for asset disposals and asset exchanges, and the accounting framework is described and illustrat
for
measuring
asset
impairments
Two additional categories of long-term assets relate to natural resources and intangible assets. Natural resources are re
development cost. This cost, less anticipated residual value, is allocated to the units produced through a process known a
either inventory or cost of goods sold, depending on the circumstances. Intangible assets, like patents and copyrights, are
of an intangible is allocated over its useful life through a process known as amortization. Some intangibles have an
amortized, but are subjected to periodic impairment testing.

Exercises
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Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Goals Achievement: Chapter Eleven
Select the appropriate response.
Which of the following expenditures meet at least one of the criteria for capitalization?
repairs or betterments
For costs incurred after asset acquisition, capitalization will occur only if the service life of an asset is
prolonged.
true or false
The difference between the book value of an asset and the proceeds received from its sale should be
reported as a gain or loss.
true or false
If an asset with a book value of $1,000 is abandoned, a $1,000 loss will be recognized in the income
statement.
true or false
Briefly stated, which of the following should not be recognized on exchanges that lack commercial
substance?
gains or losses
An asset impairment is normally accompanied by a direct charge to:
retained earnings or income
The total amount of depletion for a given period is necessarily charged to expense in the income
statement.
true or false
Intangible assets should be carried in the accounting records at their:
cost less amortization or market value
The amortization period for intangible assets is generally considered to be the economic life of the
property, not to exceed 40 years.
true or false
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Chapter Summary
Chapter 11 extends the coverage of accounting issues related to property, plant, and equipment. This includes accountin
subsequent to acquisition. A distinction is made between costs that are expensed as incurred (i.e., "revenue expenditures
many possible scenarios for asset disposals and asset exchanges, and the accounting framework is described and illustrat
for
measuring
asset
impairments
Two additional categories of long-term assets relate to natural resources and intangible assets. Natural resources are re
development cost. This cost, less anticipated residual value, is allocated to the units produced through a process known a
either inventory or cost of goods sold, depending on the circumstances. Intangible assets, like patents and copyrights, are
of an intangible is allocated over its useful life through a process known as amortization. Some intangibles have an
amortized, but are subjected to periodic impairment testing.

Exercises
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Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Fill in the Blanks: Chapter Eleven
1. , also known as improvements or extraordinary repairs, generally improve or increase future
service potential of an asset.
2. If a cash sale of an item of depreciable property occurs, and the journal entry to record the sale is
balanced by the recording of a debit, then a should be recognized.
3. Briefly stated, gains and losses are to be recognized on exchanges that have .
4. For tax purposes, the exchange of similar assets will normally result in no or .
5. Additional monetary consideration in an exchange transaction is known as .
6. is the allocation of natural resource cost to the resources extracted during an accounting period.
7. Patents, copyrights, and franchises are examples of .
8. occurs when the value of a company as an operating entity exceeds the value of its individual
tangible assets and liabilities.
9. The process of charging the cost of an intangible to expense is known as .
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Chapter Summary
Chapter 11 extends the coverage of accounting issues related to property, plant, and equipment. This includes accountin
subsequent to acquisition. A distinction is made between costs that are expensed as incurred (i.e., "revenue expenditures
many possible scenarios for asset disposals and asset exchanges, and the accounting framework is described and illustrat
for
measuring
asset
impairments
Two additional categories of long-term assets relate to natural resources and intangible assets. Natural resources are re
development cost. This cost, less anticipated residual value, is allocated to the units produced through a process known a
either inventory or cost of goods sold, depending on the circumstances. Intangible assets, like patents and copyrights, are
of an intangible is allocated over its useful life through a process known as amortization. Some intangibles have an
amortized, but are subjected to periodic impairment testing.

Exercises
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Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Multiple Choice: Chapter Eleven
1. Cross Country Trucking Company recently replaced the oil filter on one of its cross country rigs.
How should one account for this cost?
a.
As
a
repair
b.
As
an
increase
in
c.
As
a
reduction
in
accumulated
d. As an intangible asset.
and
maintenance
expense.
the
cost
of
the
truck.
depreciation
associated
with
the
truck.
HELP ME!
2. On January 1, 20X2, Lynn Corporation purchased a machine for $100,000. Lynn paid shipping
expenses of $1,000 as well as installation costs of $2,400. The machine was estimated to have a
useful life of ten years and an estimated salvage value of $6,000. In January 20X3, additions costing
$7,200 were made to the machine. These additions significantly improved the quality of output, but
did not change the life or salvage value of the machine. If Lynn records depreciation under the
straight-line
method,
depreciation
expense
for
20X3
is:
a.
b.
c.
d. $11,140
$9,740
$10,340
$10,540
HELP ME!
3. If an asset is impaired, and future cash flows will not allow recovery of the recorded amount, then
the
firm
should
reduce
the
asset
in
the
accounts.
In
addition,
a.
a
loss
b.
an
intangible
c.
the
asset
d. depreciation should cease.
should
asset
be
should
should
be
be
recognized.
recorded.
discarded.
HELP ME!
4. A machine that cost $18,000, with a book value of $4,000, is sold for $3,400. Which of the following
is true concerning the journal entry to record the sale?
a.
Accumulated
Depreciation
is
debited
for
b.
Machinery
is
credited
for
c.
Loss
on
sale
of
machinery
is
credited
for
d. Accumulated Depreciation is debited for $14,000.
$4,000.
$4,000.
$600.
HELP ME!
5. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were:
a.
Less
than
b.
Greater
c.
Greater
d. Less than book value.
current
market
than
than
book
value.
cost.
value.
HELP ME!
6. Equipment costing $3,000 with accumulated depreciation of $2,125 is exchanged for another asset
with a fair value of $625. The exchange has commercial substance. How much is the gain or loss on
this
transaction?
a.
A
gain
of
$250
should
be
recognized.
b.
A
loss
of
c.
A
loss
of
d. No gain or loss should be recognized.
$250
$500
should
should
be
be
recognized.
recognized.
HELP ME!
7. Deep Gold Mining Company recognizes $4 of depletion for each ton of ore mined. This year,
300,000 tons of ore were mined but only 180,000 were sold. The amount of depletion which should be
deducted from revenue this year is:
a.
b.
c.
d. $1,200,000
$0
$480,000
$720,000
HELP ME!
8.
Which
of
the
following
terms
best
relates
to
natural
a.
b.
c.
d. Accrual.
resources?
Depreciation.
Depletion.
Amortization.
HELP ME!
9. On January 5, 20X1, a corporation was granted a patent on a product. On January 2, 20X9, to
protect its patent, the corporation purchased a patent on a competing idea that was originally issued
on January 10, 20X5. Because of its unique nature, the corporation does not feel the competing
patent can be used in producing a product. The cost of the competing patent should be:
a.
Amortized
b.
Amortized
c.
Amortized
d. Expensed in 20X9.
over
over
over
a
a
a
maximum
maximum
maximum
period
period
period
of
of
of
20
13
12
years.
years.
years.
HELP ME!
10. Which of the following statements regarding goodwill is false?
a. The difference between the price paid to purchase a particular company, and the fair value of the
underlying
identifiable
assets
received
(less
liabilities
assumed)
is
goodwill.
b. Goodwill should not be amortized, but should be evaluated for impairment.
c.
Goodwill
is
an
intangible
asset.
d. Goodwill may be recorded for a company whether it is internally generated or purchased.
HELP ME!
1. a. Repair and maintenance expense is recorded because this is a relatively small expenditure
benefiting only the immediate period. If it qualified as a capital expenditure, it might be recorded as
described in choices "b" or "c." This is clearly not an intangible asset.
2. c. $10,540. The original annual depreciation is $9,740 (($100,000 + $1,000 + $2,400 - $6,000)/10
years). The additional amount of depreciation is $800 ($7,200/9 years) per year.
3. a. If an asset is impaired, and future cash flows will not allow recovery of the recorded amount, then
the firm should reduce the asset in the accounts. In addition, a loss should be recognized.
4. d. The appropriate journal entry to record the sale is:
Accumulated Depreciation
Loss
Cash
Machinery
The only choice consistent with this entry is "d."
14,000
600
3,400
18,000
5. d. A loss on the sale of a depreciable asset indicates that the proceeds received from the sale were
less than the recorded book value of the asset. A gain would result if the proceeds were greater than
cost or book value. Hopefully, the sale proceeds equaled market value; a loss, therefore, suggests
that market value is also below book value.
6. b. The consideration given ($3,000 - $2,125) = $875) is $250 greater than the value of the asset
received ($625), necessitating the recording of a loss.
7. c. $720,000. The depletion which should be deducted from revenue equals the 180,000 units sold
times the $4 per ton depletion rate. The depletion on the other 120,000 units (300,000 - 180,000) is
reported as inventory (120,000 X $4 = $480,000).
8. b. Depletion is the allocation of the cost of a natural resource. Depreciation relates to plant and
equipment and amortization relates to intangible assets. Accrual is a more general concept relating to
accounting measurements.
9. c. Patents have a 20-year life. Because the only purpose for the purchased patent is to protect an
existing patent (already 8 years old), the cost of the purchased patent should be spread over no more
than the twelve year remaining life of the old patent.
10. d. Goodwill should only be recorded when it is purchased; internally generated goodwill is not
recorded. The comments in the other choices are all correct.
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Chapter Summary
Chapter 11 extends the coverage of accounting issues related to property, plant, and equipment. This includes accountin
subsequent to acquisition. A distinction is made between costs that are expensed as incurred (i.e., "revenue expenditures
many possible scenarios for asset disposals and asset exchanges, and the accounting framework is described and illustrat
for
measuring
asset
impairments
Two additional categories of long-term assets relate to natural resources and intangible assets. Natural resources are re
development cost. This cost, less anticipated residual value, is allocated to the units produced through a process known a
either inventory or cost of goods sold, depending on the circumstances. Intangible assets, like patents and copyrights, are
of an intangible is allocated over its useful life through a process known as amortization. Some intangibles have an
amortized, but are subjected to periodic impairment testing.

Exercises
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providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!
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Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Objectives: Chapter Eleven
THE FOLLOWING LEARNING OBJECTIVES FOR THIS CHAPTER MAP TO THE CURRICULUM DESIGN
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The accounting for costs incurred subsequent to asset acquisition.
Define capital expenditure and revenue expenditure.
What three conditions help an item qualify as a capital expenditure?
Make a distinction between the accounting for a replacement and a betterment.
Appropriate methods to measure and record the disposal of PP&E.
Be able to record the removal of a depreciable asset from the accounts.
Know how to record the sale of a depreciable asset, including situations
involving either a gain or loss.
Accounting for asset exchanges.
State the fundamental
commercial substance.
accounting
rules
relating
to
exchanges
having
Know the general principles for asset exchanges that lack commercial
substance.
Be able to prepare journal entries necessary to record asset exchange
transactions.
Understand the meaning and general of effect of "boot" in an exchange
transaction.
Rules for recording asset impairments.
Understand
impairments.
the
fundamental
accounting
issues
pertaining
Natural resource accounting and depletion concepts.
to
asset
What types of assets are considered to be natural resources?
Define the term "depletion."
Prepare depletion calculations and the related journal entries.
Distinguish between depletion that is charged to expense versus reported as an
asset on the balance sheet.
Know how to account for depreciable assets used in conjunction with natural
resource extraction.
Intangible asset accounting and amortization concepts.
What types of assets are considered to be intangible?
What is the difference between the accounting for an intangible with a
determinable life versus an indefinite life?
Define the term "amortization."
Know how to calculate, record, and present amortization in the financial
statements.
Be able to name several specific types of intangibles, and understand the how
their lives would be assessed.
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Key Terms: Chapter Eleven
amortization
The process used to allocate the cost of an intangible asset to the accounting periods benefited
betterment
Expenditures that improve or increase the service potential of an asset even beyond its original
new condition; such costs may be capitalized by increasing the asset's cost
boot
Term used to describe additional monetary consideration that may accompany an exchange
transaction
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commercial substance
The quality of an exchange transaction such that it changes the future cash flow potential of the
entity
depletion
The process used to allocate the cost of a natural resource asset to the accounting periods
benefited
exchange transaction
Trading one asset for another; to be booked at fair value if the transaction has commercial
substance
impairment
When the carrying amount of an asset is not recoverable from its future cash flow
intangible asset
Long-term asset that lacks physical existence; contract rights, copyrights, patents, trademarks,
etc.
natural resources
Oil and gas reserves, mineral deposits, thermal energy sources, and standing timber are just a few
examples of such assets that a firm may own
replacement
A restoration of an asset, at least partially, to its original condition; such costs may be capitalized
by reducing accumulated depreciation
revenue expenditure
Not a capital expenditure; to be expensed as incurred
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Chapter Summary
Chapter 12 provides coverage of accounting for current liabilities and payroll. There are many types of current liabilities, a
principles are cited. Great care is needed to correctly identify unique current liabilities, such as upcoming principal paym
arise in reporting currently maturing debt subject to refinancing. The basics of accounting for notes payable are introduced
more
complex
debt
accounting
issues
that
arise
in
The measurement and reporting principles for contingent obligations are presented. Special attention is needed becaus
reported
as
Payroll accounting is introduced. It is important to learn about the full cost of a payroll, and how all such costs are to be re
duties of an employer to maintain proper payroll records and discharge fiduciary duties for remitting taxes to the governm
forms of employee compensation, such a pension, are briefly described.

Exercises
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Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Goals Achievement: Chapter Twelve
Select the appropriate response.
An example of an accrued liability is:
salaries payable or the current portion of long-term debt
Collections for third parties should be recorded as a current liability.
true or false
Which of the following would not be a typical current liability?
prepayments (advances) to suppliers or amounts collected for and payable to third parties
A Discount account should be established when interest is included in the face amount of the note.
true or false
The process of reducing a discount by recognizing interest expense is frequently referred to as
discount amortization.
true or false
The guidelines for the recognition of contingent liabilities reflect that they should be recorded in the
accounts when it is probable that the future event will occur and the amount of the liability can be
reasonably:
estimated or isolated
By definition, contingent liabilities are improbable.
true or false
Which of the following payroll taxes is borne exclusively by the employer?
social security tax or unemployment tax
Deductions from employee earnings, plus net pay, equals:
gross earnings or gross withholdings
Withholding allowances are determined by reference to the:
W-4 or W-2
Amounts withheld from employees' paychecks are recorded on the employer's books as a:
liability or contra liability
Stated simply, paid vacation time should be expensed while the employee is on vacation.
true or false
The total amounts owed to employees for retirement benefits will appear on the balance sheet as a
liability.
true or false
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Chapter Summary
Chapter 12 provides coverage of accounting for current liabilities and payroll. There are many types of current liabilities, a
principles are cited. Great care is needed to correctly identify unique current liabilities, such as upcoming principal paym
arise in reporting currently maturing debt subject to refinancing. The basics of accounting for notes payable are introduced
more
complex
debt
accounting
issues
that
arise
in
The measurement and reporting principles for contingent obligations are presented. Special attention is needed becaus
reported
as
Payroll accounting is introduced. It is important to learn about the full cost of a payroll, and how all such costs are to be re
duties of an employer to maintain proper payroll records and discharge fiduciary duties for remitting taxes to the governm
forms of employee compensation, such a pension, are briefly described.

Exercises
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Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Goals Achievement: Chapter Twelve
Select the appropriate response.
An example of an accrued liability is:
salaries payable or the current portion of long-term debt
Collections for third parties should be recorded as a current liability.
true or false
Which of the following would not be a typical current liability?
prepayments (advances) to suppliers or amounts collected for and payable to third parties
A Discount account should be established when interest is included in the face amount of the note.
true or false
The process of reducing a discount by recognizing interest expense is frequently referred to as
discount amortization.
true or false
The guidelines for the recognition of contingent liabilities reflect that they should be recorded in the
accounts when it is probable that the future event will occur and the amount of the liability can be
reasonably:
estimated or isolated
By definition, contingent liabilities are improbable.
true or false
Which of the following payroll taxes is borne exclusively by the employer?
social security tax or unemployment tax
Deductions from employee earnings, plus net pay, equals:
gross earnings or gross withholdings
Withholding allowances are determined by reference to the:
W-4 or W-2
Amounts withheld from employees' paychecks are recorded on the employer's books as a:
liability or contra liability
Stated simply, paid vacation time should be expensed while the employee is on vacation.
true or false
The total amounts owed to employees for retirement benefits will appear on the balance sheet as a
liability.
true or false
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Chapter Summary
Chapter 12 provides coverage of accounting for current liabilities and payroll. There are many types of current liabilities, a
principles are cited. Great care is needed to correctly identify unique current liabilities, such as upcoming principal paym
arise in reporting currently maturing debt subject to refinancing. The basics of accounting for notes payable are introduced
more
complex
debt
accounting
issues
that
arise
in
The measurement and reporting principles for contingent obligations are presented. Special attention is needed becaus
reported
as
Payroll accounting is introduced. It is important to learn about the full cost of a payroll, and how all such costs are to be re
duties of an employer to maintain proper payroll records and discharge fiduciary duties for remitting taxes to the governm
forms of employee compensation, such a pension, are briefly described.

Exercises
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Multiple Choice
Objectives
Key Terms
Multiple Choice: Chapter Twelve
1. Typical current liabilities include:
a.
Prepayments
by
customers.
b.
Travel
advances
to
employees.
c. The principal portion of a mortgage note that is due beyond one year or the operating cycle,
whichever
is
longer.
d. Accumulated depreciation.
HELP ME!
2. Contingent liabilities should be recorded in the accounts when:
a.
It
is
probable
b.
The
amount
of
c.
Both
d. Either (a) or (b).
that
the
the
liability
(a)
future
can
be
event
will
reasonably
and
occur.
estimated.
(b).
HELP ME!
3. On June 1, Whit Corporation purchased a truck for $30,000. To pay for the truck, Whit issued and
recorded a six-month note payable for $31,500. No other entry was recorded for the note until
payment on December 1. The journal entry to record payment of the note would include:
a.
A
debit
b.
A
debit
to
c.
A
debit
d. A debit to Cash for $31,500.
to
Discount
to
Interest
on
Notes
Expense
for
Notes
Payable
for
Payable
for
$1,500.
$1,500.
$30,000.
HELP ME!
4. The Discount on Notes Payable:
a.
Is
a
contra
liability
b.
Is
a
contingent
liability
c.
Should
be
reported
as
an
asset
because
of
its
d. Is amortized to reduce interest expense over the life of the note payable.
account.
account.
balance.
debit
HELP ME!
5. If the journal entry to record an accrued liability were accidentally recorded twice, it would:
a.
Understate
income
b.
Overstate
income
c.
Have
no
effect
on
d. Understate accrued liabilities at the end of the year.
for
for
income
the
the
for
year.
year.
year.
the
HELP ME!
6. Landry paid $5,000 cash for warranty service work. If a Warranty Liability account had been
previously established, the proper journal entry to record the service work would be:
a.
Sales
Cash
5,000
5,000
b.
Warranty
5,000
Expense
5,000
Warranty
5,000
Expense
5,000
Cash
Warranty
5,000
Liability
5,000
Cash
Warranty Liability
c.
d.
HELP ME!
7.
The
employee's
withholding
a.
b.
c.
d. Payroll register.
allowance
certificate
is
popularly
referred
to
as
a:
W-2.
W-4.
1040.
Form
HELP ME!
8.
The
FICA
tax
a.
Employees
b.
Employers
c.
Both
employees
d. Earnings in excess of base amounts.
HELP ME!
is
levied
and
on:
only.
only.
employers.
9. Burgundy Drug Store paid $137,000 in salaries during 20X1. Salary expense for the year was
$148,500 and salaries payable at the end of 20X1 amounted to $17,300. What was the amount of
salaries payable as of January 1, 20X1?
a.
b.
c.
d. $28,800
$5,800
$11,500
$17,300
HELP ME!
10. The gross payroll for Zurich Corporation was $100,000. Federal income tax withheld from
employee paychecks amounted to $24,000, state income tax withheld amounted to $3,000, Social
Security amounted to $8,500 (both the employee and employer portion), and Medicare amounted to
$3,500 (both the employee and employer portion). Furthermore, employees elected to have $1,000 of
insurance and charitable contributions withheld from their paychecks. How much was net pay?
a.
b.
c.
d. $72,000
HELP ME!
$34,000
$60,000
$66,000
1. a. Prepayments by customers should be reported as a current liability entitled Unearned Revenue.
Travel advances to employees is a current asset. The principal portion of a mortgage note which will
be paid within (not beyond!) one year or the operating cycle, whichever is longer, is reported as a
current liability. Accumulated depreciation is a contra asset.
2. c. To be recorded in the accounts, a contingent liability should be both probable and subject to
reasonable estimation.
3.
a.
Notes
Interest
Discount
Cash
The
appropriate
Payable
Expense
on
Notes
31,500
journal
Payable
entry
is:
31,500
1,500
1,500
4. a. Discount on Notes Payable is subtracted from the related Notes Payable, and is therefore a
contra liability. The discount is not "contingent." Amortization of a discount increases interest expense.
5. a. The error would cause an expense to be overstated (via the extra debit), as well as overstating
the related payable (via the extra credit). Therefore, income would be understated and liabilities would
be overstated.
6. d. At the time warranty service is performed, the previously recorded liability should be reduced by
the amount of the expenditure. The expense should have already been recorded in an earlier period.
7. b. The W-4 is the withholding allowance certificate prepared at the time an employee is hired. The
W-2 is the annual wage and tax statement furnished to an employee, the form 1040 is an individual's
federal income tax return, and the payroll register is basically a special journal maintained by an
employer for recording payroll related transactions.
8. c. Both the employee and the employer must pay equal amounts of the FICA tax. The tax is levied
on income only up to a base amount.
9. a. $5,800. Burgundy expensed $11,500 more than it paid ($148,500 - $137,000), resulting in an
increase in salaries payable. The ending salaries payable minus the increase in salaries payable
yields the beginning amount ($17,300 - $11,500 = $5,800).
10. c. $66,000. Net pay equals gross pay ($100,000) minus various withholdings attributable to the
employees ($24,000 + $3,000 + ($8,500/2) + ($3,500/2) + $1,000). The $8,500 and $3,500 are
divided by 2 because the cost is borne equally by both the employee and employer.
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Chapter Summary
Classroom
Bookstore
Chapter 12 provides coverage of accounting for current liabilities and payroll. There are many types of current liabilities, a
principles are cited. Great care is needed to correctly identify unique current liabilities, such as upcoming principal paym
arise in reporting currently maturing debt subject to refinancing. The basics of accounting for notes payable are introduced
more
complex
debt
accounting
issues
that
arise
in
The measurement and reporting principles for contingent obligations are presented. Special attention is needed becaus
reported
as
Payroll accounting is introduced. It is important to learn about the full cost of a payroll, and how all such costs are to be re
duties of an employer to maintain proper payroll records and discharge fiduciary duties for remitting taxes to the governm
forms of employee compensation, such a pension, are briefly described.

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!
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Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Objectives: Chapter Twelve
THE FOLLOWING LEARNING OBJECTIVES FOR THIS CHAPTER MAP TO THE CURRICULUM DESIGN
FOR OUR ONLINE UNIVERSITY-LEVEL COURSES. THESE COURSES ARE OFFERED THROUGH UTAH
STATE UNIVERSITY, AND RESULT IN THE AWARDING OF UP TO 6 HOURS OF HIGHLY
TRANSFERRABLE COLLEGE CREDIT. TO LEARN MORE, CHECK OUT THE CLASSROOM LINK.
The nature and recording of typical current liabilities.
Provide a definition for current liabilities.
What is the operating cycle?
Identify typical current liabilities.
Why is the current portion of long-term debt presented as a current liability,
and how are such amounts calculated?
What is an accrued liability?
Why is a customer prepayment shown as a current liability?
Describe the nature and financial statement presentation of collections for third
parties.
Accounting for notes payable.
Understand the nature of notes and the related interest calculations.
Know key features of borrowing agreements, and how they can impact the cost
of borrowing.
Be comfortable with the accounting for notes payable, including notes with
interest included in the face value.
Know about truth in lending rules.
The criteria for recognition and/or disclosure of contingent liabilities.
What is a contingent liability?
Describe the criteria that apply in accounting for contingencies.
How does timing of events give rise to the recording of contingencies?
Be able to account for warranties.
Basic accounting for payroll and payroll related taxes.
What is the significance of the distinction between an employee and an
independent contractor?
What is a 1099?
Distinguish between gross pay and net pay.
Identify the nature of social security and Medicare taxes, and understand the
calculations related to the rate and base.
pay?
How do income taxes and other deductions enter into the calculation of net
Be able to record journal entries for payroll and withholdings.
What is a W-2, and what is a W-4?
In addition to an employee's salary or wages, what other costs must an
employer incur related to payroll?
Be able to record the payroll taxes levied on the employer.
Describe the importance of maintaining accurate payroll records.
Other components of employee compensation.
What is a compensated absence.
What criteria signal the need to record a liability for a future period of
compensated absence.
Be able to describe the appropriate accounting for vacation pay.
Generally, describe the nature of a defined contribution pension plan.
Generally, describe the nature of a defined benefit pension plan.
Generally, describe postretirement health-care benefits and the related
accounting consequences.
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Chapter Summary
Chapter 12 provides coverage of accounting for current liabilities and payroll. There are many types of current liabilities, a
principles are cited. Great care is needed to correctly identify unique current liabilities, such as upcoming principal paym
arise in reporting currently maturing debt subject to refinancing. The basics of accounting for notes payable are introduced
more
complex
debt
accounting
issues
that
arise
in
The measurement and reporting principles for contingent obligations are presented. Special attention is needed becaus
reported
as
Payroll accounting is introduced. It is important to learn about the full cost of a payroll, and how all such costs are to be re
duties of an employer to maintain proper payroll records and discharge fiduciary duties for remitting taxes to the governm
forms of employee compensation, such a pension, are briefly described.

