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All Textbook Solutions for Managerial Accounting: The Cornerstone of Business Decision-Making

1MCQ To make a capital investment decision, a manager must a. estimate the quantity and timing of cash flows. b. assess the risk of the investment. c. consider the impact of the investment on the firms profits. d. choose a decision criterion to assess viability of the investment (such as payback period or NPV). e. All of these.Mutually exclusive capital budgeting projects are those that a. if accepted or rejected do not affect the cash flows of other projects. b. if accepted will produce a negative NPV. c. if rejected preclude the acceptance of all other competing projects. d. if accepted preclude the acceptance of all other competing projects. e. if rejected imply that all other competing projects have a positive NPV.4MCQ An investment of 1,000 produces a net cash inflow of 500 in the first year and 750 in the second year. What is the payback period? a. 1.67 years b. 0.50 year c. 2.00 years d. 1.20 years e. Cannot be determined The payback period suffers from which of the following deficiencies? a. It is a rough measure of the uncertainty of future cash flows. b. It helps control the risk of obsolescence. c. It ignores the uncertainty of future cash flows. d. It ignores the financial performance of a project beyond the payback period. e. Both c and d.7MCQ An investment of 2,000 provides an average net income of 400. Depreciation is 40 per year with zero salvage value. The ARR using the original investment is a. 44%. b. 22%. c. 20%. d. 40%. e. None of these.If the NPV is positive, it signals a. that the initial investment has been recovered. b. that the required rate of return has been earned. c. that the value of the firm has increased. d. All of these. e. Both a and b.10MCQ 11MCQ Using NPV, a project is rejected if it is a. equal to zero. b. negative. c. positive. d. equal to the required rate of return. e. greater than the cost of capital.If the present value of future cash flows is 4,200 for an investment that requires an outlay of 3,000, the NPV a. is 200. b. is 1,000. c. is 1,200. d. is 2,200. e. cannot be determined.Assume that an investment of 1,000 produces a future cash flow of 1,000. The discount factor for this future cash flow is 0.80. The NPV is a. 0. b. 110. c. (200). d. 911. e. None of these.Which of the following is not true regarding the IRR? a. The IRR is the interest rate that sets the present value of a projects cash inflows equal to the present value of the projects cost. b. The IRR is the interest rate that sets the NPV equal to zero. c. The popularity of IRR may be attributable to the fact that it is a rate of return, a concept that is comfortably used by managers. d. If the IRR is greater than the required rate of return, then the project is acceptable. e. The IRR is the most reliable of the capital budgeting methods.Using IRR, a project is rejected if the IRR a. is equal to the required rate of return. b. is less than the required rate of return. c. is greater than the cost of capital. d. is greater than the required rate of return. e. produces an NPV equal to zero.17MCQ Postaudits of capital projects are useful because a. they are not very costly. b. they have no significant limitations. c. the assumptions underlying the original analyses are often invalidated by changes the actual working environment. d. they help to ensure that resources are used wisely. e. All of these.For competing projects, NPV is preferred to IRR because a. maximizing IRR maximizes the wealth of the owners. b. in the final analysis, relative profitability is what counts. c. choosing the project with the largest NPV maximizes the wealth of the shareholders. d. assuming that cash flows are reinvested at the computed IRR is more realistic than assuming that cash flows are reinvested at the required rate of return. e. All of these.Assume that there are two competing projects, A and B. Project A has an NPV of 1,000 and an IRR of 15%. Project B has an NPV of 800 and an IRR of 20%. Which of the following is true? a. Project A should be chosen because it has a higher NPV. b. Project B should be chosen because it has a higher IRR. c. It is not possible to use NPV or IRR to choose between the two projects. d. Neither project should be chosen. e. None of these.21BEA Accounting Rate of Return Uchdorf Company invested 9,000,000 in a new product line. The life cycle of the product is projected to be 7 years with the following net income stream: 360,000, 360,000, 600,000, 1,080,000, 1,200,000, 2,520,000, and 1,444,000. Required: Calculate the ARR.Net Present Value Snow Inc. has just completed development of a new cell phone. The new product is expected to produce annual revenues of 1,400,000. Producing the cell phone requires an investment in new equipment, costing 1,500,000. The cell phone has a projected life cycle of 5 years. After 5 years, the equipment can be sold for 180,000. Working capital is also expected to increase by 200,000, which Snow will recover by the end of the new products life cycle. Annual cash operating expenses are estimated at 820,000. The required rate of return is 8%. Required: Prepare a schedule of the projected annual cash flows. Calculate the NPV using only discount factors from Exhibit 12B.1 (p. 670). Calculate the NPV using discount factors from both