2-77. Analyze the Impact of a Decision on Income Statements You were appointed the manager of Drive Systems Division (DSD) at Tunes2Go, a manufacturer of portable music devices using the latest developments in hard drive technology, on December 15 last year. DSD manufactures the drive assembly, M-24, for the company's most popular product. Your bonus is determined as a percentage of your division's operating profits before taxes. One of your first major investment decisions was to invest $3 million in automated testing equipment for the M-24. The equipment was installed and in operation on January 1 of this year. This morning, J. Bradley Finch III, the assistant manager of the division (and, not coinciden- tally, the grandson of the company founder and son of the current CEO) told you about an offer by Pan-Pacific Electronics. Pan-Pacific wants to rent to DSD a new testing machine that could be installed on December 31 (only two weeks from now) for an annual rental charge of $690,000. The new equipment would enable you to increase your division's annual revenue by 7 percent. This new, more efficient machine would also decrease fixed cash expenditures by 6 percent. Without the new machine, operating revenues and costs for the year are estimated to be as fol- lows. Sales revenue and fixed and variable operating costs are all cash. a. b. Sales revenue Variable operating costs. Fixed operating costs.. Equipment depreciation.. Other depreciation If you rent the new testing equipment, DSD will have to write off the cost of the automate testing equipment this year because it has no salvage value. Equipment depreciation shown in th income statement is for this automated testing equipment. Equipment losses are included in th bonus and operating profit computation. Because the new machine will be installed on a company holiday, there will be no effect operations from the changeover. Ignore any possible tax effects. Assume that the data given in yc expected income statement are the actual amounts for this year and next year if the current equi ment is kept. Required Assume the new testing equipment is rented and installed on December 31. What will be impact on this year's divisional operating profit? C. $4,800,000 600,000 2,250,000 450,000 375,000 Zola Assume the new testing equipment is rented and installed on December 31. What will be impact on next year's divisional operating profit? Would you rent the new equipment? Why or why not?
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
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