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!
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
Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Key Terms: Chapter Twelve
accounts payable
Amounts due to suppliers relating to the purchase of goods and services on credit
compensated absences
Term to describe paid time off; vacations, sick leave, etc.
contingent liabilities
Events that may or may not give rise to an actual liability because the outcome is uncertain;
examples include lawsuits, environmental damage issues, and so forth
defined benefit plan
A type of pension plan where the benefits are a function of years of service, pay, and age; the
ultimate employer cost is not known in advance
defined contribution plan
A type of pension plan where the benefits are based on amounts in trust for the benefit of the
employee; employer contributions are usually a fixed percentage of pay
employee
A person who works for a specific business and whose activities are directed by that business
FICA
Federal Insurance Contributions Act (also known as social security and Medicare); establishes a
tax that employers must withhold and match for government-based retiree benefit
Form 1099
A form required to be issued to an independent contractor reporting amounts paid; to assist with
tax compliance issues (this form used to report other payments like interest, etc.)
FUTA
Federal Unemployment Tax levied on employer to provide funds for unemployed workers; rate is
dependent on existence of SUTA and employer history of layoffs, etc.
gross pay
Also known as gross earnings; this it is the total amount earned by an employee before any
deductions
income taxes
Taxes that are based on the amount income; for employees such amounts must be withheld by
employers and remitted to the government
independent contractor
One who performs a designated task or service for a company, and the company has the right to
control or direct only the result of the work done
net pay
Also known as net earnings; this is the gross pay less all applicable deductions ("take home pay")
notes payable
Formal short-term borrowings usually evidenced by a specific written promise to pay
pension plan
A general term to describe some form of arrangement for continuing payments to retirees
SUTA
State Unemployment Tax levied on employer to provide funds for unemployed workers; rate is
adjusted for employer history of layoffs, etc.
W-2
An annual statement provided to employees stating the amount of earnings and withholdings;
assists employee in preparing their own tax returns
W-4
A form filled out by an employee stating the amount of exemptions to which they are entitled for
tax purposes; such exemptions bear on the amount of income tax withholdings
warranty liability
A liability that is recorded for the future costs of claims that are anticipated because of product
warranty agreements
workers compensation insurance
Insurance paid by the employer to cover work related injuries sustained by employees
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Chapter Summary
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Chapter 13 discusses numerous issues related to accounting for long-term obligations. The chapter begins with illustra
payment notes, including how to calculate periodic payments. This necessarily requires consideration of future and
preliminary
coverage
within
t
The middle portion of the chapter introduces bonds payable and related features for these financial instruments. A n
appropriate bond accounting, whether the bonds are issued at par, a premium, or discount. Coverage includes both the s
The chapter includes coverage of special bond accounting situations, including bonds issued between interest paymen
accounting. The chapter closes with a section describing debt analysis techniques and ratios, and the reporting of lease-re

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!
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
Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Goals Achievement: Chapter Thirteen
Select the appropriate response.
As a general rule, which type of note payable involves interest-only payments, with the full principal
being due at maturity?
level pay note or term loan
In computing the periodic payments on a loan that involves equal payments over the entire term, such
that the last payment extinguishes the final amount of obligation, what basic calculation is called for?
Divide the loan amount by an annuity present value or Divide the loan amount by the number of
periods
The stream of level cash flows is known as a(n):
lump sum or annuity
Secured bonds are often known as debentures.
true
or false
Most bonds issued in recent years have been:
registered or coupon
To determine the issue price of a bond, one would need to discount the future cash flow of the bond
using factors related to:
present value or future value
As the effective interest rate increases, the issue price of a bond (as determined by its discounted
cash flow) will:
increase or decrease
At the time a bond is issued, the Bonds Payable account is established for the face amount of the
bond.
true or false
When a bond's contract interest rate is higher than the market (effective) rate of interest at the time of
issue, the bonds will be issued at a:
premium or discount
The interest rate stated on the face of a bond is the:
contract rate or effective rate
If a bond is issued at a premium, what relation will interest expense bear to the amount of cash paid
for interest each period over the life of the bond?
greater than or less than
Which amortization technique is theoretically superior?
straight-line or effective-interest
The amortization of a premium will cause interest expense to:
increase or decrease
Which of the following amortization techniques result in a level amount of interest expense over the
life of a bond issue?
straight-line or effective-interest
Bond interest expense for a period is equal to the cash paid for interest plus the premium amortized.
true or false
When bonds are issued between interest payment dates, the first interest payment will involve cash
flow for:
a full period's interest or a partial period's interest
Gains and losses may result on:
bond retirements or bond issuances
When a bond is retired, any unamortized premium or discount should continue to be amortized over
the remaining periods the bond would have been outstanding.
true or false
In calculating the times interest earned ratio, what amount is included in both the numerator and
denominator?
interest expense or net income
It is a safe bet that all contractual commitments involving future payments are reported on the balance
sheet as a liability.
true or false
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Chapter Summary
Chapter 13 discusses numerous issues related to accounting for long-term obligations. The chapter begins with illustra
payment notes, including how to calculate periodic payments. This necessarily requires consideration of future and
preliminary
coverage
within
t
The middle portion of the chapter introduces bonds payable and related features for these financial instruments. A n
appropriate bond accounting, whether the bonds are issued at par, a premium, or discount. Coverage includes both the s
The chapter includes coverage of special bond accounting situations, including bonds issued between interest paymen
accounting. The chapter closes with a section describing debt analysis techniques and ratios, and the reporting of lease-re

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!

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


Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Fill in the Blanks: Chapter Thirteen
1. Although one can readily determine the present value factors for a lump sum via tables or
computers, a equally simple method is to just divide "1" by , where "n" is the number of periods and
"i" is the interest rate per period.
2. is the amount to which an outlay will grow by the end of a designated time period, while is the
inverse or reciprocal technique.
3. An is a series of equal cash flows.
4. The provisions of a bond issue are normally stipulated in an accompanying document called a .
5. In contrast to secured bonds, have no assets pledged as security.
6. bonds permit the issuer to repay bondholders prior to the stipulated maturity date.
7. A fund that is set aside to provide for the eventual repayment of bonds at maturity is known as a .
8. The set amount to be repaid on a bond's maturity date is known as , whereas, the bond payable
amount less any unamortized discount or plus any unamortized premium is known as .
9. The interest rate printed on the face of a bond certificate is called the , whereas the actual interest
rate is the .
10. When bonds are sold at more than face value, the difference between the issue price and the face
value is commonly referred to as a .
11. Under , an equal amount of discount is allocated to each interest period, whereas, under the
method of amortization, interest expense is calculated as a constant percentage of the bond carrying
value.
12. Premium amortization causes interest expense to .
13. For bonds issued between interest dates, the issuer will receive accrued interest on the date, and
repay this interest on the next date.
14. If a bond is retired early, a gain will result if the retirement price is the .
15. Ratio analysis of indebtedness provides clues about the financial strength of an entity, but the
user of the financial statements should look to the notes to determine additional information about
other and .
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Chapter Summary
Chapter 13 discusses numerous issues related to accounting for long-term obligations. The chapter begins with illustra
payment notes, including how to calculate periodic payments. This necessarily requires consideration of future and
preliminary
coverage
within
t
The middle portion of the chapter introduces bonds payable and related features for these financial instruments. A n
appropriate bond accounting, whether the bonds are issued at par, a premium, or discount. Coverage includes both the s
The chapter includes coverage of special bond accounting situations, including bonds issued between interest paymen
accounting. The chapter closes with a section describing debt analysis techniques and ratios, and the reporting of lease-re

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!

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

Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives

Key Terms
Multiple Choice: Chapter Thirteen
1. The present value factor at 8% for one period is 0.92593, for two periods is 0.85734, for three
periods is 0.79383, for four periods is 0.73503, and for five periods is 0.68058. Given these factors,
what amount should be deposited in a bank today to grow to $100 three years from now?
a. $100/0.79383
b. $100/(0.92593/3)
c. ($100/0.92593 + $100/0.85734 + $100/0.79383)
d. $100 X 0.79383
HELP ME!
2. You are thinking of borrowing $250,000 to buy a new house. If you are going to finance this
purchase at 12% interest per annum, and make 360 level monthly payments to pay off the loan, how
much will your payments be?
a. $250,000/360
b. $250,000/present value factor for lump sum at 360 months and 1% per period
c. $250,000/present value factor for annuity of 360 months at 1% per period
d. $250,000 X present value factor for annuity of 360 months at 1% per period
HELP ME!
3. Assume that Kamchatny Vladimir borrowed $100,000 on January 1 of Year 1, at 5% interest per
annum. On December 31, of Year 1, an $8,000 payment is made. On December 31, of year 2,
another $8,000 payment is made. Using normal assumptions about interest and principal reduction,
how much is the unpaid balance of Vladimir's loan after the second payment?
a.
b.
c.
d. 84,000
$100,000
$94,000
$93,850
HELP ME!
4. Bonds payable should be disclosed on the balance sheet.
a.
At
their
b.
At
their
c.
At
d. At their face value.
face
face
value
minus
value
plus
their
any
any
unamortized
unamortized
maturity
premiums.
premiums.
value.
HELP ME!
5. When the contract interest rate for a bond exceeds the effective interest rate of the bond, then:
a. The price of the bond will be equal to the future cash flow associated with the bond.
b. The bond will be issued at a premium.
c. The bond will be issued at a discount.
d. The face value of the bond will fluctuate over its life.
HELP ME!
6. On June 1, Surge Corporation issued $100,000 of 9%, 5-year bonds. The bonds are dated June 1,
20X1. The bonds were issued at 96, and pay interest on December 1 and June 1. The entry to record
issuance of the bonds is:
a.
Bonds Payable
Cash
100,000
Discount
Bonds Payable
Cash
on
100,000
Bond
Bonds Payable
Cash
Interest
100,000
b.
c.
d.
100,000
Bonds
Payable
104,000
4,000
Payable
Cash
Bond
Bonds Payable
Interest
100,000
96,000
4,000
96,000
4,000
Expense
HELP ME!
7. On April 1, 20X1, German Corporation issued $100,000 of 7%, 5-year bonds dated April 1, 20X1,
at 101. Interest is paid on March 31 and September 30. The proper entries to record bond interest
expense for the (entire) year ended 20X1 would include a decrease in interest expense for premium
amortization in the amount of (round to the nearest dollar and assume straight-line amortization):
a.
b.
c.
d. $200
$0
$117
$150
HELP ME!
8. Jeske Company issued $1,000,000 of 8% bonds at a time when the market rate of interest was
10%. If the bonds were issued at a $50,000 discount and interest was paid annually, how much was
interest expense for the first full year of the bond issue (utilize the effective-interest amortization
technique)?
a.
b.
c.
d. $100,000
$76,000
$80,000
$95,000
HELP ME!
9. When interest payment dates on a bond are June 1 and December 1, and the bond is sold on July
1, the amount of cash received at issuance will be:
a.
Decreased
by
accrued
interest
from
July
1
b.
Decreased
by
accrued
interest
from
June
c.
Increased
by
accrued
interest
from
July
1
d. Increased by accrued interest from June 1 to July 1.
HELP ME!
to
1
to
December
to
July
December
1.
1.
1.
10. Billings Corporation retired $1,000,000 face of bonds payable. At the time of the retirement, the
bonds had unamortized discount of $20,000, and all interest accruals and payments were current.
Under the outstanding covenants, Billings was required to pay the bond holders 103.
a.
The
transaction
caused
Billings
to
recognize
b.
The
transaction
caused
Billings
to
recognize
c.
The
transaction
caused
Billings
to
recognize
d. The transaction caused Billings to recognize a gain of $20,000.
HELP ME!
a
a
a
loss
gain
loss
of
of
of
$50,000.
$50,000.
$30,000.
1. d. The amount to invest today is the present value of $100, or $100 times the present value factor
of 0.79383.
2. c. The payment times the present value factor for the stream of payments (1% per month, 36
months) is equal to the loan amount. This is equivalent algebraically to dividing the loan by the
present value factor to derive the payment amount.
3. c. $93,850. The first payment is $5,000 of interest ($100,000 X .05) and $3,000 principal
reduction. The resulting principal balance for Year 2 is $97,000; which accrues interest of $4,850
($97,000 X .05). The $8,000 payment in Year 2 therefore reduces the principal by $3,150 ($8,000 $4,850) to $93,850.
4. b. Bonds are disclosed on the balance at their face amount, minus any unamortized discount or
plus any unamortized premium.
5. b. The bond would be issued at a premium because the contract yield is superior to the going rate
of interest for similar bonds. The price of the bond will be less than the future cash flow (it will be
equal to the present value of the future cash flow). The face value of a bond does not change over
time.
6. b. The bonds were issued at a $4,000 discount. Choice "b" is the only choice which reflects this
fact.
7. c. $150. The monthly amortization is $16.67 ($1,000/60 months). The total amortization is $150
($16.67 X 9 = $150).
8. c. $95,000. The bonds' carrying value ($1,000,000 - $50,000) times the effective interest rate (10%)
yields the total interest expense.
9. d. Bonds issued between interest dates require that the issuer receive the accrued interest relating
to the time period from the date of the bond issue (or previous interest payment date in some cases)
to the actual effective issue date.
10. a. Billings would report of a loss of $50,000. In simple terms, the transaction requires Billings to
pay out $1,030,000 to retire debt that is carried at $980,000 ($1,000,000 - $20,000 unamortized
discount). In journal entry form, a $50,000 debit (loss) would be needed to balance the entry that is
necessary to remove the bond payable ($1,000,000 debit to remove), unamortized discount ($20,000
credit to remove), and cash ($1,030,000 credit to reduce).
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Chapter Summary
Chapter 13 discusses numerous issues related to accounting for long-term obligations. The chapter begins with illustra
payment notes, including how to calculate periodic payments. This necessarily requires consideration of future and
preliminary
coverage
within
t
The middle portion of the chapter introduces bonds payable and related features for these financial instruments. A n
appropriate bond accounting, whether the bonds are issued at par, a premium, or discount. Coverage includes both the s
The chapter includes coverage of special bond accounting situations, including bonds issued between interest paymen
accounting. The chapter closes with a section describing debt analysis techniques and ratios, and the reporting of lease-re

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!






Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Objectives: Chapter Thirteen
THE FOLLOWING LEARNING OBJECTIVES FOR THIS CHAPTER MAP TO THE CURRICULUM DESIGN
FOR OUR ONLINE UNIVERSITY-LEVEL COURSES. THESE COURSES ARE OFFERED THROUGH UTAH
STATE UNIVERSITY, AND RESULT IN THE AWARDING OF UP TO 6 HOURS OF HIGHLY
TRANSFERRABLE COLLEGE CREDIT. TO LEARN MORE, CHECK OUT THE CLASSROOM LINK.
Long-term notes and present value concepts.
Be able to account for a simple term note payable.
Understand compound interest concepts and calculations.
Define "future value," and know the computations and how to use future value
tables (for lump sum and annuity situations).
Define "present value," and know the computations and how to use present
value tables (for lump sum and annuity situations).
Calculate and account for amounts related to notes payable that include level
payments of principal and interest over their life.
Know that electronic spreadsheets frequently include functions that can be
used to calculate note payments.
The nature of bonds and related terminology.
Describe the basic characteristics of a bond.
Review and understand bond terminology.
Identify the different types of bonds and their key features.
Accounting for bonds payable, whether issued at par, a premium or
discount.
What factors will generally impact the issue price of a bond?
Understand why present value is important to bond pricing calculations.
Be able to calculate the issue price for a bond.
Prepare journal entries for the entire life cycle of a bond issued at par.
Be able to describe when a bond is issued at a premium, and prepare journal
entries for its issuance.
Use the straight-line method to account for a bond issued at a premium.
Be able to describe when a bond is issued at a discount, and prepare journal
entries for its issuance.
Use the straight-line method to account for a bond issued at a discount.
Understand how bonds are presented on a balance sheet, whether issued at
par, a premium, or discount.
Effective-interest amortization methods.
Use the effective-interest method to account for a bond issued at a premium.
Use the effective-interest method to account for a bond issued at a discount.
Bonds issued between interest dates, bond retirements, and fair value
measurements.
Determine the appropriate procedures for bonds issued between interest
payment dates.
Determine the appropriate year-end accounting for bonds issued at par, a
discount, or a premium.
Understand the potential impact of a bond retirement.
Analysis, commitments, and leases.
Know how to calculate the debt to total assets and the debt to equity ratios.
Know how to calculate the times interest earned ratio.
Be able to express an understanding of debt analysis, including cautionary
caveats.
Differentiate between a liability and a commitment, and understand that
significant commitments should be disclosed.
Express a basic level of understanding regarding the accounting for capital
leases.
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Chapter Summary
Chapter 13 discusses numerous issues related to accounting for long-term obligations. The chapter begins with illustra
payment notes, including how to calculate periodic payments. This necessarily requires consideration of future and
preliminary
coverage
within
t
The middle portion of the chapter introduces bonds payable and related features for these financial instruments. A n
appropriate bond accounting, whether the bonds are issued at par, a premium, or discount. Coverage includes both the s
The chapter includes coverage of special bond accounting situations, including bonds issued between interest paymen
accounting. The chapter closes with a section describing debt analysis techniques and ratios, and the reporting of lease-re

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!






Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Key Terms: Chapter Thirteen
annuities
Streams of level (i.e., the same amount each period) payments occurring on regular intervals
bonds payable
An obligation divided into transferable units requiring the issuer to make periodic interest
payments and an eventual repayment of the face amount
callable bond
A bond that provides the issuer an option to reacquire the bonds before scheduled maturity at a
preset price
commitments
Promises to engage in some future action; not necessarily creating a recordable accounting liability
but potentially necessitating enhanced disclosure
compound interest
Interest calculations that provide for periodic inclusion of accumulated interest into the base on
which interest is calculated; "interest on the interest"
convertible bond
A bond that may be converted by the holder into stock of the issuing company
coupon bond
A bond that has detachable coupons that are exchanged for interest payments; historically popular
but falling into disuse
debenture bond
A bond that lacks specific collateral; payment is only assured by the general faith and
creditworthiness of the issuer
effective-interest amortization
A theoretically preferable method for amortizing premiums and discounts on bonds; interest
expense is a constant percentage of the bonds ever-changing carrying value
future value
The amount to which an interest-earning amount is expected to grow over a stipulated time period
at a given interest rate
junk bond
A bond that is issued by a company of low credit worthiness, and entails substantial risk of
nonpayment; generally offers a high interest rate to compensate for the high risk
nonredeemable bond
A bond that cannot be paid off before scheduled maturity
nonrefundable bond
A bond that cannot be paid off with the proceeds of a new debt issue
present value
The calculated value today of an amount to be received in the future, based upon an assumed
interest rate (the reciprocal of future value)
registered bond
A bond for which ownership records are maintained, and interest is paid to the registered owner
secured bond
A bond that provides specific assets as collateral to help assure the payment stream
serial bond
A bond issue that has multiple repayment dates, rather than the entire issue maturing at one fixed
maturity date
simple interest
Interest calculations that do not provide for periodic inclusion of accumulated interest into the base
on which interest is calculated
sinking fund bond
A bond issue that requires periodic setting aside of monies into a separate fund to provide for
eventual repayment of the debt at maturity
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Chapter Summary
Chapter 14 provides in-depth coverage of accounting issues that are unique to corporations. The chapter begins with a
entity, and its advantages and disadvantages. There are various types of stock, and each type has unique features. Th
common and preferred stock, and identifies features that should be fully understood. The presence of multiple classes
dividends
and
capital
structure,
as
described
Companies may buy back shares of their own stock, which are known as treasury shares. The proper accounting for treas
and
practices.
Companies
would
generally
not
recognize
gains
and
los
As described in the chapter, the appropriate accounting for stock splits and stock dividends depends on the legal
methodology is further impacted for stock dividends, based upon whether a transaction is deemed to be a large or small
an illustrative statement of stockholders' equity, which is more extensive and often substituted for a statement of retained

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!






Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Goals Achievement: Chapter Fourteen
Select the appropriate response.
The feature of limited liability means that stockholders can never lose more than the par value of the
stock in which they have invested.
true or false
Which of the following features would be associated with common stock?
preemptive rights or cumulative
Which of the following types of stock is accounted for similar to par-value stock?
no-par or stated-value
Total paid-in capital equals the par value of capital stock plus:
paid-in capital in excess of par value or retained earnings
For a cash dividend, stockholders' equity would be reduced on the:
date of declaration or date of payment
In the event dividends are paid to only one class of stock, which class is ordinarily paid?
preferred stock or common stock
Dividends that have not been paid on cumulative preferred stock are said to be:
in arrears or forgiven
If a corporation has dividends in arrears on preferred stock for two years ($5,000 per year), and
declares $20,000 of dividends during the current (third) year, how much will be paid to the common
shareholders?
$5,000 or $10,000
Treasury stock is stock of one corporation that is owned by another corporation.
true or false
Treasury stock should be reported as:
a reduction of stockholders' equity or an asset
The reissuance of treasury stock would never result in a credit to:
Gain on Sale or
Paid-in Capital
The accounting for a stock split requires the recording of a journal entry.
true or false
A small stock dividend (one that is less than 20-25%) should be accounted for based on:
par value or fair value
Stock dividends are reported on the statement of retained earnings.
true or false
In preparing the stockholders' equity section (and related footnotes), how much detail is required?
limited or significant
In lieu of the Statement of Retained Earnings, many companies will prepare an expanded Statement
of Stockholders' Equity.
true or false
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Chapter Summary
Chapter 14 provides in-depth coverage of accounting issues that are unique to corporations. The chapter begins with a
entity, and its advantages and disadvantages. There are various types of stock, and each type has unique features. Th
common and preferred stock, and identifies features that should be fully understood. The presence of multiple classes
dividends
and
capital
structure,
as
described
Companies may buy back shares of their own stock, which are known as treasury shares. The proper accounting for treas
and
practices.
Companies
would
generally
not
recognize
gains
and
los
As described in the chapter, the appropriate accounting for stock splits and stock dividends depends on the legal
methodology is further impacted for stock dividends, based upon whether a transaction is deemed to be a large or small
an illustrative statement of stockholders' equity, which is more extensive and often substituted for a statement of retained

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!






Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Fill in the Blanks: Chapter Fourteen
1. A is an artificial being, existing only in contemplation of law.
2. A corporation is created by obtaining a from one of the states.
3. A is a corporation which has shares of stock owned by relatively few persons.
4. The taxing of income to the corporation, and the subsequent taxing of dividends to the stockholders
is commonly termed .
5. The allows existing shareholders the opportunity to maintain their respective interests in a
corporate entity by acquiring additional shares on a pro rata basis.
6. The feature that allows a corporation to reacquire stock, at the corporation's option, is commonly
known as the feature; the feature that allows the shareholder to exchange preferred shares for
common shares is called the feature.
7. The significance of par value is that it represents per share of stock.
8. A debit balance in Retained Earnings is commonly referred to as a .
9. The is the date that corporate records are reviewed to determine who will receive a previously
declared dividend.
10. The number of shares that a corporation is permitted to issue is termed the shares, whereas the
number of shares actually issued and held by stockholders is termed shares.
11. For a preferred stock to have dividends in arrears, it must be .
12. Corporations frequently purchase shares of their own stock. These shares are termed .
13. When a corporation reissues treasury stock at more than its cost, the account should be
increased.
14. A involves increasing the number of shares outstanding and reducing the stock's par or stated
value per share.
15. Accounting for a small stock dividend is based on value.
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Chapter Summary
Chapter 14 provides in-depth coverage of accounting issues that are unique to corporations. The chapter begins with a
entity, and its advantages and disadvantages. There are various types of stock, and each type has unique features. Th
common and preferred stock, and identifies features that should be fully understood. The presence of multiple classes
dividends
and
capital
structure,
as
described
Companies may buy back shares of their own stock, which are known as treasury shares. The proper accounting for treas
and
practices.
Companies
would
generally
not
recognize
gains
and
los
As described in the chapter, the appropriate accounting for stock splits and stock dividends depends on the legal
methodology is further impacted for stock dividends, based upon whether a transaction is deemed to be a large or small
an illustrative statement of stockholders' equity, which is more extensive and often substituted for a statement of retained

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!






Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Multiple Choice: Chapter Fourteen
1. Which of the following characteristics is considered to be an advantage of the corporate form of
organization?
a.
Avoidance
b.
Limited
c.
Low
d. The absence of a perpetual existence
of
liability
level
double
of
of
taxation
stockholders
regulation
HELP ME!
2. Of the following characteristics, which is not generally regarded as a right of common
shareholders?
a.
b.
c.
Preference
d. Transferability of shares
Preemptive
Voting
right
rights
liquidation
in
HELP ME!
3. The appropriate journal entry to record the issue of 1,000 shares of $1 par-value common stock,
which is issued for $4 per share would be:
a.
Cash
4,000
Common Stock
b.
4,000
Cash
Common
Paid-in Capital in Excess of Par
c.
4,000
1,000
Stock
3,000
Cash
Common
Retained Earnings
d.
Paid-in
Common Stock
Cash
Capital
4,000
1,000
Stock
3,000
in
Excess
of
Par
1,000
3,000
4,000
HELP ME!
4. If 1,000 shares of $10 par-value common stock are issued in exchange for land with a fair market
value of $25,000, the land and common stock (along with any additional paid-in capital) should be
recorded at:
a.
b.
c.
d. $25,000
$0
$1,000
$10,000
HELP ME!
5. Jackson Corporation has 500,000 shares of common stock outstanding. On April 10, the board of
directors declared a $0.60 per share cash dividend, to be paid to stockholders of record on April 25.
The dividend was distributed on June 6. The proper journal entry to record on June 6 is:
a.
Dividends
Expense
300,000
300,000
Dividends
Payable
300,000
300,000
Retained
Earnings
300,000
300,000
Cash
b.
Cash
c.
Cash
d.
Dividends
Retained Earnings
Payable
300,000
300,000
HELP ME!
6. Dividends omitted on preferred shares that must be paid before common shareholders are entitled
to be paid are referred to as:
a.
b.
c.
d. In arrears
Participating
Callable
Cumulative
HELP ME!
7. Magic Corporation paid $100,000 in dividends. The corporation had 10,000 shares of common
stock outstanding and 5,000 shares of $100 par value 5% preferred stock. The preferred stock was
two years in arrears prior to the current year. How much was paid to the common stockholders?
a.
b.
c.
d. $75,000
$0
$25,000
$50,000
HELP ME!
8. In reviewing corporate equity on a balance sheet, what would be included in the description "Total
Capital Stock"?
a.
b.
c.
Paid-in
d. Both (a) and (b)
Par
Par
capital
value
value
in
excess
of
of
of
par
preferred
common
value
HELP ME!
9. Which of the following statements about treasury stock is false?
a. Gains are not recorded on treasury stock transactions, but losses are.
b.
Acquiring
treasury
stock
causes
stockholders'
equity
to
decrease.
c.
Treasury
stock
is
reported
as
a
deduction
from
stockholders'
equity.
d. The excess of the sales price of treasury stock over its cost should be credited to Paid-in Capital
from Treasury Stock.
HELP ME!
10. Elmer Company has 500,000 shares of common stock authorized. The stock has a par value of
$1.50 per share, and 150,000 shares are outstanding. The company declared a 5% stock dividend at
a time when the market value was $7 per share. What entry, if any, should Elmer record for the
declaration?
a. No entry
b.
Retained
Common Stock
Earnings
11,250
11,250
c.
Retained
Stock
Dividend
Paid-in Capital in Excess of Par
d.
Stock
Retained
Common Stock
HELP ME!
Earnings
Distributable
41,250
52,500
11,250
Payable
11,250
41,250
Dividends
Earnings
52,500
1. b. Stockholders are only held liable for the amount of their investment. Double taxation and high
regulation are considered to be disadvantages. Corporations have a perpetual existence.
2. c. Common shareholders are entitled only to the residual interest in a liquidation; creditors and
preferred shareholders have the preference. In the absence of modification, common shares hold a
preemptive right, have voting privileges, and are readily transferable.
3. b. The journal entry to record the issue of $1 par-value common stock for $4 per share is:
Cash
Common
Paid-in Capital in Excess of Par
Stock
3,000
4,000
1,000
4. d. $25,000. Stock issued for assets should be recorded at the fair value of the stock or assets,
whichever is more clearly determinable.
5. b. Dividends Payable and Cash are reduced on the payment date. The Dividends Payable account
would have been established on the date of declaration.
6. d. Dividends omitted on cumulative preferred stock are called dividends in arrears. Participating
preferred stock shares in excess earnings of the firm, and callable allows the corporation the option to
reacquire its shares at a set price.
7. b. $25,000. Of the $100,000 total dividend distribution, $75,000 is for preferred stockholders. The
$75,000 consists of $25,000 for the current year ($100 X 0.05 X 5,000 shares), and $50,000 for the
two years of dividends in arrears.
8. d. Total capital stock consists of the par value of common and preferred shares. Total paid-in
capital would include total capital stock and paid-in capital in excess of par value.
9. a. Treasury stock transactions are capital transactions, not income activities; therefore, neither
gains nor losses are recognized. Acquiring treasury stock decreases stockholders' equity by the
purchase price. Further, treasury stock is subtracted from stockholders' equity, and Paid-in Capital
from Treasury Stock is credited for the sales price in excess of cost.
10. c. For small stock dividends (less than 20%), Retained Earnings is debited for the fair value of the
declaration (150,000 shares X 5% = 7,500 shares; 7,500 shares X $7 = $52,500). Stock Dividend
Distributable is credited for the par value of the shares to be issued (7,500 shares X $1.50 = $11,250).
Paid-in Capital in Excess of Par Value is credited for the difference ($41,250).
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Chapter Summary
Chapter 14 provides in-depth coverage of accounting issues that are unique to corporations. The chapter begins with a
entity, and its advantages and disadvantages. There are various types of stock, and each type has unique features. Th
common and preferred stock, and identifies features that should be fully understood. The presence of multiple classes
dividends
and
capital
structure,
as
described
Companies may buy back shares of their own stock, which are known as treasury shares. The proper accounting for treas
and
practices.
Companies
would
generally
not
recognize
gains
and
los
As described in the chapter, the appropriate accounting for stock splits and stock dividends depends on the legal
methodology is further impacted for stock dividends, based upon whether a transaction is deemed to be a large or small
an illustrative statement of stockholders' equity, which is more extensive and often substituted for a statement of retained

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!






Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Objectives: Chapter Fourteen
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Characteristics of the corporate form of organization.
Define the essence of the corporate form of entity.
Describe the process by which a corporation is formed, and how business
operations commence.
Cite and explain the advantages of the corporate form of organization.
What is a prospectus?
Cite and explain the disadvantages of the corporate form of organization.
Generally describe the regulatory environment for issuing stock to the public.
Common and preferred stock.
Distinguish between common and preferred stocks, carefully detailing the
rights and features of each class.
What is meant by the term "callable?"
What is meant by the term "convertible?"
What is the significance of par value?
Be able to prepare complete journal entries to record the issuance of par value
stock.
How is stock accounted for that is issued for assets other than cash?
Describe the important dates that pertain to dividends.
When are journal entries recorded for dividend transactions?
How are declared but unpaid dividends reported in the financial statements?
Define "legal capital."
Note the distinction between "additional paid-in capital" and "total paid-in
capital."
Be able to prepare a complete stockholders' equity section for a corporate
entity.
Note the thorough nature of the capital stock descriptions on the face of the
balance sheet.
Be able to perform dividend calculations in cases involving cumulative and
noncumulative preferred stock.
Treasury stock.
What is treasury stock, and where is it positioned on a balance sheet?
Prepare journal entries for treasury stock transactions, including reissuances.
Do gains and losses arise on treasury stock transactions?
Can retained earnings be increased or decreased as a result of treasury stock
transactions?
Stock splits and stock dividends.
Differentiate between a stock split and a stock dividend, and the related
accounting significance of each.
Know that journal entries are not needed for stock splits.
Understand the balance sheet modification necessitated by a stock split.
What is a stock dividend?
Be able to give reasons for issuing stock dividends.
Be able to prepare journal entries for small and large stock dividends, and cite
examples of when each is appropriate.
Be able to provide computations demonstrating the impact of stock dividends
on equity accounts.
Explain the probable impact on market value of stock splits and stock
dividends.
The statement of stockholders' equity.
Be able to prepare a statement of stockholders' equity.
Know about the international approach of presenting a statement of recognized
income and expense.
Know about
revaluations.
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international
approach
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for
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Chapter Summary
Chapter 14 provides in-depth coverage of accounting issues that are unique to corporations. The chapter begins with a
entity, and its advantages and disadvantages. There are various types of stock, and each type has unique features. Th
common and preferred stock, and identifies features that should be fully understood. The presence of multiple classes
dividends
and
capital
structure,
as
described
Companies may buy back shares of their own stock, which are known as treasury shares. The proper accounting for treas
and
practices.
Companies
would
generally
not
recognize
gains
and
los
As described in the chapter, the appropriate accounting for stock splits and stock dividends depends on the legal
methodology is further impacted for stock dividends, based upon whether a transaction is deemed to be a large or small
an illustrative statement of stockholders' equity, which is more extensive and often substituted for a statement of retained

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!

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



Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Key Terms: Chapter Fourteen
callable preferred
Preferred stock that can be repurchased by issuer for a preset price
common stock
The residual equity interest in a corporation; last in liquidation but usually receiving the full
benefits of any corporate growth
convertible preferred
Preferred stock that can be exchanged for common stock at some preagreed ratio
cumulative preferred
Preferred stock that is entitled to a periodic dividend, and those dividends must be paid
(eventually) before any monies can be distributed to common stockholders
dividends in arrears
An omitted dividend on cumulative preferred stock that must eventually be paid before any monies
can be distributed to common stockholders
ex-dividend
The event (date) when a transfer of stock ownership between shareholders will occur without the
right for the purchaser to receive any previously declared dividends
initial public offering
The first time stock in a corporation is offered to the investing public; registration and other
requirements must be met; proceeds may flow to the corporation or private shareholders
legal capital
Usually the par value of the stock of a corporation
paid-in capital in excess of par
The amount by which a stock's issue price exceeds its par value; also referred to as "additional
paid-in capital"
preemptive right
A right that may or may not be provided to shareholders enabling them with a first right of refusal
to buy any additional shares offered by a corporation
preferred stock
A class of stock that generally benefits from a stipulated periodic dividend and priority in
liquidation; but, usually lacking in upside participation in corporate growth
prospectus
The documentation describing financial and business aspects of an initial public offering
statement of stockholders' equity
A financial statement that is often presented in lieu of a statement of retained earnings and other
disclosures about equity accounts
stock
Transferable units of ownership in a corporation
stock dividend
A noncash corporate activity to provide shareholders with additional shares in proportion to
existing ownership; makes for more shares outstanding, but does not change total equity
stock split
A corporate action to increase the number of shares and reduce the par per share by a stipulated
ratio (e.g., 2 for 1)
total paid-in capital
The sum of legal capital plus paid-in capital in excess of par
treasury stock
Shares of a company's own stock that it has reacquired
s of Accounting.com :
y
by delving into more advanced reporting issues, and building an awareness of the accounting profession's conceptual underpinnings. The
llustrations and explanations of special reporting scenarios, including corrections of errors, discontinued operations, extraordinary items
income,
and
changes
in
accounting
m
ng to earnings per share and book value per share are discussed and illustrated. This is followed by a discussion of the use and interpreta
dividend
and
return
ection of the chapter takes a broad overview perspective on the objectives and qualities of accounting information. A brief history
nerally accepted accounting principles and the audit profession is provided. This section concludes with a review of key assumptions inhe
ting
model,
many
of
which
have
been
introduced
throughout
the
udes with coverage of issues arising from global commerce. This topic divides into issues related to reporting issues for global subsidiar
ransactions. Illustrative entries are shown for the foreign exchange transactions.
erstanding of this chapter, exercises with solutions are available for free download at Bookboon.com. You will find these exercises very he
nd guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!
nt
Goals Achievement: Chapter Fifteen
Select the appropriate response.
The utilization of a prior period adjustment is appropriate for:
correction of an error or an appropriation
Which of the following would precede the other on a detailed corporate income statement?
discontinued operations or extraordinary items
To report an event as an extraordinary item, how many of the criteria (unusual in nature and infrequent in occurrence) must
be satisfied?
at least one or
both
Continuing operations, discontinued operations, extraordinary items, and prior period adjustments should all be
reported net of their related tax effect.
true or false
Changing from one generally accepted accounting method to another one should be accounted for via:
retrospective adjustment or restatement
Earnings per share is a popular measure of corporate book value.
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Chapter Summary
Chapter 15 begins by delving into more advanced reporting issues, and building an awareness of the accounting professio
provides detailed illustrations and explanations of special reporting scenarios, including corrections of errors, discontinu
comprehensive
income,
and
changes
in
Calculations relating to earnings per share and book value per share are discussed and illustrated. This is followed by a
selected
dividend
and
ret
The next major section of the chapter takes a broad overview perspective on the objectives and qualities of accou
development of generally accepted accounting principles and the audit profession is provided. This section concludes wit
the
accounting
model,
many
of
which
have
been
introduced
The chapter concludes with coverage of issues arising from global commerce. This topic divides into issues related to r
foreign exchange transactions. Illustrative entries are shown for the foreign exchange transactions.

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!
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

Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Fill in the Blanks: Chapter Fifteen
1. Correction of an error that occurred in the computation of the net income of a previous period is
accomplished by the use of a .
2. A has operations that are clearly distinguishable operationally and for reporting purposes.
3. The accounting profession has stipulated that extraordinary items must be and occur infrequently.
4. In calculating earnings per share, the numerator should consist of and the denominator should
consist of .
5. earnings per share is calculated by ignoring the dilutive effect of convertible securities.
6. In calculating book value per share for a company with more than one class of stock, the amount
allocated to preferred stock should be based on the preferred stock's call value, sometimes referred to
as the or value.
7. An objective of financial accounting is to provide information useful in assessing the , , and of an
organization's cash inflows and outflows.
8. Information is deemed to be if it influences the actions of a decision maker.
9. Usefulness of accounting information is enhanced if a company's financial statements are with the
statements of other enterprises.
10. Accounting information should be comprehensible to those who have a understanding of business
and economic activities.
11. are the assumptions, concepts, and procedures that collectively serve as the underlying
foundation of accounting.
12. Congress established the to regulate business reporting practices for companies that issue
publicly traded securities.
13. The is a national association of licensed CPAs, and, at one time, was the parent of the standardsetting .
14. The private sector organization currently in charge of formulating standards for financial reporting
is the .
15. The assumption holds that an entity's life can be divided into discrete time periods.
16. The exchange rate in effect at a particular point in time is known as the .
17. Foreign currency payables and receivables will result in exchange gains and losses if exchange
rates .
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Chapter Summary
Chapter 15 begins by delving into more advanced reporting issues, and building an awareness of the accounting professio
provides detailed illustrations and explanations of special reporting scenarios, including corrections of errors, discontinu
comprehensive
income,
and
changes
in
Calculations relating to earnings per share and book value per share are discussed and illustrated. This is followed by a
selected
dividend
and
ret
The next major section of the chapter takes a broad overview perspective on the objectives and qualities of accou
development of generally accepted accounting principles and the audit profession is provided. This section concludes wit
the
accounting
model,
many
of
which
have
been
introduced
The chapter concludes with coverage of issues arising from global commerce. This topic divides into issues related to r
foreign exchange transactions. Illustrative entries are shown for the foreign exchange transactions.

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!




Problems
Goals Achievement
Fill in the Blanks
Multiple Choice


Objectives
Key Terms
Multiple Choice: Chapter Fifteen
1. Which of the following is considered as extraordinary by the accounting profession?
a.
Write-down
or
write-off
of
receivables,
inventory,
and
intangible
assets.
b. Gains and losses from the sale or abandonment of equipment used in a business.
c. Effects of a strike, including those against competitors and major suppliers.
d. Flood damage from unusually heavy rains in a normally dry environment.
HELP ME!
2. Which of the following would not be reported as a separate component on the income statement?
a.
Income
b.
c.
Prior
d. Extraordinary item
from
Discontinued
continuing
period
operations
operations
adjustment
HELP ME!
3. Oakwood Furniture Corporation had 100,000 shares of common stock outstanding on January 1.
An additional 50,000 shares were issued on July 1, and 25,000 shares were reacquired on
September 1. What was the weighted-average number of share outstanding during the year?
a.
b.
c.
d. 116,667
140,000
125,000
118,750
HELP ME!
4. Sparks Corporation had 15,000 shares of common stock outstanding on January 1, and issued an
additional 5,000 shares on June 1. There was no preferred stock outstanding. The corporation reports
net income of $200,000. How much is basic earnings per share (to the nearest cent) for the calendar
year?
a.
b.
c.
d. $13.33
$10.00
$11.16
$11.43
HELP ME!
5. Sparks Corporation had 15,000 shares of common stock outstanding on January 1, and issued an
additional 5,000 shares on June 1. There was preferred stock outstanding, and dividends on the
preferred stock amounted to $20,000. The corporation reports net income of $200,000. The preferred
stock is not convertible. How much is basic earnings per share (to the nearest cent) for the calendar
year?
a.
b.
c.
d. $10.29
$9.00
$10.00
$10.05
HELP ME!
6. If a corporation has total stockholders' equity of $1,000,000, 100,000 shares of common stock
outstanding, and 1,000 shares of $100 par value preferred stock outstanding, how much is book value
per common share? Assume that the preferred stock is callable at $110 and dividends of $4,000 on
preferred stock are due.
a.
b.
c.
d. $10.00
$8.86
$9.00
$9.96
HELP ME!
7. Which of the following is a stated objective of financial reporting?
a. To provide information useful in assessing the amounts, timing, and uncertainty of an organization's
cash
inflows
and
outflows.
b. To provide information useful in preparing tax returns and other governmental reports.
c. To provide information about the current cost of an enterprise's assets.
d. To ensure that all companies use the same financial accounting principles.
HELP ME!
8. The organization that has been given the authority by Congress to set accounting principles for
public companies is the:
a.
Internal
b.
Financial
Accounting
c.
Securities
and
d. Institute of Management Accountants.
Revenue
Standards
Exchange
Service.
Board.
Commission.
HELP ME!
9. Relevance is a qualitative characteristic of accounting information. Which definition best applies to
the concept of relevance?
a. The quality of information that assures that information is reasonably free from error and bias.
b. The capacity of information to make a difference in the decision process.
c. The quality of information that enables users to comprehend the message being communicated.
d. The quality of information that enables users to identify similarities and differences between two
sets of economic phenomena.
HELP ME!
10. Darland Corporation (USA) purchased goods on account for 1,000 Swiss francs. On the date of
purchase, the spot rate for the Swiss franc was $0.70. By the time the corporation settled its
obligation, the spot rate had fallen to $0.65 per Swiss franc. How much was the foreign currency
exchange gain or loss?
a.
b.
c.
d. $83 gain
HELP ME!
$50
$50
$0
gain
loss
1. d. Extraordinary items must be both unusual in nature and occur infrequently. The only choice that
satisfies these conditions is "d."
2. c. Prior period adjustments are reported on the statement of retained earnings. Income from
continuing operations, discontinued operations, and extraordinary items are all separately reported on
the income statement.
3.
d.
100,000
X
6/12
150,000
X
2/12
125,000
X
4/12
Weighted Average 116,667 (50,000 + 25,000 + 41,667)
=
=
=
116,667.
50,000
25,000
41,667
4. b. $11.16. The $200,000 net income is divided by the weighted-average shares outstanding
((15,000 X 5/12) + (20,000 X 7/12) = 17,916.67 shares).
5. c. $10.05. The income available to common shareholders ($200,000 - $20,000 preferred dividends
= $180,000) is divided by the weighted-average shares outstanding ((15,000 X 5/12) + (20,000 X
7/12) = 17,916.67 shares).
6. a. $8.86. The equity attributable to common stockholders ($1,000,000 total equity - $110,000 call
price of preferred stock - $4,000 dividends due on preferred stock = $886,000) is divided by the
common shares outstanding (100,000).
7. a. A stated objective of financial reporting is to provide information that is useful in assessing the
amounts, timing, and uncertainty of an organization's cash inflows and outflows. Tax return
preparation is not a primary financial accounting objective. Accounting is based on historical cost, not
current cost. Different companies typically use different accounting methods.
8. c. Congress has given the ultimate authority for setting accounting principles to the Securities and
Exchange Commission. The Internal Revenue Service deals with tax law implementation. The
Financial Accounting Standards Board and the National Association of Accountants are both private
sector groups.
9. b. Relevance means that information bears on the decision process. Choice "a" relates to reliability,
choice "c" to understandability, and choice "d" to comparability.
10. b. $50 gain. The $0.05 decrease in the spot rate reduced the U.S. dollar equivalent by $50 ((1,000
X $0.70) - (1,000 X $0.65)). Because Darland had a payable, the reduction in the payable is a gain.
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Chapter Summary
Chapter 15 begins by delving into more advanced reporting issues, and building an awareness of the accounting professio
provides detailed illustrations and explanations of special reporting scenarios, including corrections of errors, discontinu
comprehensive
income,
and
changes
in
Calculations relating to earnings per share and book value per share are discussed and illustrated. This is followed by a
selected
dividend
and
ret
The next major section of the chapter takes a broad overview perspective on the objectives and qualities of accou
development of generally accepted accounting principles and the audit profession is provided. This section concludes wit
the
accounting
model,
many
of
which
have
been
introduced
The chapter concludes with coverage of issues arising from global commerce. This topic divides into issues related to r
foreign exchange transactions. Illustrative entries are shown for the foreign exchange transactions.

Exercises
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

Problems
Goals Achievement




Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Objectives: Chapter Fifteen
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Special reporting situations.
What is a prior period adjustment, and when is this accounting device used?
Know the journal entry and financial statement effect of restatements for
errors.
Be able to define a business component.
Identify the nature of discontinued operations.
Know the
operations.
special
accounting
treatment
associated
with
discontinued
Describe intraperiod tax allocation, and state why this approach is used.
Know the special accounting rules for extraordinary items.
Prepare a comprehensive income statement that includes elements such as
discontinued operations and extraordinary items.
Know how to account for and report changes in accounting principle.
Distinguish between the terms restatement and retrospective adjustment,
knowing which is applicable to changes in principle.
Be familiar with EBIT and EBITDA.
Earnings per share and other key indicators.
Be able to calculate basic earnings per share.
Understand the concepts and computations for weighted-average shares and
earnings available to common stockholders.
Be familiar with diluted earnings per share.
Understand the price/earnings ratio.
What is book value per share, how should it be interpreted, and how is it
calculated?
Understand the confounding effects on book value calculations, when there is
more than one class of stock.
Be able to calculate the dividend payout ratio and the dividend yield.
Be able to calculate return on assets and return on equity.
The objectives and qualities of accounting information.
What are the key objectives of accounting.
What primary and secondary characteristics serve to make accounting useful?
Provide specific definitions for relevance, reliability, comparability, consistency,
and understandability.
The development of generally accepted accounting principles.
Define generally accepted accounting principles.
What bodies are instrumental in the development of GAAP?
What body influences the formulation of international accountancy?
What is the purpose of an audit?
What is the nature of an audit report?
What government entity oversees the audit profession?
Key assumptions of financial accounting and reporting.
Be able to define the following assumptions: entity, going-concern, periodicity,
monetary unit, and stable currency.
Issues in accounting for global commerce.
What are two key accounting issues that can arise from global commerce?
Distinguish between translation and remeasurement, and to what subject do
they relate?
Know how to account for typical foreign currency transactions, with special
attention to appropriate year-end adjustments.
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Chapter Summary
Chapter 15 begins by delving into more advanced reporting issues, and building an awareness of the accounting professio
provides detailed illustrations and explanations of special reporting scenarios, including corrections of errors, discontinu
comprehensive
income,
and
changes
in
Calculations relating to earnings per share and book value per share are discussed and illustrated. This is followed by a
selected
dividend
and
ret
The next major section of the chapter takes a broad overview perspective on the objectives and qualities of accou
development of generally accepted accounting principles and the audit profession is provided. This section concludes wit
the
accounting
model,
many
of
which
have
been
introduced
The chapter concludes with coverage of issues arising from global commerce. This topic divides into issues related to r
foreign exchange transactions. Illustrative entries are shown for the foreign exchange transactions.