Exhibits 12B.1 and 12B.2 (p. 671).Internal Rate of Return Lisun Company produces a variety of gardening tools and aids. The company is examining the possibility of investing in a new production system that will reduce the costs of the current system. The new system will require a cash investment of 4,607,200 and will produce net cash savings of 800,000 per year. The system has a projected life of 9 years. Required: Calculate the IRR for the new production system.NPV and IRR, Mutually Exclusive Projects Hunt Inc. intends to invest in one of two competing types of computer-aided manufacturing equipment: CAM X and CAM Y. Both CAM X and CAM Y models have a project life of 10 years. The purchase price of the CAM X model is 3,600,000, and it has a net annual after-tax cash inflow of 900,000. The CAM Y model is more expensive, selling for 4,200,000, but it will produce a net annual after-tax cash inflow of 1,050,000. The cost of capital for the company is 10%. Required: 1. Calculate the NPV for each project. Which model would you recommend? 2. Calculate the IRR for each project. Which model would you recommend?26BEB Accounting Rate of Return Cannon Company invested 9,000,000 in a new product line. The life cycle of the product is projected to be 7 years with the following net income stream: 360,000, 360,000, 600,000, 1,080,000, 1,200,000, 2,520,000, and 1,444,000. Required: Calculate the ARR.Net Present Value Talmage Inc. has just completed development of a new printer. The new product is expected to produce annual revenues of 2,700,000. Producing the printer requires an investment in new equipment costing 2,880,000. The printer has a projected life cycle of 5 years. After 5 years, the equipment can be sold for 360,000. Working capital is also expected to increase by 360,000, which Talmage will recover by the end of the new products life cycle. Annual cash operating expenses are estimated at 1,620,000. The required rate of return is 8%. Required: Prepare a schedule of the projected annual cash flows. Calculate the NPV using only discount factors from Exhibit 12B.1 (p. 670). Calculate the NPV using discount factors from both Exhibits 12B.1 and 12B.2 (p. 671).Internal Rate of Return Richins Company produces automobile engine parts. The company is examining the possibility of investing in a new production system that will reduce the costs of the current system. The new system will require a cash investment of 11,551,968 and will produce net cash savings of 1,800,000 per year. The system has a projected life of 10 years. Required: Calculate the IRR for the new production system.NPV and IRR, Mutually Exclusive Projects Techno Inc. intends to invest in one of two competing types of flexible manufacturing systems: FLEX-1K and FLEX-2Z. Both systems have a project life of 10 years. The purchase price of the FLEX-1K system is 9,600,000, and it has a net annual after-tax cash inflow of 2,400,000. The FLEX-2Z is more expensive, selling for 11,200,000, but it will produce a net annual after-tax cash inflow of 2,800,000. The cost of capital for the company is 12%. Required: 1. Calculate the NPV for each system. Which system would you recommend? 2. Calculate the IRR for each system. Which system would you recommend?31E Accounting Rate of Return Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Cobre Company is considering the purchase of new equipment that will speed up the process for extracting copper. The equipment will cost 3,600,000 and have a life of 5 years with no expected salvage value. The expected cash flows associated with the project are as follows: Emily Hansen is considering investing in one of the following two projects. Either project will require an investment of 75,000. The expected cash revenues minus cash expenses for the two projects follow. Assume each project is depreciable. Suppose that a project has an ARR of 30% (based on initial investment) and that the average net income of the project is 120,000. Suppose that a project has an ARR of 50% and that the investment is 150,000. Required: Compute the ARR on the new equipment that Cobre Company is considering. CONCEPTUAL CONNECTION Which project should Emily Hansen choose based on the ARR? Notice that the payback period is the same for both investments (thus equally preferred). Unlike the payback period, explain why ARR correctly signals that one project should be preferred over the other. How much did the company in Scenario c invest in the project? What is the average net income earned by the project in Scenario d?Net Present Value Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. a. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be 480,000 per year. The system costs 2,700,000 and will last 10 years. b. Evee Cardenas is interested in investing in a womens specialty shop. The cost of the investment is 270,000. She estimates that the return from owning her own shop will be 52,500 per year. She estimates that the shop will have a useful life of 6 years. c. Barker Company calculated the NPV of a project and found it to be 63,900. The projects life was estimated to be 8 years. The required rate of return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of 135,000. Required: 1. Compute the NPV for Campbell Manufacturing, assuming a discount rate of 12%. Should the company buy the new welding system? 