Accounting Based Equity Valuation Model: One Period

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ACCT 2302
Fundamentals of Accounting II
Spring 2011
Lecture 8
Professor Jeff Yu
Review: CVP Analysis
Expected profit (NOI) may change due to:
 a change in fixed expenses
 a change in CM per unit (=price - VC/unit)
 a change in sales volume:
once the break-even point has been reached, NOI will
increase by CM per unit for each additional unit sold.
Two approaches to predict profit using CVP analysis:
1)Income Statement approach
2)Incremental approach: ΔNOI = ΔCM – ΔFE
Review
 Margin of Safety (units, sales, percentage)
 Degree of Operating Leverage
 Sales Mix and Break-even Analysis
Midterm Exam Information
 Monday, February 21: class time & in the classroom.
 The exam will cover lectures 1 through 8 and chapters 2, 3, 5, and 6.
 Please plan to arrive 10 minutes earlier. The exam will start when
everyone in the room has an exam packet and will stop promptly
after 100 minutes or the end of the class, whichever comes earlier.
 Please spread out as much as possible when you get seated. I may
ask you to change seats if I determine that you sit too close to the
other student. Your cooperation will expedite the exam handout
process so that all students will have more time to work on the exam.
 This is a closed-book exam and you may not use any cheat sheet. I
may choose not to answer your question during the exam, to be fair.
 You will need a non-programmable calculator. Please bring one!
Type of questions
 Multiple Choice Questions (6%)
No partial credit
 Problems (94%)
Show your work with legible and carefully labeled computations so
that I can assign partial credit. If I cannot understand your
computations, I will not assign partial credit.
Similar to practice problems in the lecture notes and HW problems.
Practice exam questions (based on past years’ exam) posted on the
class website for your information only.
(warning: this year’s exam questions may be different!)
Studying for the exam
•
•
•
•
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Carefully study lecture notes
Re-work problems in the lecture notes
Re-work HW and quiz problems
Work on practice exam questions on the class website
If you need more practice, use the review problem at the end of each
chapter in the textbook.
• Don’t look at the solutions before you have made at least one
serious attempt to solve each problem.
• Come to TA’s or my office hours to clarify difficult materials.
 TA office hours this Thursday 2:30pm-4pm
 Additional office hours?
 There will be no office hour on Monday, Feb 21 (to be fair with
section 1 students)
After the exam
• I will post the exam solutions on the class website
• I will try my best to post your exam grades on Blackboard ASAP.
Please understand that it takes a lot of time to assign partial credits
and I will be working extremely hard to ensure that I grade your
exam consistently and fairly.
• I will return the graded test to you ASAP. Grade disputes procedure
is written in detail on the syllabus.
Review: what do managers do and how MA can help
Formulating long-and
short-term plans
Begin
(Planning)
Comparing actual to
planned performance
(Controlling)
Decision
Making
Implementing plans
(Directing and
Motivating)
Measuring performance
(Controlling)
MA provides information that help managers make decisions
throughout the planning and control cycle.
Review: Managerial vs. Financial Accounting
Financial
Accounting
Users
Time Focus
Emphasis
Verifiability and
Precision
Subject
The whole
Organization
Follow GAAP
Requirement
Managerial
Accounting
Review: cost behavior
 __________ per unit does NOT change when activity
level changes.
 Total ____________ does NOT change when activity
level changes.
 ________________ increases when activity level
increases.
 ________________ decreases when activity level
increases.
 ________________ is the range of activity within
which the assumptions about cost behavior are valid.
Review: cost classification for decision making
______________ are costs that differ between two (or
more) alternatives.
______________ is the value of the next best alternative
foregone as the result of making a decision.
______________ is a cost that has already been incurred
and cannot be changed by any decision made now or in
the future.
______________ is not a differential cost and should be
ignored when making decisions.
Review: cost terms under Absorption Costing
Manufacturing Costs = ________ Costs
Direct
Material
Direct
Labor
Marketing/
Selling Costs
Manufacturing
Overhead
Administrative
Costs
Nonmanufacturing Costs = _______ Costs
Review: Manufacturing Cost Flows
Costs
Balance Sheet
Inventories
Income
Statement
Expenses
Raw Material
Purchases
Direct Labor
Manufacturing
Overhead
Goods Sold
How to show product cost flows using T-accounts?
Review: Job-order costing vs. Process costing
A firm making built-to-order products typically use ___________ costing.
A firm mass-producing a single product typically use _________ costing.
Under job-order costing, product costs are accumulated by _______ to
get the average product cost for each unit.
Under process costing, product costs are accumulated by _______ to get
the average product cost for each unit.
Service companies typically use ______________ costing.
Both job-order costing and process costing are _______ costing systems.
Review: MOH Application in job-order costing
Manufacturing overhead is applied (allocated) to individual jobs
(work-in-process) based on a ___________ rate (POHR).
At the ________ of the period, calculate:
POHR = Estimated total MOH cost / __________ total activity level
________ the period, calculate:
Applied MOH = POHR * ________ activity level
At the _______ of the period, calculate:
_______ MOH - Applied MOH
to determine whether MOH was underapplied or overapplied.
Review: Job-Order Costing
1. If Applied MOH>Actual MOH, then MOH is ________ for the period.
If Applied MOH<Actual MOH, then MOH is __________ for the period.
2. What is the journal entry to apply MOH to jobs during the period?
3. What is the adjusting journal entry to close the overapplied
(underapplied) MOH to CGS at the end of the period?
Review: Product Cost Flow in Job-order Costing
Direct Materials
Direct Labor
Applied MOH
Work-in-Process
(JOB)
Finished
Goods
Cost of
Goods
Sold
Review: Cost Behavior
True Variable Cost (a=0, b>0)
Total cost: Y=bX, increases with X
Average cost: Y/X=b, constant
Fixed Cost (a>0, b=0)
Total cost: Y=a, constant
Average cost: Y/X=a/X,
decreases with X
Mixed Cost (a>0, b>0)
Total cost: Y=a+bX, increases with X
Average cost: Y/X=a/X + b,
decreases with activity level X.
Review: Cost Function & High-low Method
Cost Function: Y = a + bX
(1) Select the highest- & the lowest- activity levels: Xh, Xl
(2) Fit a line through the two data points: (Xh, Yh), (Xl, Yl)
Yh =a + bXh
Yl =a + bXl
b=(Yh - Yl)/(Xh - Xl)
a= ?
The slope of the line: b = Variable Cost per unit
The intercept of the line: a = Total Fixed Cost
Review: The Contribution Format Income Statement
Used primarily for
external reporting
Used primarily for Managerial
Decision making
Review: The Contribution Margin Method
Break - even Point in Units 
Fixed Expenses
CM per Unit
Break - even Point in Sales Dollars 
Units sales to attain Target Profit 
Fixed Expenses
CM Ratio
Fixed Expenses  Target Profit
CM Per Unit
Review: The Equation Method
Let B.E.P. in units = X
Sales – Variable Expenses – Fixed Expenses = NOI
Price * X
VC/unit * X
$$$
B.E.P in sales dollars = B.E.P. in Units * Price
$0
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