Exercises
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providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!

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
Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Key Terms: Chapter Fifteen
accounting changes
Changes from one acceptable method of accounting to another acceptable method; like straightline depreciation to a declining balance approach
Accounting Principles Board
The private sector group charged with developing accounting standards from 1959 to 1973;
primary authoritative pronouncements were known as "opinions"
AICPA
American Institute of CPAs; an organization whose members are CPAs interested in advancing the
accounting profession
basic EPS
The simplest earnings per share number; earnings available to common shares divided by
weighted average shares, without factoring in potential dilution
book value per share
Common stockholders' equity divided by common shares outstanding, to indicate stockholders'
equity per share
business component
Part of a business with clearly distinguishable operations; a business segment, unit, subsidiary, or
group of assets
comparability
A quality of accounting such that different companies may use different accounting methods, but
there is still sufficient basis for valid comparison
complex capital structure
Companies with options, warrants, or convertible bonds and stocks that may result in the issuance
of additional shares
comprehensive income
Net income plus items of other comprehensive income (e.g., market value adjustments of
available for sale securities)
consistency
A quality of accounting holding that deviations in measured outcomes from period to period should
be the result of deviations in underlying performance (not accounting quirks)
diluted EPS
An earnings per share number; adjusted to reflect the potential effect of dilutive securities
dilutive securities
Options, warrants, convertible bonds, convertible stocks, and other items that have the potential
to increase the number of shares outstanding
discontinued operations
The special income statement reporting of the impact of disposing or abandoning of a component
of a business
dividend payout ratio
Dividend per share divided by earnings per share
dividend rate
Dividend per share divided by stock price; also called dividend yield
earnings
A concept that relates to income from continuing operations plus/minus discontinued operations
and extraordinary items
Earnings per share
EPS; generally understood as the amount of income for each share of stock, but is actually better
refined as basic and diluted EPS (see those definitions)
EBIT
An analysts calculation to reflect "earnings before interest and taxes"
EBITDA
An analysts calculation to reflect "earnings before interest, taxes, depreciation, and amortization"
entity assumption
Accounting information should be presented for circumscribed distinct economic units
extraordinary item
The gain or loss resulting from a transaction or event that is both unusual in nature and infrequent
in occurrence; reported below income from continuing operations
GAAP
Generally accepted accounting principles -- encompass the rules, practices, and procedures that
define the proper execution of accounting
going concern assumption
In the absence of evidence to the contrary, accountants assume that a business will continue to
operate well into the future
IASB
International Accounting Standards Board;
accounting rules with global acceptance
organization
undertaking
to
develop
cohesive
intraperiod tax allocation
Separately reported item like discontinued operations, extraordinary items, etc., are to reported
net of their specifically related tax effects
net income
Income from continuing operations plus/minus other special items like discontinued operations,
etc., but before items of "other comprehensive income"
PCAOB
Public Accounting Oversight Board -- a private-sector, non-profit corporation, charged with
overseeing the auditors of public companies
price earnings ratio
The per share market value of a stock divided by its earnings per share
principles-based
The idea that accounting standards should articulate broad-based principles rather than specific
and detailed rules
prior period adjustment
To correct errors from prior years; prior financial statements are retroactively changed to make
them correct
relevance
A quality of accounting such that it is timely and bears on the decision-making process by
possessing feedback and/or predictive value
reliability
A quality of accounting information such that it is faithful in representation; free from bias, neutral,
and verifiable
remeasurement
One of two approaches for converting the financial statements of a foreign affiliate to the reporting
currency
restatement
The financial statements of prior periods are redone to reflect the correct amounts
return on assets ratio
A ratio comparing income (net income plus interest) to the average total assets
return on equity ratio
A ratio comparing income (net income minus preferred dividends) to the average total equity
rules-based
The idea that accounting standards must be very specific to provide adequate guidance and drive
consistency in reporting
Sarbanes-Oxley
"SOX" -- Legislation that imposes stringent controls over reporting and auditing; created the Public
Accounting Oversight Board
Securities and Exchange Commission
"SEC" -- regulatory body with which public companies must file and report
stable currency assumption
An accounting assumption that presumes the currency is not impacted over time by inflation
translation
One of two approaches for converting the financial statements of a foreign affiliate to the reporting
currency
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Chapter Summary
Chapter 16 opens with a review of the various ratios that have been introduced throughout the book. The ratios are cate
liquidity, debt, turnover, profitability, and other indicators. A summary table includes the formulations, and show
comprehensive
financial
statement
The next section of the chapter introduces a deeper coverage of the statement of cash flows. This required financial state
indirect approach. Both methods are illustrated. The direct method can involve complex calculations of certain cas
formulations
for
these
calculations
are
The chapter closes by demonstrating a worksheet that can facilitate the preparation of a statement of cash flows. The e
builds a bridge between a beginning-of-period and end-of-period balance sheet, explaining how changes are reconcilable t

Exercises
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providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!
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Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Goals Achievement: Chapter Sixteen
Select the appropriate response.
Which of the following is excluded in calculating the quick ratio?
short-term investments or merchandise inventory
Which type of ratio is useful for measuring the ability of a business to meet current debts as they
come due?
liquidity ratio or profitability ratio
Inventory turnover and accounts receivable turnover are examples of:
coverage ratios or activity ratios
What is included in the numerator of the inventory turnover ratio?
average inventory or cost of goods sold
The numerator for the return on assets ratio includes:
net income and preferred dividends or interest expense
The times interest earned ratio consists of income before income taxes and interest divided by:
debt or interest charges
The statement of cash flows reveals the cash generated or consumed by a firm's operating, investing,
and financing activities.
true or false
Cash flow information provides signals about the maturity of a business, as well as information about
looming financial problems.
true or false
The statement of cash flows is primarily designed to explain the changes in retained earnings.
true or false
Which activities relate primarily to the production and sale of goods and services and enter into the
determination of income?
operating activities or financing activities
Which of the following would constitute a typical cash inflow from an investing activity?
sale of stocks of other firms or issuance of stock
Only transactions that directly generate or consume cash are reported on a statement of cash flows.
true or false
Which of the following would constitute a noncash investing/financing transaction?
exchanging land for stock or issuing a stock dividend
Significant noncash investing/financing transactions are reported on a statement of cash flows
prepared using either the direct method or:
the indirect method or investing method
Which of the following approaches to preparing the statement of cash flows translates income from
the accrual basis to the cash basis?
direct method or indirect method
Cash received from customers can be calculated by starting with accrual basis sales and adding:
decreases in accounts receivable or increases in accounts receivable
To calculate cash flow from operating activities under the indirect method, nonoperating gains should
be:
added or subtracted
With the indirect approach to calculating cash flow from operating activities, increases in current
assets related to operations should be subtracted from the accrual basis income figure.
true or false
In preparing a statement of cash flows, the proceeds from a disposal of equipment should be reported
as a cash inflow from investing activities.
true or false
Cash dividends paid are reported as a financing cash:
inflow or outflow
Both the direct and indirect methods are acceptable for external financial reporting.
true or false
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Chapter Summary
Chapter 16 opens with a review of the various ratios that have been introduced throughout the book. The ratios are cate
liquidity, debt, turnover, profitability, and other indicators. A summary table includes the formulations, and show
comprehensive
financial
statement
The next section of the chapter introduces a deeper coverage of the statement of cash flows. This required financial state
indirect approach. Both methods are illustrated. The direct method can involve complex calculations of certain cas
formulations
for
these
calculations
are
The chapter closes by demonstrating a worksheet that can facilitate the preparation of a statement of cash flows. The e
builds a bridge between a beginning-of-period and end-of-period balance sheet, explaining how changes are reconcilable t

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!
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Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Fill in the Blanks: Chapter Sixteen
1. measure the ability of a business to meet current debts and obligations as they come due.
2. One of the most widely used liquidity measures is the which compares current assets and current
liabilities.
3. Activity ratios are often termed .
4. Insight into the amount of protection that is afforded the long-term creditors is provided by a ratio
called .
5. The annual cash dividend per share divided by the current market price of stock is the .
6. are those which arise from transactions and events that enter into net income.
7. are those that involve investment of an entity's resources.
8. are those that supply a firm with funds from either the firm's owners or creditors.
9. Under both the direct and indirect approaches to preparing a statement of cash flows, a separate
schedule of investing/financing transactions should be presented.
10. Under the , individual items on the income statement are translated from the accrual basis to the
cash basis.
11. Under the , operating cash flows are calculated by starting with accrual basis net income, then
adding and subtracting amounts to convert to the cash basis.
12. If the indirect method is used, noncash expenses like depreciation should be in calculating the
cash provided by operating activities.
13. The purchase of land, disposal of equipment, and so forth are activities.
14. The payment of dividends and receipt of proceeds from bond issues are examples of activities.
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Chapter Summary
Classroom
Bookstore
Chapter 16 opens with a review of the various ratios that have been introduced throughout the book. The ratios are cate
liquidity, debt, turnover, profitability, and other indicators. A summary table includes the formulations, and show
comprehensive
financial
statement
The next section of the chapter introduces a deeper coverage of the statement of cash flows. This required financial state
indirect approach. Both methods are illustrated. The direct method can involve complex calculations of certain cas
formulations
for
these
calculations
are
The chapter closes by demonstrating a worksheet that can facilitate the preparation of a statement of cash flows. The e
builds a bridge between a beginning-of-period and end-of-period balance sheet, explaining how changes are reconcilable t

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!






Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Multiple Choice: Chapter Sixteen
1. Financial statement ratio analysis may be undertaken to study liquidity, turnover, profitability, and
other indicators. To which does the current ratio most relate?
a.
b.
c.
d. Other indicator
Liquidity
Turnover
Profitability
HELP ME!
2. Zhang Corporation had net income of $100,000, paid income taxes of $30,000, and had interest
expense of $8,000. What was Zhang's times interest earned ratio?
a.
b.
c.
d. 17.85
HELP ME!
3. Selected information for 20X1 for the Bernstein Company is as follows:
Cost of goods
$6,000,000
sold
Average inventory$2,000,000
Net sales
$8,000,000
Average
$3,000,000
receivables
Net income
$1,000,000
12.5
16.25
17.25
Assuming a 360-day business year, what was the inventory turnover ratio for Bernstein?
a.
b.
c.
d. 6
3
4
5
HELP ME!
4. Thompson Corporation wrote off a $200 uncollectible account receivable against the $2,400
balance in its Allowance for Bad Debts account. Compare the current ratio before the write-off (X)
with the current ratio after the write-off (Y).
a.
X
b.
c.
X
d. Cannot be determined
greater
than
X
Y
Y
Y
equals
less
than
HELP ME!
5. Ames Corporation's net accounts receivable were $750,000 on December 31, 20X1, and
$1,250,000 on December 31, 20X2. Net cash sales for 20X2 were $3,300,000. The accounts
receivable turnover ratio for 20X2 was 16. What were the total net sales for 20X2?
a.
b.
c.
d. $19,300,000
$12,800,000
$16,000,000
$16,100,000
HELP ME!
6. On a statement of cash flows, which of the following types of activities would not be disclosed in a
separate section?
a.
b.
c.
d. Contractual activities
Operating
Investing
Financing
activities
activities
activities
HELP ME!
7. Which of the following activities would generally be regarded as a financing activity in preparing a
statement of cash flows?
a.
b.
Proceeds
from
the
c.
Loans
made
by
d. Employees' salaries and wages paid
Dividend
sale
the
of
entity
stocks
to
distribution
of
other
firms
other
businesses
HELP ME!
8. In preparing the statement of cash flows, how should noncash investing/financing activities be
reported?
a.
b.
Be
reported
in
a
Not
separate
schedule
be
accompanying
the
statement
of
reported
cash flows
c. Be reported in the investing activities section of the statement
d. Be reported in the financing activities section of the statement of cash flows
of
cash
flows
HELP ME!
9. For purposes of calculating cash receipts from customers, which of the following adjustments
should be made to convert accrual basis sales to cash basis sales?
a.
Add
an
increase
in
accounts
receivable
b.
Subtract
an
increase
in
accounts
receivable
c.
Add
cash
in
bank
to
d. Add the change in cash to the accrual basis sales
to
accrual
basis
from
accrual
basis
accrual
basis
sales
sales
sales
HELP ME!
10. If the indirect approach for the statement of cash flows is presented, which of the following items
should be subtracted from accrual basis net income to derive cash flow from operating activities?
a.
Gains
on
b.
Losses
on
c.
d. Amortization expense
the
the
sale
sale
Depreciation
of
of
long-term
long-term
investments
investments
expense
HELP ME!
11. As a generalization, the adjustment of accrual basis income to cash provided by operating
activities requires which of the following to be added?
a.
Increases
in
current
b.
Increases
in
current
c.
Decreases
in
current
d. Both (a) and (c) are correct.
assets
liabilities
liabilities
related
related
related
to
to
to
operating
operating
operating
activities
activities
activities
HELP ME!
12. When preparing a statement of cash flows under the indirect method, supplemental disclosure
should be made for which of the following?
a.
Net
b.
c.
Cash
d. All of the above
cash
Cash
paid
consumed
for
by
dividend
interest
operating
and
activities
distributions
taxes
HELP ME!
13. Wilkin Corporation reported accrual basis sales of $200,000, cost of goods sold of $80,000, and
operating expenses, taxes, and interest summing to $30,000. In evaluating Wilkin's comparative
balance sheets, it is determined that accounts receivable increased $10,000, inventory increased
$5,000, and accounts payable decreased $7,000. There were no changes in prepaid expenses nor
were there any interest or taxes payable at the beginning or end of the year. How much was cash
basis income for Wilkin Corporation for the year?
a.
b.
c.
d. $112,000
$68,000
$82,000
$105,000
HELP ME!
14. Dixon Corporation reported 20X1 accrual basis net income of $50,000. Relevant information to
adjust accrual basis income to cash basis income follows.
Depreciation expense
Loss on the sale of land
Increase in accounts
receivable
Decrease in merchandise
inventory
Increase in accounts payable
Increase in taxes payable
$12,000
16,000
8,000
4,000
3,000
2,000
How much is net cash provided by operating activities?
a.
b.
c.
d. $79,000
$47,000
$49,000
$51,000
HELP ME!
15. In preparing a work sheet for the statement of cash flows, the lower portion corresponds to a
statement of cash flows prepared using the indirect method. Items in the debit column of this lower
portion
most
closely
correspond
to
items
which:
a.
Explain
b.
Explain
c.
Relate
d. Relate to investing activities.
HELP ME!
increases
decreases
to
in
in
financing
cash.
cash.
activities.
1. a. The current ratio is a liquidity ratio.
2. c. 17.25. Income before income taxes and interest ($100,000 + $30,000 + $8,000 = $138,000) is
divided by interest charges ($8,000).
3. a. 3. Cost of goods sold ($6,000,000) is divided by average inventory ($2,000,000).
4. b. The write-off of an uncollectible account reduces Accounts Receivable and the corresponding
contra account, Allowance for Uncollectible Accounts. Therefore, net accounts receivable, total
current assets, and the current ratio are not changed by the write-off.
5. d. $19,300,000. Total net sales equals cash sales ($3,300,000) plus credit sales ($16,000,000).
Credit sales are 16 times the amount of average accounts receivable (($750,000 + $1,250,000)/2 =
$1,000,000).
6. d. The statement of cash flows includes separate sections for operating, investing, and financing
activities. The statement is silent with regard to contractual activities.
7. a. Dividends are a return to the owners who provided financing for the company; hence, they are
reported as a financing activity. Proceeds from the sale of the stock of other firms and loans made to
others are investing activities. Salaries and wages relate to operations.
8. b. Noncash investing/financing activities must be reported in a separate schedule accompanying
the statement of cash flows.
9. b. Increases in accounts receivable relate to accrual basis sales not yet collected. Therefore, the
amount of the increase in accounts receivable must be subtracted from accrual basis sales in
calculating cash basis sales. The total change in cash and cash in bank are unrelated to the
conversion process.
10. a. Nonoperating gains must be subtracted from accrual basis income in working toward operating
cash flows (i.e., accrual basis income was increased for this nonoperating amount); conversely,
nonoperating losses would be added. The conversion process requires that depreciation and
amortization be added to accrual basis income because they reduce accrual basis income without
consuming cash.
11. b. Increases in current liabilities related to operations are indicative of expenses and purchases
not yet paid. Therefore, such amounts must be added to accrual basis income when computing cash
from operating activities; conversely, decreases would be subtracted. Increases in current assets
related to operations are also subtracted.
12. c. Choices "a" and "b" are an integral part of the statement. Cash paid for interest and taxes must
be presented as a supplement.
13. a. $68,000. The accrual basis income ($200,000 - $80,000 - $30,000 = $90,000) is reduced by the
increase in accounts receivable ($10,000), the increase in inventory ($5,000), and the decrease in
accounts payable ($7,000).
14. d. $79,000. The $50,000 accrual basis income should be increased by depreciation expense
($12,000), loss on the sale of land ($16,000), decrease in merchandise inventory ($4,000), increase in
accounts payable ($3,000), and increase in taxes payable ($2,000), and be decreased by the
increase in accounts receivable ($8,000). ($50,000 + $12,000 + $16,000 + $4,000 + $3,000 + $2,000
- $8,000 = $79,000).
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Chapter Summary
Chapter 16 opens with a review of the various ratios that have been introduced throughout the book. The ratios are cate
liquidity, debt, turnover, profitability, and other indicators. A summary table includes the formulations, and show
comprehensive
financial
statement
The next section of the chapter introduces a deeper coverage of the statement of cash flows. This required financial state
indirect approach. Both methods are illustrated. The direct method can involve complex calculations of certain cas
formulations
for
these
calculations
are
The chapter closes by demonstrating a worksheet that can facilitate the preparation of a statement of cash flows. The e
builds a bridge between a beginning-of-period and end-of-period balance sheet, explaining how changes are reconcilable t

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!
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Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Objectives: Chapter Sixteen
THE FOLLOWING LEARNING OBJECTIVES FOR THIS CHAPTER MAP TO THE CURRICULUM DESIGN
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Tools for financial statement analysis.
Know the liquidity ratios: current ratio and quick ratio.
Know the debt service ratios: debt to total assets, debt to total equity, and
times interest earned.
Know the turnover ratios:
turnover.
accounts receivable turnover and inventory
Know the profitability ratios: net profit on sales, gross profit margin, return on
assets, and return on equity.
Know other indicators: EPS, P/E, dividend rate/yield, dividend payout ratio,
and book value per share.
Understand the importance of monitoring trends in the relationships between
various financial statement components.
Evaluating cash flow and the statement of cash flows.
What is the purpose of a statement of cash flows?
Understand the importance of the statement of cash flows in providing
information about business solvency.
What three categories make up the major body of the statement of cash flows,
and what other information is to be presented?
Define the form and content of the operating activities section.
Define the form and content of the investing activities section.
Define the form and content of the financing activities section.
Identify investing and financing activities that do not affect cash.
The direct approach to preparing a statement of cash flows.
Be able to calculate cash received from customers.
Be able to calculate cash payments for merchandise.
Be able to calculate cash payments for selling and administrative expenses,
and cash payments for interest and income taxes.
What items found on an income statement tend to be ignored in the
preparation of a statement of cash flows?
Know what is typically included in the investing and financing activities section
of a statement of cash flows.
Be able to reconcile net income to cash flows from operating activities.
Know how to prepare a statement of cash flows under the direct approach.
The indirect approach to presenting operating activities.
Understand the difference between the direct and indirect approaches to
presenting the statement of cash flows.
How are noncash expenses dealt with in the preparation of a statement of cash
flows prepared under the indirect approach?
How are gains and losses dealt with in the preparation of a statement of cash
flows prepared under the indirect approach?
Know how to prepare a statement of cash flows under the indirect approach.
Using a worksheet to prepare a statement of cash flows.
Be able to use a worksheet to facilitate preparation of a statement of cash
flows.
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Chapter Summary
Chapter 16 opens with a review of the various ratios that have been introduced throughout the book. The ratios are cate
liquidity, debt, turnover, profitability, and other indicators. A summary table includes the formulations, and show
comprehensive
financial
statement
The next section of the chapter introduces a deeper coverage of the statement of cash flows. This required financial state
indirect approach. Both methods are illustrated. The direct method can involve complex calculations of certain cas
formulations
for
these
calculations
are
The chapter closes by demonstrating a worksheet that can facilitate the preparation of a statement of cash flows. The e
builds a bridge between a beginning-of-period and end-of-period balance sheet, explaining how changes are reconcilable t

Exercises
To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. Y
providing models and guidelines for solving all of the problems at principlesofaccounting.com. COMING SOON!






Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms
Key Terms: Chapter Sixteen
direct approach
The preferred method for preparing the statement of cash flows; operating cash flows are
presented according to their direct source (e.g., cash received from customers)
financing activities
A cash flow category; including receipts from stock issues, bonds, notes and loans, -- and
payments for loan repayment, acquisitions of treasury stock, and dividend distributions
indirect approach
An alternative method for preparing the statement of cash flows; operating cash flows are
presented as a reconciliation of income to cash from operating activities
investing activities
A cash flow category; including receipts from disposal of investments and long-term assets -- and
payments to acquire long-term assets and investments
operating activities
A cash flow category; generally related to transactions that enter into the determination of income
-- items that are not investing or financing
statement of cash flows
A financial statement that summarizes the cash flows relating to operating, investing, financing,
and noncash investing/financing activities of an entity
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chapter 17
Introduction to Managerial Accounting
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
GOALS ACHIEVEMENT
Select the appropriate response.
Which area of accounting is concerned primarily with external reporting, that is, reporting the results
of economic activities to parties outside the firm?
managerial accounting or financial accounting
Managerial accounting is more free formed than financial accounting, and tends to focus on products,
departments, or activities.
true or false
The Institute of Management Accountants sponsors professional designations such as the CMA and:
CPA or CFM
Good management decision making requires information necessary to plan, direct, and control an
organization.
seldom or always
Decision making can be viewed as an integral part of planning and control rather than as a separate
independent management function.
true or false
Formulating business strategy should include consideration of core values.
Bookstore
true or false
There are various types of budgets that can be prepared including operating budges, capital budgets,
and:
depreciation budgets or financing budgets
Product costing is an important cost accounting function, and can occur under a variety of methods.
The method that is best suited to production that occurs in a homogenous continuous flow is the:
process costing method or job order method
Modern technology has enabled electronic data exchange between companies, facilitating
procurement and other business processes. The acronym that is oftentimes used for this phenomena
is:
B2B or EOQ
The controller is the leader of the cost accounting function. Another title for this individual is the:
comptroller or CFO
Which of the following seeks to improve performance by keying on and eliminating bottlenecks within
an organization?
Theory of constraints or total quality management
For expediency, minor materials are normally accounted for as indirect materials which are:
included in the direct materials account or
treated as part of manufacturing overhead
Another name for factory overhead is:
factory burden or prime cost
Direct labor costs should include:
gross wages or net wages
The costs that go into inventory are termed:
prime costs or product costs
Which of the following costs is expensed during the current period?
product costs or period costs
Errors in determining product costs and period costs will likely affect net income and reported
inventory valuations.
true or false
On the balance sheet of a manufacturing concern, three key inventory accounts include finished
goods, work in process, and:
indirect materials or raw materials
Cost of goods sold is synonymous with cost of goods manufactured for a manufacturing concern.
true or false
Indirect materials used is included in calculations on a schedule of cost of goods manufactured.
true or false
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chapter 17
Introduction to Managerial Accounting
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
FILL IN THE BLANKS
1. One primary difference between financial and managerial accounting is that financial is geared
mainly toward the needs of users, whereas managerial is geared mainly toward the needs of users.
2. Because of its expanding role, complexity, and areas of involvement, managerial accounting is
increasingly referred to as .
3. Business value is driven by good management decisions in the areas of , , and .
4. A business should carefully define and communicate its to set the rules by which it will play.
5. can be defined as the collection, assignment, and interpretation of cost.
6. A relatively modern costing method where costs are attributed to activities, which are in turn
allocated to jobs is .
7. Deviations from standards that may require management attention are known as .
8. In the manufacture of wooden toy chests, lumber would be an example of material and nails would
be an example of material.
9. Prime costs consist of and . Conversion costs consist of and .
10. costs are those that go directly into inventory and costs are those that are deducted as expenses
in the period in which they are incurred.
11. The three categories of inventory for a manufacturer are , , and .
12. An inventory account that would be found only on the balance sheet of a manufacturer is .
13. Total production costs differ from the cost of goods manufactured due to the change in inventories
from the beginning of the year to the end of the year.
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chapter 17
Introduction to Managerial Accounting
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
MULTIPLE CHOICE QUESTIONS
Select the appropriate response:
1. Which of the following statements about differences between financial and managerial accounting
is incorrect?
a. Managerial accounting information is prepared primarily for external parties such as stockholders
and creditors; financial accounting is directed at internal users.
b. Financial accounting is aggregated; managerial accounting is focused on products and
departments.
c. Managerial accounting pertains to both past and future items; financial accounting focuses primarily
on past transactions and events.
d. Financial accounting is based on generally accepted accounting practices; managerial accounting
faces no similar constraining factors.
HELP ME!
2. Which of the following functions is managerial accounting intended to facilitate?
a.
b.
c.
d.
Planning
Decision making
Control
All of these
HELP ME!
3. Cost accounting information can be used for:
a. Budget control and evaluation.
b. Determining standard costs and variances.
c. Pricing and inventory valuation decisions.
d. All of these
HELP ME!
4. Acronyms are perhaps overused, but nonetheless important to know. Which of the following
acronyms is used to described a process for describing an inventory management process that
attempts to minimize the money invested in inventory?
a. CFM
b. TQM
c. ABC
d. JIT
HELP ME!
5. Manufacturing costs are also known as product costs. Which of the following best describes those
costs which are considered to be manufacturing costs?
a. Direct materials, direct labor, and factory overhead.
b. Direct materials and direct labor only.
c. Direct materials, direct labor, factory overhead, and administrative overhead.
d. Direct labor and factory overhead.
HELP ME!
6. The 20X5 work in process inventories of Parkhurst, Inc., totaled $20,000 on January 1 and $15,000
on December 31. If total manufacturing cost was 90% of cost of goods sold, how much was cost of
goods sold?
a.
b.
c.
d.
Cannot be determined from the information presented.
110% of total manufacturing cost.
($20,000 - $15,000)/0.90.
($20,000 - $15,000) + 110% of total manufacturing cost.
HELP ME!
7. Machine lubricant used on processing equipment in a manufacturing plant would be classified as a:
a. period cost/manufacturing overhead.
b. period cost/SG&A.
c. product cost/manufacturing overhead.
d. product cost/SG&A.
HELP ME!
8. Factory overhead includes all manufacturing costs except direct material and direct labor. Which of
the following items would not be considered to be a factory overhead cost?
a. Repainting the corporate office building.
b. Indirect labor.
c. Repair and maintenance expenditures on factory machinery.
d. Small expenditures pertaining to items like rags, screws, adhesives, etc., used in the production
process.
HELP ME!
9. Which of the following product costs is both a prime cost and conversion cost?
a. All of the following (a, b, and c).
b. Manufacturing overhead.
c. Direct material.
d. Direct labor.
HELP ME!
10. On a schedule of cost of goods manufactured:
a. Cost of goods manufactured and total manufacturing costs are always the same.
b. Cost of goods manufactured is calculated by adding the beginning work in process inventory to
total manufacturing costs and subtracting the ending work in process inventory balance
c. Beginning raw materials inventory plus direct labor plus factory overhead yields total manufacturing
costs.
d. All of the above are correct.
HELP ME!
1. a. Managerial accounting information is prepared for internal users, while financial accounting
information is directed primarily at external users such as stockholders and creditors. The other
statements are all correct.
2. d. Planning, control, and decision making are all served by managerial accounting information.
3. d. These functions are all served by, and in fact depend on, solid cost accounting information.
4. d. JIT is just-in-time inventory management. CFM is a professional designation for "certified
financial manager." TQM refers to "total quality managment." ABC is "activity-based costing."
5. a. Direct materials, direct labor, and factory overhead are all included as a manufacturing cost.
Administrative overhead is not included.
6. a. Not enough information is given to determine the required amount.
7. c. Machine lubricant is an indirect material that becomes part of manufacturing overhead.
Manufacturing overhead is a product cost.
8. a. Costs of repainting the corporate office is not a factory overhead cost. The other items are all
typical factory overhead items.
9. d. Direct labor is both a prime cost and a conversion cost. Direct material is only a prime cost
and manufacturing overhead is only a conversion cost.
10. b. Cost of goods manufactured is calculated by adding the beginning work in process inventory
to total manufacturing costs and subtracting the ending work in process inventory balance. Cost of
goods manufactured and total manufacturing costs are not necessarily the same. (They would be the
same if there were no work in process inventory.) Total manufacturing costs consist of direct
materials used (not beginning raw materials) plus direct labor plus factory overhead.
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chapter 17
Introduction to Managerial Accounting
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
EXAM CHECK LIST
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review
and check-off each noted item to be certain that important concepts have not been overlooked in your
study.
Distinguish between financial and managerial accounting, and note the importance of specific
rules to each.
Be familiar with the Certified Management Accountant and Certified Financial Manager
designations issued by the Institute of Management Accountants.
Know how business value relates to management decision making.
Describe and differentiate between planning, control, and decision-making functions.
Be able to explain how strategy, positioning, and budgets are important parts of the planning
process.
Understand the need for defining the core values of an organization.
Know the basic nature of operating, capital, and financing budgets.
Be able to briefly compare and contrast job order, processing, and activity-based costing
methods.
Distinguish between absorption and direct costing techniques.
Be able to describe recent innovations in production management and information systems:
ERP, B2B, RFID, M2M.
Be familiar with inventory management concepts like JIT and EOQ.
Know the basic job duties of a controller and a CFO.
What legislation has contributed to the need for controls within a business organization.
What is the purpose of setting standards and monitoring deviations from those standards?
What is a balanced scorecard?
Discuss the concepts of total quality management and the theory of constraints.
What three costs are incurred by a manufacturing concern?
Distinguish between direct and indirect materials.
Distinguish between direct and indirect labor.
Identify costs that are typically regarded as part of manufacturing overhead.
What comprises prime and conversion costs?
What is the difference between a product (inventoriable) cost and a period cost, and why is this
important to the accountant?
Be able to prepare the financial statements of a manufacturer, noting specifically the special
inventory categories on the balance sheet and the expanded nature of the income statement.
Be able to demonstrate the calculation of cost of goods manufactured.
Be able to diagram the cost flows within a manufacturing company.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
activity-based costing
(ABC) A costing system for situations where overhead is
high and/or a variety of products are produced; costs are
traced to activities and then activities are allocated to
production
B2B
(Business to Business) A system that enables data
interchange between companies; sometimes sufficiently
robust to permit automatic inventory replenishment, etc.
budget
A planning tool that outlines the financial plans for an
organization; there are various types of budgets -- operating,
capital, and financial
CFM
Certified Financial Manager; a professional designation of
competency in the field of financial management that is
issued by the Institute of Management Accountants
CMA
Certified Management Accountant; a professional
designation of competency in the field of management
accounting that is issued by the Institute of Management
Accountants
controller
The primary person responsible for the cost and managerial
accounting functions
conversion cost
Cost components need to change raw materials to finished
goods, specifically direct labor and manufacturing overhead
cost accounting
The process by which an organization's cost is collected,
assigned, and interpreted
cost of goods manufactured
The amount of cost attributable to goods reaching the end of
production; beginning work in process (wip) + (direct
materials, direct labor, manufacturing overhead) - ending
wip
direct labor
Gross wages paid to those who physically and directly work
on the goods being produced
direct material
The costs of all materials that are an integral part of a
finished product and that have a physical presence that is
readily traced to that finished product
ERP
(Enterprise Resource Package) Comprehensive database
software that tracks an almost endless array of business and
accounting data
finished goods
Finished goods represent the cost of completed products
awaiting sale to a customer
IMA
Institute of Management Accountants; a professional
association for management accountants that sponsors the
CMA and CFM designations
inventoriable cost
product costs that attach to inventory
job costing method
A costing approach whereby actual labor and material is
tracked for each job or product
M2M
(Machine to Machine) enables connected devices to
communicate with each other
manufacturing overhead
all costs of manufacturing other than direct materials and
direct labor (also called factory overhead)
period cost
A cost not attributable to the acquisition or manufacture of
inventory; expensed as incurred
prime cost
Product costs that are direct in nature; direct materials and
direct labor
process costing methods
A product costing method particularly well suited to
situations where production occurs in a continuous process;
costs are pooled and assigned to aggregate output
product cost
Costs that attach to a product; the summation of direct
materials, direct labor, and factory overhead
raw materials
the components that will be used in manufacturing units that
are not yet started -- also known as direct materials
RFID
(radio frequency identification) Micro processes embedded
in inventory that emit radio frequency signals that enable a
computer to automatically track inventory
scorecards (balanced)
A system for evaluating elements that are important to the
organization and under the control of an employee holding
that position
SG&A
Selling, general, and administrative costs; the period costs
of the business
standards
Benchmarks against which actual productive activity is
compared
theory of constraints
(TOC) Efficiency is improved by seeking out and eliminating
constraints within the organization
total quality management
(TQM) A process for continuous improvement by focusing
on customer service and systematic problem solving via
teams made up of front-line employees
variances
Deviations from the norm that may provide warning signs of
situations requiring corrective action by managers
work in process
Goods that are in production but not yet complete; an
accumulation of monies spent on direct material, direct
labor, and applied manufacturing overhead
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chapter 18
Cost-Volume-Profit and Business Scalability
goals discussion goals achievement fill in the blanks multiple choice problems
GOALS ACHIEVEMENT
check list and key terms
Select the appropriate response.
A cost which varies in direct proportion to a change in an activity base, but is fixed per unit, is known
as a:
fixed cost or variable cost
Fixed costs are assumed to be constant:
at any level of production
or over the relevant range
Costs like supervisory salary, office space, and so forth, which increase in chunks are called:
mixed costs or step costs
A statistical technique that relies on mathematical formulas to separate a cost between its fixed and
variable components is called:
the method of least squares or scattergraph
The method of separating costs between fixed and variable components which relies on only two data
points for analysis is called the:
high-low method or mixed-cost method
The high-low method and scattergraph method will achieve the same results.
true or false
The break-even point in units can be determined by dividing fixed costs by the:
unit contribution margin or contribution margin ratio
On a break-even graph with dollars on the vertical axis and sales volume on the horizontal axis, fixed
costs would appear as a straight line parallel to the:
vertical axis or horizontal axis
The contribution margin equals the selling price per unit minus the fixed cost per unit.
true or false
The contribution margin can be defined as the amount that an additional unit of sales contributes
towards covering fixed costs and generating income.
true or false
In computing the sales volume necessary to achieve a target income, target income is treated the
same as a:
fixed cost or variable cost
In considering the impact of operating changes on CVP analysis, any change to any component in the
CVP model will require a complete revision of all elements included in the original CVP analysis.
true or false
For a multi-product firm, the break-even point computation begins with a computation of the:
weighted contribution margin or weighted fixed costs
With a multi-product firm the break-even units refer to the sum of:
the unit sales for each product or a combination of the individual products in the same proportion as
the predicted sales mix
A limiting assumption of cost-volume-profit analysis is that costs can be classified as fixed or variable.
true or false
Correct cost-volume-profit analysis depends on the assumption that inventory levels:
increase from period to period or remain fairly stable
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chapter 18
Cost-Volume-Profit and Business Scalability
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
FILL IN THE BLANKS
1. The study of interrelationships among cost and volume is termed analysis.
2. varies in direct proportion to a change in activity base.
3. The area of activity where a specified cost relationships is expected to hold true is known as the .
4. Cost functions which change only when a sizable change in volume is experienced are called
costs.
5. fixed costs arise from an organization's commitment to engage in operations, whereas fixed costs
are those that originate from top management's yearly spending decisions.
6. Another name for mixed costs is costs.
7. A graphical representation of observed relationships between costs and activity levels is termed a .
8. The method focuses on only two data points when analyzing costs.
9. Selling price minus variable costs is termed the margin.
10. On a break-even chart the amount by which the total revenue line is above the total cost line is the
amount of .
11. The amount of sales necessary to produce a particular level of income, often called the income,
can be determined by using cost-volume-profit analysis.
12. Fixed costs divided by unit contribution margin equals break-even sales in .
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chapter 18
Cost-Volume-Profit and Business Scalability
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
MULTIPLE CHOICE QUESTIONS
Select the appropriate response:
1. Costs that do not change when the activity base fluctuates are known as:
a. Variable costs
b. Discretionary costs
c. Fixed costs
d. Mixed costs
HELP ME!
2. A company's telephone bill consisting of a $200 monthly base amount, plus long distance charges,
would be classified as a:
a. Variable cost
b. Committed fixed cost
c. Discretionary fixed cost
d. Mixed cost
HELP ME!
3. If one would prepare a graph with a horizontal axis representing units of production and a vertical
axis representing per-unit production cost, how would a line representing fixed production cost be
drawn?
a. As a horizontal line
b. As a vertical line
c. As a straight line sloping upward to the right
d. As a straight line sloping downward to the right
HELP ME!
4. The term "committed costs" refers to those:
a. Costs which are likely to respond to additional sales volume.
b. Costs which are governed mainly by past decisions that establish the present level of capacity.
c. Costs which fluctuate in response to changes in the rate of utilization of capacity.
d. Costs which management decides to incur in the current period to enable the company to achieve
objectives other than the filling of orders placed by customers.
HELP ME!
5. Lansing Corporation provides household painting services. During June, its busiest month,
Lansing had total direct labor hours of 20,000 and total costs of $274,000. During December, its
slowest month, the company had labor hours of 12,500 and total costs of $214,000. The company is
planning for 16,000 direct labor hours in July. How many dollars should the company budget for fixed
costs during July?
a. $114,000
b. $162,000
c. $242,000
d. $251,500
HELP ME!
6. Moore Company reported sales of $150,000 (20,000 units). Fixed costs amounted to $20,000 and
income for the period was $90,000. Determine the per-unit variable cost.
a. $1.00
b. $2.00
c. $4.50
d. $5.50
HELP ME!
7. Blackhat Chimney Builders constructed 80 units during 19X1. The total sales value for these 80
units was $460,000. Variable costs associated with each unit was $4,000 and the company's fixed
costs for 19X1 amounted to $50,000. How much was the per-unit contribution margin?
a. $750
b. $1,125
c. $1,750
d. $5,125
HELP ME!
8. The Environmental Filter Company is planning to sell air filter systems for $2,500 per unit. Variable
costs are $1,500 per unit and total fixed costs are $1,000,000. What is the dollar value of sales
necessary to break even?
a. $1,000,000
b. $2,000,000
c. $2,500,000
d. $5,000,000
HELP ME!
9. The Rug Outlet Store produces two products, carpet and padding. These account for 40% and
60% of the total sales dollars of the company, respectively. Variable costs (as a percentage of sales
dollars) are 40% for carpet and 50% for padding. Total fixed costs are $540,000. No other costs are
expected to be incurred. How much is the company's total break-even point in sales dollars?
a. $540,000
b. $964,285
c. $1,000,000
d. $1,173,913
HELP ME!
10. Which of the following factors would cause the break-even point to change?
a. Increased sales volume.
b. Fixed costs increased due to addition of physical plant.
c. Total variable costs increased as a function of higher production.
d. Total production decreased.
HELP ME!
1. c. Fixed costs are costs that do not change when the activity base fluctuates. Variable costs vary
in direct proportion to a change in an activity base. Discretionary costs are costs which can be
avoided. Discretionary costs are typically fixed in nature. Mixed costs are those costs which contain
both variable and fixed elements. Mixed costs change in response to fluctuations in the activity base;
however, the change is not directly proportional because of the presence of a constant fixed charge.
2. d. The phone bill would be a mixed cost because it includes a base or fixed amount plus a variable
component. Variable costs vary in direct proportion to changes in the activity base. Fixed costs do
not vary with the change in activity base. Fixed costs may be committed or discretionary. Committed
costs are not easily changed. Discretionary costs can be avoided over time.
3. d. The per-unit fixed cost would decline as production increased. That is, total production divided
into the constant fixed cost amount would result in a decreasing per unit fixed cost. A line sloping
downward to the right would represent this situation.
4. b. Committed costs arise from an organization's commitment to engage in operation and are
governed mainly by past decisions that establish the present levels of capacity.
5. a. $114,000. Using the high-low method, the difference between the highest and lowest activity
levels was 7,500 hours (20,000 minus 12,500). The difference in cost was $60,000 ($274,000 minus
$214,000). These computations reveal a variable per-hour cost of $8.00 ($60,000 divided by 7,500
hours). At 20,000 direct labor hours total variable costs would amount to $160,000 (20,000 hours
times $8.00 per hour), leaving fixed costs of $114,000 ($274,000 minus $160,000). During the
slowest month, fixed costs would also be computed to be $114,000. Therefore, during July the
expectation continues at $114,000 for fixed costs.
6. b. $2.00. The income plus the fixed costs incurred equals the contribution margin ($90,000 plus
$20,000 equals $110,000). Therefore, total variable costs must have been $40,000 ($150,000 in
sales minus $110,000 contribution margin equals $40,000 variable costs). If 20,000 units produced
$40,000 of variable costs, then the per-unit variable cost must have been $2.00.
7. c. $1,750. The sales price per unit was $5,750 ($460,000 divided by 80 units). The variable cost
per unit was $4,000. Contribution margin per unit was $1,750 ($5,750 minus $4,000).
8. c. $2,500,000. The contribution margin per unit is $1,000 ($2,500 sales price minus $1,500
variable cost). Dividing the $1,000,000 fixed cost by the $1,000 per-unit contribution margin yields
required sales in units of 1,000. At $2,500 per unit, the 1,000 units sold would generate $2,500,000 of
total sales.
9. c. $1,000,000. The total fixed cost of $540,000 must be divided by the weighted average
contribution margin ratio. The contribution margin ratio for carpet is 60% of sales (1 minus .4) and the
contribution margin ratio for padding is 50% of sales. The weighted average contribution margin ratio
is 54% ((.4 times .6) plus (.6 times .5)). The $540,000 fixed cost divided by the .54 weighted average
contribution margin ratio yields total sales in dollars of $1,000,000.
10. b. An increase in fixed cost with no change in variable cost would increase the number of units
which must be produced and sold to achieve the break-even point. Changes in sales volume and
production volume would not affect the break-even point.
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chapter 18
Cost-Volume-Profit and Business Scalability
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
EXAM CHECK LIST
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review
and check-off each noted item to be certain that important concepts have not been overlooked in your
study.
Define cost-volume-profit analysis.
Differentiate between a variable cost, fixed cost, and mixed cost.
Describe the nature of variable costs, in the aggregate and per unit.
Describe the nature of fixed costs, in the aggregate and per unit.
Describe the concept of economies of scale.
What is meant by the term "relevant range?"
Discuss the nature of specific types of fixed costs: committed fixed costs and discretionary fixed
costs.
Identify the nature of a step cost, and cite the appropriate business strategy for dealing with step
costs.
Carefully describe the nature of a mixed (semivariable cost).
Describe how a scattergraph, the method of least squares, and the high-low method can be
used to sort out the fixed and variable components of a mixed cost.
Be able to apply the mechanics of the high-low method.
Be able to prepare a "break-even graph."
Define the contribution margin; distinguishing between aggregate, per unit, and ratio amounts.
Understand the break-even point and target income.
Be able to perform break-even and target income computations.
Understand the impact of operating changes on break-even and other CVP computations.
Be able to apply CVP analysis to firms with multiple products.
What are some of the applications for CVP analysis?
Cite the assumptions of CVP modeling.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
break-even point
The level of activity where revenues equal total expenses,
producing a zero net income; also the point where the
contribution margin is said to cover fixed costs
committed fixed cost
Costs that arise from an organization's commitment to
engage in operations; unavoidable elements like
depreciation, rent, insurance, property taxes
contribution margin
Revenues minus all variable expenses, whether related to
production or selling and administration (do not to be
confuse with gross profit)
cost-volume-profit analysis
(CVP) Analysis focusing on the interplay of pricing, volume,
variable and fixed costs, and product mix
discretionary fixed cost
Fixed cost resulting from yearly spending decisions; proper
planning can result in avoidance of these costs as
necessary (e.g., advertising and training)
economies of scale
Efficiencies associated with increases in volume
fixed cost
A total cost that is the same regardless of volume; total cost
is constant and per unit cost decreases with volume
increases
high-low method
A simple means for separating costs into fixed and variable
components, based upon the difference between costs at
the highest and lowest observed levels of activity
method of least squares
A complex means for separating costs into fixed and
variable components, based upon minimizing the variances
between all observations and the resulting assumed cost
function
mixed costs
A cost that has both fixed and variable components
relevant range
The level of activity for which assumptions underlying CVP
are expected to hold true
scattergraph
A simplistic mapping of observed data points, where a line is
"visually" drawn to represent the estimated cost function
step cost
A cost function that is fixed over a range, and then increases
by a measured step to a new level at the next higher
increment of activity
target income
A level of income that is to be obtained; CVP projects
activity levels necessary to achieve this benchmark
variable cost