2. CONCEPTUAL CONNECTION Assuming a required rate of return of 8%, calculate the NPV for Evee Cardenas investment. Should she invest? What if the estimated return was 135,000 per year? Would this affect the decision? What does this tell you about your analysis? 3. What was the required investment for Barker Companys project?Internal Rate of Return Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Cuenca Company is considering the purchase of new equipment that will speed up the process for producing flash drives. The equipment will cost 7,200,000 and have a life of 5 years with no expected salvage value. The expected cash flows associated with the project follow: Kathy Shorts is evaluating an investment in an information system that will save 240,000 per year. She estimates that the system will last 10 years. The system will cost 1,248,000. Her companys cost of capital is 10%. Elmo Enterprises just announced that a new plant would be built in Helper, Utah. Elmo told its stockholders that the plant has an expected life of 15 years and an expected IRR equal to 25%. The cost of building the plant is expected to be 2,880,000. Required: Calculate the IRR for Cuenca Company. The companys cost of capital is 16%. Should the new equipment be purchased? Calculate Kathy Shorts IRR. Should she acquire the new system? What should be Elmo Enterprises expected annual cash flow from the plant?Net Present Value and Competing Projects Spiro Hospital is investigating the possibility of investing in new dialysis equipment. Two local manufacturers of this equipment are being considered as sources of the equipment. After-tax cash inflows for the two competing projects are as follows: Both projects require an initial investment of 560,000. In both cases, assume that the equipment has a life of 5 years with no salvage value. Required: 1. Assuming a discount rate of 12%, compute the net present value of each piece of equipment. 2. A third option has surfaced for equipment purchased from an out-of-state supplier. The cost is also 560,000, but this equipment will produce even cash flows over its 5-year life. What must the annual cash flow be for this equipment to be selected over the other two? Assume a 12% discount rate.Payback, Accounting Rate of Return, Net Present Value, Internal Rate of Return Blaylock Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of tractors. The outlay required is 384,000. The NC equipment will last 5 years with no expected salvage value. The expected after-tax cash flows associated with the project follow: Required: Compute the payback period for the NC equipment. Compute the NC equipments ARR. Round the percentage to one decimal place. Compute the investments NPV, assuming a required rate of return of 10%. Compute the investments IRR.37E Net Present Value, Basic Concepts Wise Company is considering an investment that requires an outlay of 600,000 and promises an after-tax cash inflow of 693,000 one year from now. The companys cost of capital is 10%. Required: 1. Break the 693,000 future cash inflow into three components: (a) the return of the original investment, (b) the cost of capital, and (c) the profit earned on the investment. Now compute the present value of the profit earned on the investment. 2. CONCEPTUAL CONNECTION Compute the NPV of the investment. Compare this with the present value of the profit computed in Requirement 1. What does this tell you about the meaning of NPV?Solving for Unknowns Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. a. Thomas Company is investing 120,000 in a project that will yield a uniform series of cash inflows over the next 4 years. b. Video Repair has decided to invest in some new electronic equipment. The equipment will have a 3-year life and will produce a uniform series of cash savings. The NPV of the equipment is 1,750, using a discount rate of 8%. The IRR is 12%. c. A new lathe costing 60,096 will produce savings of 12,000 per year. d. The NPV of a project is 3,927. The project has a life of 4 years and produces the following cash flows: The cost of the project is two times the cash flow produced in Year 4. The discount rate is 10%. Required: 1. If the internal rate of return is 14% for Thomas Company, how much cash inflow per year can be expected? 2. Determine the investment and the amount of cash savings realized each year for Video Repair. 3. For Scenario c, how many years must the lathe last if an IRR of 18% is realized? 4. For Scenario d, find the cost of the project and the cash flow for Year 4.Net Present Value versus Internal Rate of Return Skiba Company is thinking about two different modifications to its current manufacturing process. The after-tax cash flows associated with the two investments follow: Skibas cost of capital is 10%. Required: 1. Compute the NPV and the IRR for each investment. 2. CONCEPTUAL CONNECTION Explain why the project with the larger NPV is the correct choice for Skiba.Basic Net Present Value Analysis Jonathan Butler, process engineer, knows that the acceptance of a new process design will depend on its economic feasibility. The new process is designed to improve environmental performance. On the negative side, the process design requires new equipment and an infusion of working capital. The equipment will cost 1,200,000, and its cash operating expenses will total 270,000 per year. The equipment will last for 7 years but will need a major overhaul costing 120,000 at the end of the fifth year. At the end of 7 years, the equipment will be sold for 96,000. An increase in working capital totaling 120,000 will also be needed at the beginning. This will be recovered at the end of the 7 years. On the positive side, Jonathan estimates that the new process will save 400,000 per year in environmental costs (fines and cleanup costs avoided). The cost of capital is 12%. Required: 1. Prepare a schedule of cash flows for the proposed project. (Note: Assume that there are no income taxes.) 