A per unit cost that is the same regardless of volume; total
variable cost increases with volume increases
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chapter 19
Job Costing and Modern Cost Management Systems
goals discussion goals achievement fill in the blanks multiple choice problems
GOALS ACHIEVEMENT
Select the appropriate response.
check list and key terms
A job costing system employs a job cost sheet and does away with the need for a Work in Process
account.
true or false
Which of the following documents would provide input regarding the amount of direct materials for a
specific job?
purchase order or materials requisition
The estimated overhead cost for a job or product is determined by using an overhead application
rate. The application rate relates overhead to a specific application base.
true or false
The amount of manufacturing overhead to divide by the estimated application base (in determining
the overhead application rate) is the:
estimated amount or actual amount
Modern events that have facilitated job costing methods include the utilization of database
technologies and:
automated tracking of labor and materials or inexpensive global labor
Automation of factory production results in both an increase in the expected amount of total overhead
and a reduction in the relevance of direct labor as an appropriate cost driver.
true or false
The appropriate journal entry to record applied overhead involves a debit to:
Work in Process or Factory Overhead
The balance in Work in Process must always be closed to finished goods at the end of each
accounting period:
no or yes
Setting prices for global exchanges between affiliated companies is referred to as:
transfer pricing or cross border financing
Indirect labor costs incurred would be debited to the:
Factory Overhead account or Work in Process account
What is the impact on the Factory Overhead account of recording actual overhead costs?
debit or credit
The presence of a credit balance in the Factory Overhead account indicates that overhead has been
overapplied.
true or false
Job costing systems are not applicable to service organizations.
true or false
For a service organization, indirect costs are not allocated to specific jobs, but are instead charged
directly to Income Summary.
true or false
This Japanese term refers to a blitz-like study of business processes, relying on input from front line
employees for suggestions:
Kanban or Kaizen
The concept of lean manufacturing is focused solely on cost cutting:
true or false
A trademarked approach for seeking near-zero defects in all productive and business processes is
known as:
TQM or Six Sigma
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chapter 19
Job Costing and Modern Cost Management Systems
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
FILL IN THE BLANKS
FILL IN THE BLANKS
1. With a , costs are gathered by job or order.
2. The cost of each job is accumulated on a separate .
3. In a manufacturing system the three cost elements which flow into work in process are , , and .
4. Materials are kept in a storeroom or warehouse and issued upon receipt of a .
5. Items not easily traced to individual jobs like sandpaper, lubricants, and so on are considered to be
.
6. Labor costs are accumulated by means of and labor summaries.
7. The overhead application rate is computed by dividing factory overhead by the application base.
8. The applied overhead is credited to the account.
9. After recording actual and applied overhead in the factory overhead account, a resulting debit
balance would indicate factory overhead.
10. The account is adjusted for under- or overapplied overhead.
11. are the factors that cause specific costs to be incurred within an organization.
12. are those costs that are easily traced to a job and are charged to individual jobs that are worked
on during the accounting period.
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chapter 19
Job Costing and Modern Cost Management Systems
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
MULTIPLE CHOICE QUESTIONS
Select the appropriate response:
1. Of the following manufacturing operations, which is best suited to the utilization of a job order
system?
a. Helicopter manufacturing.
b. Soft drink bottling operation.
c. Crude oil refining.
d. Plastic molding operation.
HELP ME!
2. Which of the following statements concerning job cost sheets is incorrect?
a. A job cost sheet would show the direct materials used on that specific job.
b. A job cost sheet would reveal the selling costs associated with a particular job.
c. The total costs recorded on a job cost sheet should also be reflected in the Work in Process
account in the general ledger.
d. The amount of overhead on a job cost sheet is the applied factory overhead rather than the actual
factory overhead.
HELP ME!
3. Under normal circumstances the Work in Process account used in a job costing system:
a. Will include charges for direct labor, direct materials, and applied overhead.
b. Will include only charges for direct materials and applied overhead. The labor is charged to
expense as incurred.
c. Will include charges for direct labor, direct materials, and actual overhead.
d. Will include only charges for direct labor and direct materials.
HELP ME!
4. The Factory Overhead account in a job costing system is credited for the:
a. Excess of applied overhead over actual overhead.
b. Actual overhead.
c. Applied overhead.
d. Indirect materials and indirect labor.
HELP ME!
5. The overhead application rate is calculated by:
a. Dividing the estimated factory overhead by the estimated application base.
b. Dividing estimated per unit factory overhead by the sum of the per unit cost for direct labor and
direct materials.
c. Multiplying the estimated factory overhead by the estimated application base.
d. Dividing the estimated application base by the estimated factory overhead.
HELP ME!
6. With the job order cost system a credit balance in the Factory Overhead account at the end of an
accounting period would indicate:
a. That an error in the job cost system has occurred.
b. That the company lost money during the period.
c. The presence of underapplied overhead.
d. The presence of overapplied overhead.
HELP ME!
7. The theoretically correct method of allocating under- or overapplied overhead is to:
a. Allocate the amount to cost of goods sold.
b. Allocate the amount to finished goods.
c. Allocate the amount to work in process and finished goods.
d. Allocate the amount among work in process, finished goods, and cost of goods sold.
HELP ME!
8. Jensen Manufacturing uses a job order cost system. Overhead is applied at the rate of $20 per
direct labor hour. Job #777 includes $2,000 of direct labor cost and 150 direct labor hours. $1,500 of
indirect labor cost was actually incurred. The proper journal entry to record the wage related cost is:
a. Debit Work in Process, $3,500; credit Wages Payable, $3,500.
b. Debit Wage Expense, $3,500; credit Wages Payable, $3,500.
c. Debit Work in Process, $2,000; debit Factory Overhead, $1,500; credit Wages Payable, $3,500.
d. Debit Work in Process, $3,500; credit Factory Overhead, $1,500; credit Wage Expense, $2,000.
HELP ME!
9. The appropriate journal entry to record the application of overhead in a job costing system involves
a debit to Work in Process and a credit to:
a. Cost of Goods Sold
b. Factory Overhead
c. Cash
d. Income Summary
HELP ME!
10. Which of the following statements concerning job costing systems is incorrect?
a. Cost drivers are those items which cause actual overhead to exceed applied overhead.
b. Job costing systems are appropriate to both manufacturing and service businesses.
c. Traditionally, direct labor has been a very popular overhead application base.
d. In a service business, indirect costs of providing a service are treated as overhead and applied in a
manner similar to that for factory overhead.
HELP ME!
1. a. Job costing systems are best suited to those situations where goods are made upon the receipt
of a customer order, according to customer specifications, or in a separate batch. Such would be the
case with helicopter manufacturing but not with the other examples cited as they would be more likely
produced in a continuous process.
2. b. Selling costs do not appear on a job cost sheet, only manufacturing costs. The other statements
are all true.
3. a. The Work in Process account captures the actual direct labor and direct material costs, as well
as the applied overhead. Actual overhead is recorded in the Factory Overhead account.
4. c. The Factory Overhead account is credited for the amount of applied overhead and debited for
the amount of actual overhead. The resulting balance is frequently closed to the Cost of Goods Sold
account. Indirect materials and indirect labor are examples of actual overhead which would be
debited to the Factory Overhead account.
5. a. Dividing the estimated factory overhead by the estimated application base is the correct formula
to determine the overhead application rate. It reveals an amount of estimated overhead per unit of
application base.
6. d. A credit balance in the Factory Overhead account indicates that the applied overhead exceeded
the actual overhead thereby resulting in overapplied overhead. One would not ordinarily expect
actual and applied overhead to be the same, and the extent of under- or overapplied overhead does
not necessarily indicate a profit or loss for the period.
7. d. Theoretically, the amount of under- or overapplied overhead should be distributed among work
in process, finished goods, and cost of goods sold on a logical and equitable basis. However, for
expediency, many companies will simply close the over- or underapplied amount to cost of goods
sold.
8. c. The correct journal entry reflects a $2,000 debit to the Work in Process account for direct labor
costs and a $1,500 debit to the Factory Overhead account for the indirect labor costs incurred.
9. b. The Factory Overhead account would be credited for the applied overhead. Independently, the
Factory Overhead account is debited for the actual overhead incurred. The balance of the Factory
Overhead account, if any, is ordinarily closed to Cost of Goods Sold.
10. a. Overhead application bases are said to be cost drivers, or the factors that cause specific costs
to be incurred within an organization. The other statements are all true.
home page
chapter 19
Job Costing and Modern Cost Management Systems
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
EXAM CHECKLIST
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review
and check-off each noted item to be certain that important concepts have not been overlooked in your
study.
Describe the approach to accumulating product cost using a job costing system.
Develop an illustration that portrays the typical content of a job cost sheet.
Identify the purpose of a materials requisition.
What is a database system, and how does it facilitate job costing mechanics?
What are some of the influences of technology on job costing data capture?
Be able to prepare journal entries to record direct and indirect materials and labor.
Discuss the issues and problems associated with accounting for factory overhead.
How is an overhead application rate calculated, and how is it applied?
How is actual overhead cost accumulated?
Describe the basic content of the Factory Overhead account.
Prepare typical entries related to the completion and sale of a manufactured product.
Explain why Work in Process is actually a control account.
What is meant by over- and underapplied overhead, and how do such amounts emerge from
within the accounting system?
Define "cost driver."
In a modern manufacturing environment, why might traditional cost drivers produce misleading
results?
What is meant by capacity utilization, and how does this influence costing allocations for
service, not-for-profit, and governmental entities.
Is job costing only applicable to manufacturing businesses?
Describe some of the influences of globalization on issues relating to modern cost management.
What is the concept of of Kaizen?
Know the difference between cutting costs and developing lean organization.
Explain just in time inventory management.
Be able to discuss quality management concepts, like TQM, ISO 9000, and Six Sigma.
What is the management accountants role in quality management?
KEY TERMS AND DEFINITIONS (with links to discussion in text)
capacity utilization
The degree to which an organization's output capabilities
are being deployed or utilized
cost driver
The factor that is viewed as causing costs to be incurred
within an organization
database
An information storehouse, usually electronic, that can be
queried to extract data meeting certain parameters. Enables
singular data entry and multiple data output.
direct costs
A cost easily traced to a specific job; generally direct
material and direct labor
indirect costs
A cost not easily traced to a specific job; generally
categorized as factory or manufacturing overhead
job cost sheet
A document representing a compilation of cost data for a
specific job
just in time inventory
Raw materials are received from supplies just as they are
needed in the production process
Kaizen
Japanese term used to describe a blitz like approach to
study processes and install efficiency within an organization
Kanban
Japanese term which means some form of signal that a
particular inventory is ready for replenishment
lean manufacturing
Indicative of an environment where waste has been
trimmed; entails a focus on standardization, speed, and
quality, without compromising responsiveness to customer
demand
materials requisition form
Form showing what material has been removed from the
raw materials stock and put into production
overapplied overhead
Applied overhead exceeds the actual amount; usually
viewed as a favorable outcome, because less has spent
than anticipated for the level of achieved production
overhead application rate
A rate used to apply manufacturing overhead to output;
estimated factory overhead for a period divided by the
estimated application base
Six Sigma
A trademarked quality management system developed by
Motorola; driven by pursuit of statistical results that reflect
near perfection in production and processing
transfer pricing
The system of setting prices at which goods are exchanged
between affiliated units; usually involving cross-border
transactions
underapplied overhead
Applied overhead is less than the actual amount; usually
viewed as a unfavorable outcome, because more has spent
than anticipated for the level of achieved production
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chapter 20
Process Costing and Activity-Based Costing
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
GOALS ACHIEVEMENT
Select the appropriate response.
To a great extent process costing systems operate in much the same manner as job costing systems.
true or false
A process costing system is best suited to a manufacturing operation which gives rise to:
uniquely produced inventory items or homogeneous mass produced items
In a process costing system, costs are accumulated on:
cost of production report or job cost sheets
An equivalent unit is a physical unit stated in terms of:
raw materials or finished output
Potentially, a company could have a huge number of equivalent units of production without
completing any finished goods.
true or false
Direct materials, direct labor, and factory overhead are generally introduced at the same time
throughout the production process.
true or false
In preparing a cost of production report, which step precedes the other?
computing the equivalent unit cost or cost assignment
In preparing a cost of production report, the analysis of physical units reveals the units to account for.
This amount is identical to the equivalent units of materials and conversion costs.
true or false
On a cost of production report, the total cost accounted for in the cost assignment section should
equal the beginning work in process plus the:
current production cost incurred or current conversion cost incurred
With the weighted-average method of process costing, the units finished during the period are
assumed to be both started and completed during the period.
true or false
With a weighted-average method of process costing, the dollar value of beginning work in process is
assumed to be related to:
materials and conversion or materials only
The ending work in process equivalent units are assumed to be the same for materials and
conversion if a weighted-average process costing method is used.
true or false
To calculate the cost per equivalent unit for materials (for a company which introduces all materials at
the beginning of production and uses the FIFO method) it is not necessary to know the dollar value of
beginning work in process.
true or false
Within the ledger system for a company using process costing techniques, a credit to the Work in
Process account for the final processing department would likely indicate:
transfers from a previous department or transfers to finished goods
With a FIFO process costing system, the presence of a beginning work in process inventory requires
that the goods be studied to determine the work performed in prior periods.
true or false
With a FIFO process costing method, the beginning work in process inventory is treated as being
separate and distinct from those units that are started and completed during the period.
true or false
Which of the following will likely more likely result in cost objects absorbing a portion of the nonfactory costs?
ABC or traditional costing methods
Generally accepted accounting principles may preclude activity-based costing results because
inventory can fail to absorb:
SG&A or all manufacturing costs
Which of the following techniques will likely result in more cost drivers being used to cost a single
product?
conventional costing or activity-based costing
With activity-based costing, activities are considered to occur at various levels (e.g., unit-level, batchlevel, etc.) and the levels are then combined prior to allocating costs.
true or false
Activity-based costing results in all costs being assigned to a cost object.
true or false
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chapter 20
Process Costing and Activity-Based Costing
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
FILL IN THE BLANKS
1. The system is often employed in steel, petroleum, chemical, and other similar types of industries.
2. In a process costing system, costs are accumulated by or for a specified period of time.
3. The process costing report which documents the units and costs which flow through a
manufacturing department is called a report.
4. One of the first steps in preparing a cost of production report is to analyze the of goods.
5. is the cost to to convert raw material into finished products; more specifically, the sum of direct
labor and factory overhead.
6. Equivalent units should be separately calculated for and .
7. Two different application methods for process costing are the and the methods.
8. Before recording the cost of completed units, the account should have a balance equal to the total
costs accounted for on the production cost report.
9. is a method under which departments are divided into activities, and the cost of individual activities
are applied to cost objects.
10. are expensed under traditional costing methods, but may partially be allocated to individual
products under activity-based costing.
11. The identification of activities is facilitated by dividing business processes into levels. These
levels include:
12. From a conceptual point of view, cost objects drive the need for and activities consume .
home page
chapter 20
Process Costing and Activity-Based Costing
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
MULTIPLE CHOICE QUESTIONS
Select the appropriate response:
1. Which cost accumulation procedure is best suited to a continuous mass production process of
similar units?
a. Job order
b. Process
c. Standard
d. Actual
HELP ME!
2. Which of the following statements about process cost accounting systems is false?
a. Beginning units of work in process plus the units put into production should equal ending work in
process units plus units completed.
b. The cost flows in journal entries for process cost accounting systems and job order cost accounting
systems are similar.
c. Process cost accounting is well suited for those production processes where similar units are
produced in a continuous flow.
d. The equivalent units of production for materials and conversion costs are the same.
HELP ME!
3. An equivalent unit of material is equal to:
a. The amount of material necessary to complete one unit of production.
b. The amount of material necessary to start a unit of production into work in process.
c. Half of the material necessary to complete one unit of finished goods.
d. An equivalent unit of conversion cost.
HELP ME!
4. Beginning work in process was 1,200 units, 2,800 additional units were put into production, and
ending work in process was 500 units. How many units were completed?
a. 500
b. 3,000
c. 3,300
d. 3,500
HELP ME!
5. Wright Company had, at the beginning of 20X1, a work in process of 10,000 units. During 20X1,
57,500 additional units were started into production. Ending work in process on December 31, 20X1,
was 7,500 units. The beginning work in process was 100% complete as to direct materials and 75%
complete as to conversion costs. The ending work in process was 100% complete as to direct
materials and 50% complete as to conversion costs. Total direct material put into process cost
$57,500. Total conversion cost put into process cost $84,375. Beginning work in process cost
$21,250; $13,250 for materials and $8,000 for conversion. All materials are added at the start of the
production process, and conversion costs are incurred uniformly throughout manufacturing. Wright
Company uses a weighted-average process cost system. The cost per equivalent unit (rounded to
the nearest cent) for conversion cost for 20X1 was:
a. $1.00
b. $1.23
c. $1.33
d. $1.45
HELP ME!
6. Wright Company had, at the beginning of 20X1, a work in process of 10,000 units. During 20X1,
57,500 additional units were started into production. Ending work in process on December 31, 20X1,
was 7,500 units. The beginning work in process was 100% complete as to direct materials and 75%
complete as to conversion costs. The ending work in process was 100% complete as to direct
materials and 50% complete as to conversion costs. Total direct material put into process cost
$57,500. Total conversion cost put into process cost $84,375. Beginning work in process cost
$21,250; $13,250 for materials and $8,000 for conversion. All materials are added at the start of the
production process, and conversion costs are incurred uniformly throughout manufacturing. Wright
Company uses a weighted-average process cost system. The dollar value assigned to Wright's
ending work in process inventory at the end of 20X1 is:
a. $13,294
b. $18,750
c. $31,875
d. $56,875
HELP ME!
7. The appropriate journal entry to transfer the cost of completed units from the Work in Process
account would involve a credit to Work in Process and a debit to which of the following accounts?
a. Income Summary
b. Raw Materials Inventory
c. Finished Goods
d. Manufacturing Summary
HELP ME!
8. Mills Manufacturing computed the physical flow of completed units for the month of January 1,
20X1, as follows:
Units completed:
From work in process on January
1, 20X1
15,000
From January production
45,000
60,000
In addition to the above, units in ending work in process at January 31, 20X1, were 12,000. Materials
are added at the beginning of the process. The work in process at January 1, 20X1, was 80%
complete as to conversion costs and the work in process at January 31, 20X1, was 60% complete as
to conversion costs. What are the equivalent units of materials and conversion for the month of
January 20X1, assuming a FIFO application of the process costing method?
a.
b.
c.
d.
57,000
57,000
72,000
72,000
55,200
57,000
67,200
72,000
HELP ME!
9. Wright Company had, at the beginning of 20X1, a work in process of 10,000 units. During 20X1,
57,500 additional units were started into production. Ending work in process on December 31, 20X1,
was 7,500 units. The beginning work in process was 100% complete as to direct materials and 75%
complete as to conversion costs. The ending work in process was 100% complete as to direct
materials and 50% complete as to conversion costs. Total direct material put into process cost
$57,500. Total conversion cost put into process cost $84,375. Beginning work in process cost
$21,250. All materials are added at the start of the production process, and conversion costs are
incurred uniformly throughout manufacturing. Wright Company uses a first-in, first-out process cost
system. How much is the cost per equivalent unit for conversion costs during 20X1?
a. $1.38
b. $1.47
c. $1.50
d. $2.12
HELP ME!
10. Which of the following comments regarding activity-based costing is not a correct observation?
a. The per unit cost of an end product under ABC will necessarily be less than the per unit cost under
traditional costing methods.
b. ABC may produce results that are not suitable for external reporting under GAAP.
c. Activities are said to be resource drivers because they consume resources necessary for the
activities to happen.
d. Batch-level activities produce costs that may not be in proportion to the number of units produced.
HELP ME!
1. b. Process cost accumulation systems are best suited to continuous mass production processes.
Job order costing is suited to production of specific or unique items. Actual costs and standard costs
are important measures, but are not, in and of themselves, cost accumulation systems.
2. d. The equivalent units of material and the equivalent units of conversion are not necessarily the
same; they are independently calculated. The other statements are all true.
3. a. An equivalent unit is the amount of material necessary to complete one unit of production. The
amount of material necessary to start a unit into production varies depending on the product being
produced. Equivalent units of conversion cost and materials are not necessarily the same.
4. d. 3,500. 1,200 beginning units, plus 2,800 additional units, results in 4,000 units to account for, of
which 500 remain in ending inventory. Therefore, 3,500 units were completed (4,000 - 500).
5. d.
Quantity Schedule
Beginning work in
process
10,000
Units started
57,500
Units into production
67,500
Equivalent Units
Completed
Ending work in process
Total units
Costs
Beginning work in process
Current period
Total cost to account for
Equivalent units
Cost per equivalent unit
Materials Conversion
60,000
60,000
60,000
7,500
7,500
3,750
67,500
67,500
63,750
Total
Materials Conversion
$ 21,250
$ 13,250
$ 8,000
141,875
57,500
84,375
$163,125
$70,750
$92,375
÷ 67,500
÷ 63,750
$1.048
$1.449
6. a.
Quantity Schedule
Beginning work in
process
10,000
Units started
57,500
Units into production
67,500
Equivalent Units
Materials Conversion
Completed
60,000
60,000
60,000
7,500
7,500
3,750
67,500
67,500
63,750
Ending work in process
Total units
Costs
Total
Beginning work in process
Current period
Total cost to account for
Materials Conversion
$ 21,250
$ 13,250
$ 8,000
141,875
57,500
84,375
$163,125
$70,750
$92,375
÷ 67,500
÷ 63,750
$1.048
$1.449
Equivalent units
Cost per equivalent unit
Cost per equivalent unit
Materials Conversion
$1.048
$1.449
Total
Ending work in process
(equivalent units)
X 7,500
X 3,750
Cost assigned to ending
inventory
$ 7,860
$ 5,434 $13,294
7. c. The Finished Goods account is debited indicating that the completed units are now in inventory
for sale to customers.
8. a.
Equivalent Units
Total
Materials Conversion
From beginning work in
process
15,000
0
3,000
Units started and completed
45,000
45,000
45,000
Ending work in process
12,000
12,000
7,200
72,000
57,000
55,200
Total units accounted for
Beginning WIP conversion: 20% of 15,000 needed to complete = 3,000
Ending WIP conversion : 60% of 12,000 completed = 7,200
9. c.
Quantity Schedule
Beginning work in
process
10,000
Units started
57,500
Units into production
67,500
Equivalent Units
Materials Conversion
Completed:
From beginning work in
process
10,000
0
2,500
Units started and completed
50,000
50,000
50,000
7,500
7,500
3,750
67,500
57,500
56,250
Ending work in process
Total units accounted for
Costs
Beginning work in process
Current period
Total cost to account for
Total
$ 21,250
Materials Conversion
$
0
$
0
141,875
57,500
84,375
$163,125
$57,500
$84,375
Equivalent units
÷ 57,500
÷ 56,250
$1.00
$1.50
Cost per equivalent unit
Cost Assignment
Completed:
Beginning work in process
-Cost in beginning
inventory
Conversion cost (2,500 X
$1.50)
$21,250
3,750 $ 25,000
Units started and
completed -Materials (50,000 X
$1.00)
Conversion cost (50,000
X $1.50)
$50,000
75,000
125,000
Total cost of completed
units
$150,000
Ending work in process:
Materials (7,500 X $1.00)
$ 7,500
Conversion cost (3,750 X
$1.50)
5,625
Cost assigned to ending
inventory
13,125
Total cost accounted for
$163,125
10. a. Per unit costs can be higher or lower with ABC, as compared to traditional methods. The other
comments are all true.
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chapter 20
Process Costing and Activity-Based Costing
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
EXAM CHECK LIST
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review
and check-off each noted item to be certain that important concepts have not been overlooked in your
study.
Describe the approach to accumulating product cost using a job costing system.
Describe the fundamental characteristics of a process costing system.
Compare and contrast process costing and job order costing systems.
What is an equivalent unit of production and what are conversion costs?
Why is it important to differentiate between materials and conversion costs?
Describe the steps in applying process costing.
Be able to calculate equivalent units of production, taking into account beginning work in
process, and current period production amounts (using a weighted-average method).
Be able to prepare a cost of production report (weighted-average method).
Identify the nature and timing of journal entries that are necessitated by process costing.
Be able to calculate equivalent units of production, taking into account beginning work in
process, and current period production amounts (using a FIFO method).
Be able to prepare a cost of production report (FIFO method).
Identify the problem associated with traditional costing methods, and describe how activity-based
costing mitigates this concern.
Be able to illustrate the fundamental mathematics of activity-based costing versus traditional
approaches.
Know ABC concepts relating to cost objects, activity drivers, activities, resource drivers, and
resources.
Describe the different "levels" at which activities can occur and tell why this is important for
ABC.
Understand how and why ABC can produce different outcomes than traditional costing
approaches; know the importance of ABC to management decision making.
Know that ABC may not be consistent with GAAP in a particular situation; understanding the
fundamental difference in the handling of manufacturing versus nonmanufacturing costs.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
ABC/activity based costing
Alternative costing method for strategic management;
divides production into activities, defines costs for activities,
and allocates costs to objects based on activity consumption
activity
An event that gives rise to the consumption of resources
activity cost pool
The costs assigned to a particular activity
activity driver
Event that causes consumption of an activity
batch-level activity
Activities that relate to each batch of production;
independent of the number of units within that batch
cost object
The output for which costing information is to be determined
under ABC; can be product or service related, or customer,
market, etc.
cost of production report
A report used in a process costing environment to tabulate
the costs incurred within a particular stage/department
customer-level activity
Activities that relate to each customer; independent of the
volume of goods and services provided to the specific
customer
entity-sustaining activity
Activities that relate to an entity's ability to operate;
independent of business volume
equivalent units
A measure of physical units expressed in terms of finished
units
FIFO process costing
A process costing technique where the beginning inventory
is presumed to be the first units completed in the
subsequent period's processing
market-level activity
Activities that relate to the number of markets in which an
entity operates; independent of the number of products,
customers, etc.
process costing
Process costing is a method to allocate the total costs of
production to homogenous units produced via a continuous
process that usually involves multiple steps or departments
product-level activity
Activities that relate to the number of products produced;
independent of the number or units produced
resource
The elements consumed by activities and cost objects
resource driver
The concept that activities create the need for resources
which will be consumed in the production process
unit-level activity
Activities that relate to the number of units of output; each
additional unit of production requires another activity
weighted-average process costing
A process costing technique where all units of production
are assigned the same cost; determined by blending of
current period costs with beginning inventory cost
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chapter 21
Budgeting: Planning for Success
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
GOALS ACHIEVEMENT
Select the appropriate response.
Budgets serve to formalize the planning process but ordinarily should not serve as a basis for
performance evaluation.
true or false
In large organizations a benefit of the budgeting process is to assist in communication and
coordination of company plans and objectives.
true or false
Which budget approach rarely involves lower-level personnel during the budget construction process?
top-down approach or bottom-up approach
The bottom-up budgeting process is a dictatorial approach which is generally met with resentment
and a who cares attitude.
true or false
The bottom-up budgeting approach can be described as:
participative or imposed
Another term for budgetary slack is:
budgetary estimation
or padding
Slack may permeate the entire budgetary process and sometimes tends to perpetuate itself.
true or false
The budget process may consist of several rounds with changes and refinements being added along
the way.
correct or incorrect
Capital expenditure budgets may cover a long-term horizon of as much as five to ten years.
true or false
For purposes of control and evaluation, operating budgets should not be subdivided into quarters or
months.
true or false
Budgeting is an effective tool to reduce costs and eliminate the need for active day-to-day
management.
true or false
Perhaps the most significant limitation of budgeting is the:
amount of preparation required or human relations and administration issues
A budget process which results in the preparation of a comprehensive set of integrated budgets that
serve as a financial plan for the entire organization is a:
master budget or continuous budget
Which of the following types of budgets serve as the beginning of the entire budgetary process?
sales budget or cash budget
The direct material purchases budget probably depends most significantly on the:
production budget or sales budget
Because fixed factory overhead costs tend to be the same no matter the volume, they should not be
included in the total factory overhead budget.
true or false
Which type of budgets offer the advantage of forcing management to continually think about the
future?
stabilized budgets or continuous budgets
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chapter 21
Budgeting: Planning for Success
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
FILL IN THE BLANKS
1. A is a formal quantitative expression of management expectations.
2. With the approach upper-level executives can study the interactions of lower units and determine
the consistency of each unit's plans and expectations.
3. The method is time consuming and expensive to administer because of increased employee
involvement.
4. Intentionally overstating various anticipated costs is called budgetary .
5. In contrast to incremental budgeting, requires that each expenditure be rejustified for each budget
period.
6. A budget is a comprehensive set of integrated budgets that serve as the financial plan for the entire
organization.
7. The budget is probably the most important element of a master budget.
8. The budget incorporates all production costs other than direct material and direct labor.
9. In a cash budget, the section discloses the total cash available during the period before considering
any disbursement.
10. In a cash budget the section provides a schedule of borrowings and repayments and also
discloses the related interest payment on borrowed funds.
11. A budget covers a one-year period, however, a new month is added as the current month is
completed.
12. The preparation of budgeted financial statements is often called the preparation of statements.
13. A budgetary restriction occurring in advance of the related expenditure is often known as an .
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chapter 21
Budgeting: Planning for Success
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
MULTIPLE CHOICE QUESTIONS
Select the appropriate response:
1. With the top-down budgeting approach the budget:
a. Process begins with the issuance of general budget guidelines by top management or a budget
committee.
b. Developmental process centers on lower-level employee participation.
c. Is imposed on lower-level personnel who do not become involved in the budget construction
process in a significant way.
d. Is not characterized by sound budget preparation practices.
HELP ME!
2. There are a number of benefits associated with budgeting. Which of the following is not frequently
cited as a benefit of the budget process?
a. Budgets can help identify production bottlenecks.
b. Budgets are useful tools in performance evaluation.
c. Budgets help provide an early warning for periods during which cash may be in short supply..
d. Budgets eliminate the opportunity for slack or padding within an organization.
HELP ME!
3. Which of the following statements is incorrect?
a. The cash budget is an element of a master budget.
b. The direct labor budget is specifically dependent on the production budget.
c. The budgeting process would normally begin with preparation of a sales budget.
d. A continuous budget is feasible only for sales projections.
HELP ME!
4. Another name for "pro-forma financial statements" would be:
a. Corrected financial statements.
b. Historical-cost financial statements.
c. Projected financial statements.
d. Computer-generated financial statements.
HELP ME!
5. Roland Corporation budgeted April sales at 2,500 units. The beginning finished goods inventory
consisted of 2,000 units, however, Roland desired to have 2,500 finished units on hand by the end of
April. Direct materials inventory consisted of 800 beginning units and Roland desired an ending
balance of 1,400 units. Each finished unit required 2 units of direct material and 1 hour of direct
labor. Direct materials cost $3.00 per unit, direct labor cost $11.00 per hour, and factory overhead is
applied at $7.00 per direct labor hour. Roland has no work in process at the beginning or end of the
month. How much is the anticipated cost of goods manufactured for April?
a. $51,000
b. $57,600
c. $72,000
d. $73,800
HELP ME!
6. Bright Company manufactures mirrors which require 8 square feet of glass per mirror. Bright
anticipates production of 500 units in January, 700 units in February, and 1,700 units in March. Bright
maintains glass on hand equal to 40% of the following month's anticipated production requirements.
The glass costs $3 per square foot. At the beginning of January, only 500 square feet of glass is on
hand. How many square feet of glass should Bright plan to buy in February?
a. 2,200 square feet
b. 5,440 square feet
c. 8,800 square feet
d. 11,040 square feet
HELP ME!
7. Hanson anticipates unit sales during the first three months of the upcoming year at 5,000 for
January, 4,000 for February, and 8,000 for March. If Hanson wishes to maintain its finished goods
inventory at 80% of the following month's sales, and the January 1 finished goods inventory consisted
of 1,000 units, how many units must Hanson produce in January?
a. 3,200
b. 6,400
c. 7,200
d. 8,000
HELP ME!
8. O'Connor Corporation had December sales of $30,000. Anticipated sales during January are
$40,000, and February sales are projected at $37,500. 40% of sales are cash sales, the remainder
are on account. Sales on account are expected to be collected 50% in the month of sale, 45% in the
month following the month of sale, and 5% ultimately prove uncollectible. How much are anticipated
cash collections during the month of February?
a. $25,800
b. $26,250
c. $36,100
d. $37,050
HELP ME!
9. Scanlon Corporation has estimated its activity for April as follows:
Sales
Gross profit (based on sales)
Increase in accounts receivable during month
$800,000
40%
10,000
Increase in finished goods inventory during month
30,000
Total selling and administrative costs
80,000
Depreciation included in selling and administrative
costs
25,000
Scanlon has no raw material or work in process inventory at the beginning or end of April. On the
basis of the above, what are estimated cash disbursements for April?
a. $510,000
b. $533,000
c. $535,000
d. $565,000
HELP ME!
10. Blinder Corporation projected the following:
Sales
Fixed manufacturing
costs
$5,000,000
2,000,000
Blinder projects variable manufacturing costs of 40% of sales. Assuming no change in inventory,
what will be the projected cost of goods sold?
a. $2,000,000
b. $3,000,000
c. $4,000,000
d. $5,000,000
HELP ME!
1. c. The budget is imposed on lower-level personnel who rarely become involved in the budget
construction process. One advantage of the top-down approach is that it offers the advantage of
sound budget preparation in that it reflects the overall goals of an organization and is prepared by
those who have the best company-wide view of operations. Bottom-up budget development is
characterized by lower-level employee participation and begins with the issuance of general budget
guidelines by top management or a budget committee.
2. d. Budgets do not eliminate the slack or padding. The other items are all frequently cited as
advantages of the budgeting process.
3. d. A continuous budget results in constant monitoring and updating of the budget and would cover
more than simply sales projections. The other statements are all correct.
4. c. Pro forma means "as if" or projected financial statements. Historical-cost financial statements
pertain to past transactions and events. Pro forma is not the same as corrected. Pro forma financial
statements can be manually or computer prepared.
5. c. $72,000. Total production is 3,000 units; 2,500 sold + 500 increase in finished goods inventory
(2,500 - 2,000). The 3,000 units produced require 6,000 units (3,000 X 2) of raw materials. These
raw materials cost $3.00 per unit or $18,000 (6,000 units X $3.00 each). Direct labor costs amount to
$33,000 (3,000 units X $11.00 per unit). Factory overhead equals $21,000 (3,000 hours X $7.00).
Total cost, therefore, is $72,000 ($18,000 + $33,000 + $21,000).
6. c. 8,800. The February beginning inventory in square feet should equal 2,240. This is based on
40% of February's anticipated production; February's anticipated production of 700 units requires
5,600 square feet of glass (700 units X 8 feet per unit). February's ending inventory should equal
5,440 square feet of glass. This is 40% of March's anticipated needs (1,700 units X 8 feet per unit X
40%). The necessary units available during February should equal 11,040 square feet, or the ending
inventory desired of 5,440 + the 5,600 square feet required for February production. Of the 11,040
square feet which need to be made available during February, 2,240 square feet are in beginning
inventory, leaving a need to purchase 8,800 additional feet in February.
7. c. 7,200. The beginning inventory of 1,000 units + production of 7,200 units makes 8,200 units
available. Subtracting the 5,000 units sold would leave 3,200 units in ending finished goods
inventory. This is equal to 80% of February's anticipated needs (4,000 X 80% = 3,200).
8. d. $37,050. January sales collected in February are $10,800 ($40,000 X 60% X 45%). February
cash sales are $15,000 ($37,500 X 40%). February credit sales collected in February are $11,250
($37,500 X 60% X 50%). Total cash collections are $37,050 ($10,800 + $15,000 + $11,250).
9. d. $565,000.
Expenditure for cost of goods sold ($800,000 X 60%) = $480,000
Additional expenditure to increase inventory = $30,000
Cash selling and administrative costs ($80,000 - $25,000) = $55,000
$480,000 + $30,000 + $55,000 = $565,000
10. c. $4,000,000.
Fixed manufacturing costs = $2,000,000
Variable manufacturing costs ($5,000,000 X 40%) = $2,000,000
$2,000,000 + $2,000,000 = $4,000,000
home page
chapter 21
Budgeting: Planning for Success
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
EXAM CHECK LIST
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review
and check-off each noted item to be certain that important concepts have not been overlooked in your
study.
Define the term "budget."
Cite the benefits of the budgeting process.
Who ordinarily serves on a budget committee and what roles does this group play.
Distinguish between the mandated top-down and participative bottom-up budget construction
processes.
Discuss the nature of budgetary slack.
How does the form of organizational structure influence business budgeting, planning, and
information flow?.
Distinguish between incremental and zero-based budgeting approaches.
Generally describe potential human behavior and ethical aspects of budgeting.
Cite the components typically included in a master budget.
What should be the starting point for budget preparation?
What is the advantage of an electronic spreadsheet in the budgeting process?
Understand and be able to prepare a sales budget, production budget, direct materials purchases
budget, direct labor budget, factory overhead budget, selling and administrative expense budget, cash
budget, and budgeted income statement and balance sheet.
Define the term "pro forma."
Understand why it is important to control external distribution of budgetary information.
Distinguish between monthly, quarterly, and annual budgets.
What is a continuous budget?
What is a flexible budget and what are the advantages of such budgets?
What is an encumbrance and what control purpose does it serve?
KEY TERMS AND DEFINITIONS (with links to discussion in text)
bottom-up participative budget
An budget approach driven by the direct participation of
lower-level employees
budget committee
A group of senior managers from each business unit
charged with leading the budget preparation and review
process
budget slack
The influence of behavior to "pad" a budget via misstating
expected revenues and/or expenses; to create more
favorable budget vs. actual performance appraisals
cash budget
An essential budget component detailing planned cash
receipts, disbursements, and financing actions
continuous budget
A budget that is constantly updated; as one month/quarter is
completed another is added to the set the projections
direct labor budget
A budget that details expected direct labor needs, along with
the related costs of labor
direct material purchases budget
A budget that details expected direct material purchases,
along with the related cash payments
encumbrance
A budgetary restriction occurring in advance of a related
expenditure
factory overhead budget
A budget that details the anticipated factory overhead,
including calculations related to the allocation of such
amounts
flexible budget
A budget that covers a range of potential outcomes by
relating expense levels to the potential revenues
incremental budgeting
A budgeting approach where the prior year experience sets
a base line for a new budget; changes are made based on
new information but the base need not be rejustified in detail
master budget
Also known as the comprehensive budget; an integrated set
of articulated budgets relating to numerous operational
subcomponents (labor, material, overhead, SG&A, etc.)
pro forma financial statements
"As if" budgeted financial statements
production budget
A budget that details planned levels of production; takes into
account sales and inventory build/decline
sales budget
A budget that details anticipated sales levels
SG&A budget
A budget that details anticipated selling, general, and
administrative costs
static budget
A budget that does not anticipate alternative outcomes;
estimated sales and expenses are fixed and establish the
relevant benchmarks
top-down mandated budget
A budget approach where upper level management
establishes parameters under which the budget is to be
prepared
zero-based budgeting
A budget approach where each expenditure item must be
justified for each new budget period
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chapter 22
Tools for Enterprise Performance Evaluation
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
GOALS ACHIEVEMENT
Select the appropriate response.
A responsibility accounting system is based on the organizational structure of the firm.
true or false
Under which type of responsibility unit are operations or departments not directly involved in revenue
generating activities?
investment center or cost center
Both profit centers and investment centers hold managers accountable for the revenues and
expenses of the responsibility unit.
true or false
When evaluating performance under a responsibility accounting system, management should be held
accountable for revenues, expenses, and investments that are both controllable and uncontrollable.
true or false
As production levels fluctuate, which of the following budgets tend to become meaningless.
static or flexible
With a flexible budget, which cost component is the same no matter the presumed level of activity?
variable production cost or fixed factory overhead
Standard costs are used in the construction of both static and flexible budgets.
true or false
Which standard takes into account normal inefficiencies related to scrap, waste, spoilage, and worker
inefficiencies?
ideal standard or acheivable standard
With an ideal standard, workers can be expected to perform better because of the continued
motivation to try and achieve the unachievable.
true or false
The materials quantity variance is computed by comparing the actual quantity of materials used to the
standard quantity of materials which should have been used for the production achieved. Which
prices should be used in this comparison?
standard prices or actual prices
The net of the labor rate variance and labor efficiency variance will produce the total labor variance.
true or false
If overhead is applied on the basis of direct labor hours, then the variable overhead efficiency
variance calculations incorporate the same number of actual and standard hours as used in the
computation of the direct labor variances.
true or false
All unfavorable variances should be investigated.
true or false
The use of highly skilled employees beyond that anticipated may result in unfavorable labor rate
variances, and what type of labor efficiency variances?
favorable or unfavorable
A balanced scorecard approach to performance evaluation might consider financial, customer, and/or
process outcomes.
yes or no
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chapter 22
Tools for Enterprise Performance Evaluation
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
FILL IN THE BLANKS
1. A is a responsibility unit in which a manager is held accountable for cost incurrence.
2. An is the most complex of the responsibility centers.
3. To measure the success or failure of an investment center manager, many companies employ a
measure known as .
4. A report furnishes management with feedback of operating results and is used for purposes of
evaluation and control.
5. A process whereby performance assessment and corrective measures focus on what has gone
wrong: .
6. A budget is a budget developed for one level of activity, whereas a budget covers a range of
activity.
7. A is the expected quantity or cost of input required in producing a good or service.
8. A reveals the standard quantity and price of the production components necessary to produce a
single unit of output.
9. An standard is one that can be achieved by efficient but not perfect operations.
10. The computation and examination of variances is consistent with the concept of management by .
11. The is the amount of input that should have been used in manufacturing activities during the
period.
12. The variance for labor is computed in much the same manner as the material price variance for
materials.
13. By comparing the actual labor hours at standard prices to the standard labor requirements at
standard prices, one is able to compute the labor variance.
14. The variable total overhead variance consists of two separate variances known as the , and .
15. A focuses on financial and nonfinancial performance aspects, identifying key metrics that are
consistent with the overall entity objectives.
home page
chapter 22
Tools for Enterprise Performance Evaluation
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
MULTIPLE CHOICE QUESTIONS
Select the appropriate response:
1. An accounting system wherein the operations are broken down into cost centers controllable by a
foreman, sales manager, or supervisor, is known as:
a. Control accounting
b. Budgetary accounting
c. Responsibility accounting
d. Allocated cost accounting
HELP ME!
2. A business unit is known as a profit center:
a. if its management is held accountable for both revenues and expenses, and has the authority to
make decisions regarding its products, markets, and sources of supply.
b. if its management is compensated based on the level of profitability.
c. if its management is evaluated not only on revenues and expenses but also on asset investment.
d. if its operations or departments are not directly involved in revenue generating activities, but
instead focus on elements of cost control (including choosing the source of supply).
HELP ME!
3. The basic difference between a static budget and a flexible budget is that:
a. A flexible budget considers only variable costs, but a static budget considers all costs.
b. Flexible budgets allow management latitude in meeting goals, whereas a static budget is based on
a fixed standard.
c. A static budget is for an entire production facility, but a flexible budget is applicable only to a single
department.
d. A static budget is based on one specific level of production and a flexible budget can be prepared
for any production level within a relevant range.
HELP ME!
4. Linwood Industries prepared a flexible budget which revealed total production costs of $79,000 at
an anticipated 10,000 unit activity level. Variable production costs were (per unit) $1.50 for direct
materials, $3.50 for direct labor, and $0.75 for variable factory overhead. How much are total
anticipated production costs in Linwood's flexible budget for an activity level of 10,800 units?
a. $21,500
b. $62,100
c. $79,000
d. $83,600
HELP ME!
5. Which of the following is not one of the objectives in utilizing standard costs?
a. To simplify costing procedures and expedite cost reports.
b. To allow management to readily determine and focus attention on special problem areas.
c. To allow a measure of cost assuming ideal or perfect operating conditions.
d. To provide a measure of budgeted cost for a single unit of activity.
HELP ME!
6. If a unit manager made a decision to purchase raw materials that were of superior quality to that
which was anticipated, and this decision resulted in less spoilage than normal, the effect on the
quantity and price variances, respectively, would be:
a. Unfavorable, unfavorable
b. Favorable, unfavorable
c. Favorable, favorable
d. Unfavorable, favorable
HELP ME!
7. Quillen uses a single raw material in its production process. The standard price for a unit of
material is $7.00. During October the company purchased and used 10,000 units of this material.
The actual purchase price was $8.00 per unit. The standard quantity required per finished product is
3 units. Quillen produced 3,000 finished units of the final product in October. How much was the
material price variance for October?
a. $3,000 favorable
b. $3,000 unfavorable
c. $9,000 unfavorable
d. $10,000 unfavorable
HELP ME!
8. Finch produced 3,000 units of output. The production process normally requires 3 hours of labor
per unit of output. The standard labor rate is $7.00 per hour, but Finch paid $6.00 per hour. Actual
hours needed to complete the production process were 8,500. How much was the labor efficiency
variance?
a. $3,000 favorable
b. $3,000 unfavorable
c. $3,500 favorable
d. $3,500 unfavorable
HELP ME!
9. Actual direct labor at Subramaniam Tire during the month of June amounted to 14,000 hours. This
compares to the standard direct labor hours for the actual output of 15,000 hours. During June, total
actual variable overhead was $32,000. The standard total variable overhead application rate per
standard direct labor hour was $2.25. How much was the variable overhead spending variance for
June?
a. $500 favorable
b. $500 unfavorable
c. $2,000 favorable
d. $2,000 unfavorable
HELP ME!
10. Which of the following factors would be subject to evaluation in a balanced scorecard approach to
performance evaluation?
a. Financial outcomes
b. Customer outcomes
c. Business process outcomes
d. All of the above
HELP ME!
1. c. Responsibility accounting is a reporting system that is based on the organizational structure of a
firm. The firm is divided into cost centers or segments, such as departments, plants, divisions, etc.,
and a manager is appointed to oversee that cost center or segment.
2. a. A profit center is a responsibility unit in which a manager is held accountable for profit. Because
revenues and expenses both enter into the evaluation process, management is allowed the flexibility
to make decisions regarding product delivery and product development expenditures. An investment
center includes evaluation of management based not only on revenues and expenses, but also asset
investment decisions. A cost center is one wherein the operations or departments are not directly
involved in revenue generating activities, and management is held accountable primarily for cost
control.
3. d. A static budget assumes one operating level and includes all elements of anticipated revenues
and costs, whereas a flexible budget allows evaluations of anticipated costs dependent on the
production level achieved. Flexible budgets include both fixed and variable elements. Flexible
budgets do not really allow latitude in cost incurrence, but instead make cost incurrence a function of
revenues and production levels achieved. A flexible budget can be prepared for an entire production
facility.
4. d. $83,600
Activity Levels
Direct materials
Cost Per 10,000 10,800
Unit
$1.50 $15,000 $16,200
Direct labor
$3.50
Variable overhead
$0.75
Fixed factory
overhead
Total production costs
35,000 37,800
7,500
8,100
21,500 21,500
$79,000 $83,600
5. c. Standard costs are not necessarily developed assuming ideal conditions. Standards may be
based on currently attainable objectives (presuming a normal amount of operating inefficiency related
to scrap, waste, spoilage, and the like). The other statements are all true.
6. b. Because less material was used, the quantity variance would be favorable. However, the goods
were probably acquired at higher than anticipated prices, resulting in an unfavorable price variance.
7. d. $10,000 unfavorable. Quillen paid $1.00 per unit above the standard cost and purchased 10,000
units of material. Stated differently, the actual quantity purchased at the actual price was $80,000.
The actual quantity purchased at the standard price would have cost $70,000, for a $10,000
unfavorable difference.
8. c. $3,500 favorable. The standard hours required to produce 3,000 units at 3 hours per unit would
be 9,000 hours. Finch only needed 8,500 to achieve this production level, resulting in a 500 hour
savings. 500 hours at $7.00 per hour (standard labor rate) results in a $3,500 favorable variance.
9. b The variable overhead spending variance is $500 unfavorable as shown below:
10. d. With the balanced scorecard approach, an array of performance measurements are
developed. Each indicator should be congruent with the overall entity objectives. Further, each
measure should be easily determined and understood. These measurements can relate to financial
outcomes, customer outcomes, or business process outcomes.
15. a. A close examination of the lower portion of a work sheet reveals that the debits generally relate
to cash increases, whether related to operating, investing, or financing activities.
plements
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Tools for Enterprise Performance Evaluation
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
EXAM CHECK LIST
Following is a "checklist" of selected key concepts that are likely to be included on an exam.
and check-off each noted item to be certain that important concepts have not been overlooked in your
study.
Differentiate between centralized and decentralized decision making business structures.
Define responsibility centers and concepts of responsibility accounting.
Distinguish between cost centers, profit centers, and investment centers.
How is return on investment (ROI) calculated?
What is a performance report and how does it align with units of responsibility?
Define controllable fixed costs.
Define common fixed costs.
Define the concept of management by exception.
Differentiate between a flexible budget and a static budget.
Be able to construct a flexible budget, and demonstrate how this interfaces with
performance evaluation.
What is a standard cost, and how is it determined?
Discuss considerations necessary in the establishment of standards.
Describe different levels of standards and the pros and cons of each.
What is a variance?
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goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
GOALS ACHIEVEMENT
Select the appropriate response.
Which of the following costing methods is the more traditional method?
absorption costing or variable costing
Which cost element represents the key difference between absorption costing and variable costing?
fixed manufacturing overhead or variable manufacturing overhead
Gross profit would appear in a variable costing income statement.
true or false
With both variable costing and absorption costing, all selling and administrative costs, whether they
be fixed or variable, are expensed in the period incurred.
true or false
If the level of inventory increases during a period, then which method will produce the higher income?
absorption costing or variable costing
The determination of business segments is driven by:
SIC codes or the evaluative units judged by operating decision makers
Which of the following costs would not be considered in assessing segment margin in a contribution
income statement?
uncontrollable fixed costs or nontraceable costs
In a contribution income statement, the contribution margin is the result of subtracting what amount
from net sales?
variable cost of goods sold or variable cost of goods sold and variable selling and administrative
expenses
The controllable contribution margin is computed by subtracting fixed costs (that are both controllable
by a segment and directly traceable to the segment) from the contribution margin.
true or false
The controllable contribution margin minus uncontrollable fixed costs yields the:
segment margin or net income
The controllable contribution margin would be useful in judging management performance.
true or false
Segment data cannot be presented for external reporting purposes.
true or false
The calculation of residual income reduces operating income by:
operating assets times the cost of capital or research and development expenditures
The allocation of service department costs to productive departments, without involving any
allocations of costs between service departments, is called:
the direct method or the step method
A business dashboard is a modern information system that delivers real time information to managers
in a format that can best be described as a:
customizable layout or standardized layout
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FILL IN THE BLANKS
1. With variable costing all fixed production costs are subtracted from current period revenues;
whereas, with absorption costing fixed overhead may be allocated between and .
2. The contribution margin under variable costing corresponds to sales minus , while absorption
costing positions as sales minus cost of goods sold.
3. The cost component that is included in inventory with absorption costing, but not variable costing, is
.
4. A income statement provides top management with an understanding of how individual
responsibility centers affect total firm profitability.
5. The contribution margin is computed by subtracting fixed costs that are both controllable by the
segment's management and directly traceable to the segment from the contribution margin.
6. A controllable contribution margin minus uncontrollable costs yields the segment margin.
7. is concept whereby operating income is reduced for the cost of capital associated with operating
assets..
8. The allocates the cost of selected service departments partially to other service departments.
9. Reframing line item income statement information to reflect the specific nature of costs is
sometimes termed information.
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goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
MULTIPLE CHOICE QUESTIONS
Select the appropriate response:
1. Which of the following statements is incorrect?
a. Absorption costing is also known as product costing.
b. Variable costing is not GAAP.
c. Only variable manufacturing costs are assigned to products under the variable costing approach.
d. When using a variable costing system, the contribution margin discloses the excess of revenues
over variable costs.
HELP ME!
2. Income computed by the absorption costing method will tend to exceed income computed by the
variable costing method if:
a. Fixed manufacturing costs decrease.
b. Units sold exceed units produced.
c. Variable manufacturing costs decrease.
d. Units produced exceed units sold.
HELP ME!
3. Wang Company provides the following information for their first year of operation:
Sales
5,000 units
@ $10
Selling and administrative
costs:
Fixed
Variable
$1,000
$1 per unit
Variable production costs per
unit:
Direct materials
Direct labor
Variable overhead
Fixed factory overhead
Production
$2
$2
$1
$7,500
7,500 units
If Wang uses absorption costing, cost of goods sold would be:
a. $20,000
b. $25,000
c. $30,000
d. $36,000
HELP ME!
4. Wang Company provides the following information for their first year of operation:
Sales
5,000 units
@ $10
Selling and administrative
costs:
Fixed
Variable
$1,000
$1 per unit
Variable production costs per
unit:
Direct materials
Direct labor
Variable overhead
Fixed factory overhead
Production
$2
$2
$1
$7,500
7,500 units
If Wang uses variable costing, operating income would be:
a. $11,500
b. $14,000
c. $16,500
d. $20,000
HELP ME!
5. Manson Company produces fishing boats. From the production supervisor's perspective,
depreciation on the factory is:
a. Uncontrollable and fixed.
b. Uncontrollable and variable.
c. Controllable and fixed.
d. Controllable and variable.
HELP ME!
6. Strickland Company prepared segment information relative to its office furniture manufacturing
division. The controllable contribution margin differed from the segment margin by $100,000. This
amount corresponds to the:
a. Total variable costs.
b. Controllable fixed costs.
c. Uncontrollable fixed costs.
d. Non-traceable costs.
HELP ME!
7. Maverick Corporation had four operating segments. Information for each segment is included in
the following table. Maverick has a threshold rate of return of 7%. Which segment has the largest
residual income?
Segment Segment Segment
Segment D
A
B
C
Operating
Income
$100,000 $200,000 $300,000 $400,000
Operating Assets $200,000 $300,000 $300,000 $5,000,000
a. Segment A
b. Segment B
c. Segment C
d. Segment D
HELP ME!
8. Nina Company has two production departments -- fabrication and assembly. These departments
are supported by janitorial and engineering service units. Janitorial costs are allocated to the
production departments based on square footage while engineering is allocated based on machines
in use within each department. The following table reveals relevant facts about the various
departments.
Assuming Nina uses the direct method of allocating service department costs, how much is the total
cost attributable to the fabrication department?
a. $5,000,000
b. $5,700,000
c. $5,837,500
d. $6,200,000
HELP ME!
9. Nina Company has two production departments -- fabrication and assembly. These departments
are supported by janitorial and engineering service units. Janitorial costs are allocated to the
engineering, fabrication, and assembly departments based on square footage. Engineering is
allocated to productive departments based on machines in use within each department. The following
table reveals relevant facts about the various departments.
Assuming Nina uses the step method of allocating service department costs, how much is the total
cost attributable to the assembly department?
a. $3,000,000
b. $3,350,000
c. $3,362,000
d. $4,200,000
HELP ME!
10. The management of Ahad Engineering Services has been approached about purchasing a new
management information system. The perceived advantages of the system include each of the
following, except:
a. The new system will reduce confusion by doing away with dual presentations of information by line
item and object of expenditure.
b. The new system will enable customized business dashboards, with each executive having real-time
reports of critical business information.
c. The new system will enable automatic preparation of both internal variable costing information and
external absorption costing information.
d. The new system will facilitate disaggregation of overall results into business segment information.
HELP ME!
1. a. Absorption costing is also known as full costing. Product costing can be conducted by either
absorption or variable costing methods. The other statements are all correct.
2. d. When the units produced exceed the units sold, absorption costing income tends to be higher
than variable costing income. This results because some of the fixed manufacturing costs are
allocated to unsold inventory at the end of the period; whereas, with variable costing all such costs
would be expensed in the period incurred.
3. c. $30,000. The 5,000 units have a per unit cost of $6 each, computed as follows:
Variable production cost ($2 + $2 + $1)
Fixed factory overhead ($7,500/7,500
units)
Total
$5
1
$6
4. a. $11,500. Operating income is computed as follows:
Sales (5,000 units X $10)
$50,000
Less variable costs:
Cost of goods sold (5,000 X
$5)
Selling and administrative
(5,000 X $1)
$25,000
5,000
Contribution margin
30,000
$20,000
Less fixed costs
Manufacturing
Selling and administrative
Operating income
$ 7,500
1,000
8,500
$11,500
5. a. Factory depreciation is an uncontrollable cost which is fixed in amount.
6. c. Uncontrollable fixed costs are subtracted from the controllable contribution margin to arrive at the
segment margin. Total variable costs are subtracted from sales to achieve the contribution margin.
Controllable fixed costs are subtracted from the contribution margin to calculate the controllable
contribution margin. Nontraceable costs are not considered in calculating the individual business
unit's segment margin.
7. c. Segment C's residual income is the highest:
Segment Segment Segment
Segment D
A
B
C
Operating
Income
$100,000 $200,000 $300,000 $400,000
7% of Assets
(14,000) (21,000) (21,000) (350,000)
Residual Income
$86,000 $179,000 $279,000
$50,000
Operating Assets $200,000 $300,000 $300,000$5,000,000
8. c. $5,837,500, as revealed by the following table:
9. b. $3,350,00, as revealed by the following table:
10. a. The ability to prepare dual presentations of information by line item and object of expenditure is
an advantage (not disadvantage) of modern information systems.
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goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
EXAM CHECKLIST
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review
and check-off each noted item to be certain that important concepts have not been overlooked in your
study.
Understand absorption (full) costing logic, and know that it is required by GAAP.
Understand variable costing logic, and know how it is beneficial in the management decision
process.
Be able to prepare an absorption costing income statement.
Be able to prepare a variable costing income statement.
Be able to demonstrate how inventory fluctuations cause income to differ under absorption vs.
variable costing.
Define a business segment and identify issues related to measuring segment income.
Be able to prepare contribution income statements for business segments.
Thoroughly understand the concepts of controllable contribution margin, segment margin, and
nontraceable costs.
Know the basic content of externally reported segment data.
Be able to distinguish between direct and step methods of allocating service department costs.
Understand how the same data can be viewed from the perspective of line item vs. object of
expenditure, and why management might find such alternative displays helpful.
Know about business dashboards and their importance to contemporary managers who use
them.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
absorption costing
Also known as full costing -- a costing method where
inventory absorbs direct costs and variable and fixed factory
overhead
contribution income statement
An internal report that identifies each segment's controllable
elements; the contribution margin, controllable fixed costs,
uncontrollable fixed costs, and segment margin
dashboard
Customized business software that delivers key real time
business data in an easily monitored layout
direct method/allocating service cost
An allocation process whereby service department costs are
assigned directly to productive departments (compare to
step method)
residual income
An internal assessment technique that adjusts income for a
presumed cost of capital (or other threshold rate of return);
operating income - (operating assets X cost of capital)
segment
A business unit for which separate financial information is
evaluated by an operating decision maker who allocates
resources and judges performance of the unit
step method/allocating service cost
An allocation process whereby some service department
costs may be assigned to other service departments as part
of a sequential methodology
variable costing
A costing method where inventory absorbs direct costs and
variable factory overhead; the income statement identifies
the contribution margin
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Analytics for Managerial Decision Making
goals discussion goals achievement fill in the blanks multiple choice problems
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GOALS ACHIEVEMENT
Select the appropriate response.
In selecting among alternative courses of action, historical costs are generally not considered.
true or false
Which of the following is virtually impossible to measure in dollars?
sunk costs or qualitative factors
In a outsourcing decisions only relevant variable costs should be taken into account in the analysis.
true or false
With special order pricing, the goal is to produce items with the highest contribution margin per sales
dollar.
true or false
In deciding whether to delete a particular department, the most important element is an analysis of the
contribution margin. If the contribution margin for a particular department is positive, the unit should
not be discontinued.
correct or false
The contribution margin must be analyzed in terms of factors that limit its:
generation or reduction
The evaluation of programs and projects that influence the financial performance of more than a
single accounting period is called:
capital budgeting or master budgeting
In evaluating a capital expenditure proposal, management should identify and evaluate the amount of
an investment, the periodic returns from an investment, and which rate of return?
highest rate of return acceptable to the company or
company
lowest rate of return acceptable to the
The collective cost of funds employed by a firm is referred to as the cost of capital.
true or false
Which interest concept considers interest computed on principal plus previously computed interest?
compound interest or simple interest
The present value of an amount to be received in the future is computed through a process called:
annuitization or discounting
Individual present value factors may be computed from individual future value factors by computing
the future value factor's:
accumulated interest or reciprocal
The present value of an annuity is equal to the sum of the present value of the individual payments.
true or false
The present value of an annuity to be received in years six through ten can be calculated by
subtracting a certain amount from the present value factor for an annuity for periods one through ten.
The amount of the subtracted factor is:
the present value factor for an annuity that covers periods one through five
or
the present value factor for a single payment amount related to year five
The net present value method requires the present value of an investment's cash inflows to be netted
against the future value of the cash outflows.
true or false
Depreciation is ordinarily excluded from present value calculations because depreciation is of what
nature?
cash or noncash
In considering the impact of income taxes on cash flows, both revenues and expenses are likely to be
affected.
true or false
Depreciation may impact after-tax cash flows in such a way as to produce a:
tax savings or tax cost
Another name for the internal rate of return computation is the:
project yield rate of return or time-adjusted rate of return
Which method measures the amount of time it takes to cover a project's initial cash investment?
payback method or accounting rate of return
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FILL IN THE BLANKS
1. Future costs that differ among alternative courses of action are known as costs.
2. costs are irrelevant in decision making.
3. means that a company has decided to acquire its goods from outside vendors rather than produce
the same goods or services in-house.
4. The cost of a foregone alternative is termed .
5. The selling price minus all variable costs is termed the .
6. Expenditures related to programs and projects that influence financial performance of multiple
accounting periods are termed expenditures.
7. The concept which relates to a dollar in hand being worth more than a dollar in the future is called
the of money.
8. Future value concepts relate to interest, wherein interest is computed on principal plus previously
computed interest.
9. is the name often given to the process of calculating the present value of future cash receipts.
10. Multiple level cash flows are termed .
11. The method requires the present value of an investment's cash inflows to be netted against the
present value of the cash outflows.
12. The focuses on the average income generated by a project in relation to the project's initial
investment outlay.
13. is a capital budgeting tool which computes the interest rate necessary to equate cash inflows and
cash outflows.
14. The method is simple, yet it ignores the time value of money and cash flows which occur beyond
a designated period of time.
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goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
MULTIPLE CHOICE QUESTIONS
Select the appropriate response:
1. Which of the following statements regarding relevant costs and sunk costs is incorrect?
a. A serious drawback associated with the incremental approach of relevant cost study is that the
incremental approach is cumbersome if more than two alternatives are considered.
b. The type of cost presented to management for an equipment replacement decision should be
limited to relevant costs.
c. A sunk cost is a cost which cannot be avoided because it already has been incurred.
d. Relevant costs can be studied using an incremental approach but should not be considered with a
full project approach.
HELP ME!
2. Deep Channel Ferry Company is evaluating whether to purchase a more fuel-efficient boat or
continue to use the boat they currently own. Both boats are identical except for the engine. The fuelefficient boat costs $620,000, has an estimated service life of five years, has no salvage value, and
will have variable operating costs of $100,000 per year. The boat currently owned had an original
cost of $320,000, has an existing book value of $160,000, has an estimated remaining service life of
five years, has no salvage value at the end of its service life, has a current disposal value (now) of
$120,000, and has variable operating costs of $200,000 per year. Ignoring present value and tax
considerations, what should Deep Channel do?
a. Buy the fuel-efficient boat.
b. Keep the existing boat.
c. Be indifferent between the fuel-efficient boat and the existing boat.
d. Cannot be determined.
HELP ME!
3. The effect on a company's operating income of discontinuing a department with a contribution
margin of $8,000 and allocated overhead of $16,000 (of which $7,000 cannot be eliminated) would be
to:
a. Decrease operating income by $1,000.
b. Decrease operating income by $9,000.
c. Increase operating income by $1,000.
d. Increase operating income by $8,000.
HELP ME!
4. For a retail outlet chain with multiple stores, which of the following statements would be correct?
a. Stores which have a net loss should be discontinued.
b. Stores with a negative contribution margin should be discontinued.
c. Stores with a negative contribution margin should be discontinued provided such discontinuation
will not cause an increase in sales at other stores.
d. Stores with a negative contribution margin should not be discontinued if such discontinuation will
cause profitable stores to bear a portion of the unprofitable store's overhead.
HELP ME!
5. Lansing Department Store provided information regarding three departments:
Department Department Department
A
B
C
Sales
$5,000
$10,000
$12,500
Variable costs
2,500
8,500
13,500
Fixed costs
(unavoidable)
1,000
1,000
2,000
Fixed costs
(avoidable)
1,000
2,000
500
Assuming the trends in costs and revenues continue, which department should be discontinued?
a. A only
b. B only
c. C only
d. More than one department should be discontinued.
HELP ME!
6. Which of the following statements regarding capital budgeting decisions is incorrect?
a. Capital budgeting analysis techniques are applicable to equipment replacement decisions.
b. The amount and timing of cash flows is critical to the calculation of the net present value of an
investment.
c. The cost of capital is equal to a company's maximum desired rate of return.
d. In a capital budgeting decision, the amount of the initial investment required is critical to the
analysis; it is not treated as a sunk cost.
HELP ME!
7. Analyze the following statements regarding capital budgeting decisions and determine which is
correct.
a. The net present value of decision making and capital budgeting is superior to the payback method
in that it considers the time value of money.
b. Assuming a 6% interest rate, the factor 0.94340 would be taken from a compound interest (future
value) table of factors.
c. The internal rate of return capital budgeting technique does not consider the time value of money.
d. All capital budgeting techniques will produce the same decision in selecting among alternatives.
HELP ME!
8. How much will $1.00 invested at 10% (compounded annually) grow to by the end of 3 years?
a. $.70
b. $1.21
c. $1.30
d. $1.331
HELP ME!
9. Which of the following methods of evaluating capital budgeting proposals rests on the assumption
that income is uniform over the life of an investment?
a. Internal rate of return
b. Payback method
c. Net present value
d. Accounting rate of return
HELP ME!
10. Michaels, Inc., purchased a machine for $100,000. The machine has a useful life of five years
and no salvage value. Straight-line depreciation is to be used. The machine is expected to generate
cash flow from operations, net of income taxes, of $30,000 in each of the five years. Michaels'
expected rate of return is 10%. Information on present value factors is as follows:
Period
1
Present value of
Present value of $1
ordinary annuity of
at 10%
$1 at 10%
0.90909
0.90909
2
0.82645
1.73554
3
0.75132
2.48685
4
0.68301
3.16986
5
0.62092
3.79079
What would be the net present value?
a. $6,862.
b. $13,724.
c. $50,000.
d. $62,092.
HELP ME!
11. Birmingham Manufacturing purchased a new machine for $100,000. The machine will last ten
years and is to be depreciated by the straight-line method. The estimated salvage value of the
machine is zero. The machine should generate a yearly cash inflow of $25,000. What is the
accounting rate of return on this investment ignoring income taxes?
a. 5%
b. 15%
c. 25%
d. 35%
HELP ME!
12. Depreciation is incorporated into the discounted cash flow analysis of an investment proposal
because it:
a. Is a cost of operations which cannot be avoided.
b. Results in an annual cash outflow.
c. Is a cash inflow.
d. Reduces the cash outlay for income taxes.
HELP ME!
13. In general, the presence of taxes:
a. Will cause the net present value of an investment to increase.
b. Will cause the internal rate of return to decrease.
c. Does not change the accounting rate of return.
d. All of these.
HELP ME!
14. What is the internal rate of return associated with a $20,000 investment which returns $11,000 at
the end of year 1 and $12,100 at the end of year 2?
a. 10%
b. 11%
c. 12%
d. 13%
HELP ME!
15. Fleming Company is considering the purchase of a new machine. The machine cost $200,000
and will generate yearly cash inflow of $30,000. What is the payback period?
a. 4 years and 8 months.
b. 6 years and 8 months.
c. 6 years and 9 months.
d. 15 years.
HELP ME!
1. d. Relevant costs can be studied by using either a full project or incremental approach. The other
statements are correct.
2. c. Deep channel would be indifferent between the fuel-efficient boat and the existing boat. The
relevant costs associated with the purchase decision would include a $620,000 cash outflow for the
purchase price, plus $500,000 of operating expenses ($100,000 times 5 years), minus $120,000
which would be netted from the sale of the old boat. The total relevant costs are $1,000,000. The
operating costs associated with retaining the old boat also amount to $1,000,000 ($200,000 times 5
years). In summary, there is no difference between the relevant costs of the two alternatives.
3. c. While the company would forego $8,000 of contribution margin, they would also eliminate $9,000
of overhead ($16,000 minus $7,000). The net effect would cause an increase in income of $1,000.
4. b. Any store with a negative contribution margin should be discontinued, as it cannot even cover
variable costs with the sales revenue it is generating. That is to say, increasing sales increase losses.
5. d. All three departments should be discontinued. Department C is clearly subject to discontinuation
since variable costs exceed sales. Department B should be discontinued because the contribution
margin for the department does not cover the department's avoidable fixed costs. Department A
would be discontinued because, in discontinuing Department B and C, the unavoidable fixed costs
would then have to be absorbed by Department A. In so doing, A's contribution margin is no longer
capable of covering the full costs which exist.
6. c. The cost of capital is the collective cost of funds, is subject to a fair amount of judgment in
determination, and is not synonymous with the maximum desired rate of return. The other statements
are all correct.
7 a. The net present value method does consider the time value, whereas the payback method does
not. "b" is incorrect. The factor would reflect a present value amount; a future amount would be
greater than 1. "c" is incorrect because the internal rate of return does consider the time value of
money. "d" is incorrect. Depending on the specific circumstances, different methods may produce
different results.
8. d. $1.331. Because of compounding, $1.00 invested at 10% will grow to $1.331 ($1.00 X 1.1 =
$1.10; $1.10 X 1.1 = $1.21; $1.21 X 1.1 = $1.331).
9. d. The accounting rate of return method is based on an average annual amount of net income. An
inherent presumption is that this income occurs each year over the life of an investment. The internal
rate of return method and net present value method both directly incorporate the timing and amounts
of cash flows. The payback method simply evaluates the amount of time it takes to recover the initial
amount of the investment (considering fluctuations in annual cash flow amounts).
10. b. $13,724, computed as follows:
Initial investment
$(100,000)
Present value of annual cash inflows
($30,000 X 3.79079)
Net present value
113,724
$
13,724
11. b. 15%. The average annual accounting income is $15,000 ($25,000 cash flow minus $10,000
annual depreciation). $15,000 divided by $100,000 equals a 15% accounting rate of return.
12. d. The amount of depreciation reduces taxable income, thereby generating tax savings. This
should be incorporated into the discounted cash flow analysis.
13. b. Taxes are likely to cause the internal rate of return to decrease. Because most cash inflows
are taxable, the net after-tax cash available to consider as return on investment is reduced. Likewise,
the net present value of an investment is typically reduced for the same reasons. Furthermore, the
accounting rate of return is based on income which should probably be computed on a net-of-tax
basis.
14. a. 10%. The present value of $11,000 at the end of one year plus the present value of $12,100 at
the end of year two equals the $20,000 amount. Because present value factors were not provided,
one solution approach is to experiment with the alternative rates. For example, the $20,000
investment would return $2,000 at a 10% rate of return at the end of the first year. The return of
$11,000 consists of $2,000 return on investment and $9,000 return of investment (reducing the
remaining amount of investment to $11,000). The $11,000 investment would grow to $12,100 at the
end of the second year ($11,000 X 1.1). This is equal to the amount which is then returned at the end
of year two.
15. b. 6 years and 8 months. The $200,000 investment divided by $30,000 equals six and two-thirds
years, or six years and eight months.
home page
chapter 24
Analytics for Managerial Decision Making
goals discussion goals achievement fill in the blanks multiple choice problems
check list and key terms
EXAM CHECKLIST
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review
and check-off each noted item to be certain that important concepts have not been overlooked in your
study.
What is a relevant cost, and what is a sunk cost?
Why does decision making necessarily focus on the future?
Describe the steps in the general approach to decision making.
In addition to quantitative factors, what else should be considered in the decision making
process?
Be able to perform calculations related to outsourcing decisions ("make or buy").
Define "opportunity cost" and note its importance in the decision process.
Be able to perform calculations for special order pricing decisions.
Know why the contribution margin must be analyzed in terms of capacity constraints.
Be able to perform calculations for addition or deletion of products (or departments) in decision
making.
What is a capital expenditure?
Describe the capital budgeting process.
What is meant by the "time value of money?"
Be able to calculate compound interest.
Understand the relationship between compound interest and present value.
Be able to calculate future value and present value of lump-sum and annuity amounts.
Be able to calculate the net present value of an investment, and explain the method's strengths
and weaknesses.
How does depreciation impact cash flow calculations?
Explain and perform cash-flow calculations on a net-of-tax basis.
Be able to calculate the accounting rate of return for an investment, and explain the method's
strengths and weaknesses.
Be able to calculate the internal rate of return for an investment, and explain the method's
strengths and weaknesses.
Be able to calculate the payback period for an investment, and explain the method's strengths
and weaknesses.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
accounting rate of return
A project evaluation tool that focuses on accounting income
rather than cash flows; average annual increase in income
by the amount of initial investment.
annuity
Level streams of payments; with each payment being the
same, and occurring at a regular interval
annuity due
Also known as an annuity in advance; involves a level
stream of payments, with the payments being made at the
beginning of each time period
capital expenditure decision
Also known as capital budgeting; planning and decision
making related to longer term projects and expenditures
future value
Or "compound interest;" amount that a current payment (or
stream of payments) will grow in time; includes interest on
previous interest based on frequency of compounding
internal rate of return
Also known as time-adjusted rate of return or IRR; discount
rate causing present value of cash inflows to equal present
value of the cash outflows
net present value
Or NPV, a method of evaluating capital projects that uses a
predetermined interest rate to determine the present value
of an investment's cash net cash inflows and outflows
opportunity cost
The cost of a foregone alternative; may include lost revenue
ordinary annuity
Also known as an annuity in arrears; involves a level stream
of payments, with the payments being made at the end of
each time period
outsourcing
Utilization of independent parties to manufacture products
(sometimes known as make-or-buy) or manage data
processing, tech support, payroll services, etc.
payback
Easy method for evaluating capital projects; calculated by
dividing the initial investment by the annual cash inflow
present value
Also known as discounting; determines the current worth of
cash to be received in the future
relevant cost
Items where future costs and revenues are expected to
differ for the alternative decisions under consideration
special order
A customer order that is outside of the normal pricing and
terms
sunk cost
Historical amount expended on a project or object; not
relevant to current decisions or future actions
time value of money
Conceptual notion holding that money to be received sooner
is worth more than money to be received later