2. Compute the NPV of the project. Should the new process design be accepted?Net Present Value Analysis Emery Communications Company is considering the production and marketing of a communications system that will increase the efficiency of messaging for small businesses or branch offices of large companies. Each unit hooked into the system is assigned a mailbox number, which can be matched to a telephone extension number, providing access to messages 24 hours a day. Up to 20 units can be hooked into the system, allowing the delivery of the same message to as many as 20 people. Personal codes can be used to make messages confidential. Furthermore, messages can be reviewed, recorded, cancelled, replied to, or deleted all during the same message playback. Indicators wired to the telephone blink whenever new messages are present. To produce this product, a 1.75 million investment in new equipment is required. The equipment will last 10 years but will need major maintenance costing 150,000 at the end of its sixth year. The salvage value of the equipment at the end of 10 years is estimated to be 100,000. If this new system is produced, working capital must also be increased by 90,000. This capital will be restored at the end of the products 10-year life cycle. Revenues from the sale of the product are estimated at 1.65 million per year. Cash operating expenses are estimated at 1.32 million per year. Required: 1. Prepare a schedule of cash flows for the proposed project. (Note: Assume that there are no income taxes.) 2. Assuming that Emerys cost of capital is 12%, compute the projects NPV. Should the product be produced?Basic Internal Rate of Return Analysis Julianna Cardenas, owner of Baker Company, was approached by a local dealer of air-conditioning units. The dealer proposed replacing Bakers old cooling system with a modern, more efficient system. The cost of the new system was quoted at 339,000, but it would save 60,000 per year in energy costs. The estimated life of the new system is 10 years, with no salvage value expected. Excited over the possibility of saving 60,000 per year and having a more reliable unit, Julianna requested an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 8%. There are no income taxes. Required: 1. Calculate the projects IRR. Should the company acquire the new cooling system? 2. Suppose that energy savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. 3. Suppose that the life of the new system is overestimated by 2 years. Repeat Requirements 1 and 2 under this assumption. 4. CONCEPTUAL CONNECTION Explain the implications of the answers from Requirements 1, 2, and 3.Net Present Value, Uncertainty Ondi Airlines is interested in acquiring a new aircraft to service a new route. The route will be from Tulsa to Denver. The aircraft will fly one round-trip daily except for scheduled maintenance days. There are 15 maintenance days scheduled each year. The seating capacity of the aircraft is 150. Flights are expected to be fully booked. The average revenue per passenger per flight (one-way) is 235. Annual operating costs of the aircraft follow: The aircraft will cost 120,000,000 and has an expected life of 20 years. The company requires a 12% return. Assume there are no income taxes. Required: 1. Calculate the NPV for the aircraft. Should the company buy it? 2. In discussing the proposal, the marketing manager for the airline believes that the assumption of 100% booking is unrealistic. He believes that the booking rate will be somewhere between 70 and 90%, with the most likely rate being 80%. Recalculate the NPV by using an 80% seating capacity. Should the aircraft be purchased? 3. Calculate the average seating rate that would be needed so that NPV will equal zero. Round the seating rate to the nearest percent. 4. CONCEPTUAL CONNECTION Suppose that the price per passenger could be increased by 10% without any effect on demand. What is the average seating rate now needed to achieve an NPV equal to zero? What would you now recommend? Round the seating rate to the nearest percent.Review of Basic Capital Budgeting Procedures Dr. Whitley Avard, a plastic surgeon, had just returned from a conference in which she learned of a new surgical procedure for removing wrinkles around eyes, reducing the time to perform the normal procedure by 50%. Given her patient-load pressures. Dr. Avard is excited to try out the new technique. By decreasing the time spent on eye treatments or procedures, she can increase her total revenues by performing more services within a work period. In order to implement the new procedure, special equipment costing 74,000 is needed. The equipment has an expected life of 4 years, with a salvage value of 6,000. Dr. Avard estimates that her cash revenues will increase by the following amounts: She also expects additional cash expenses amounting to 3,000 per year. The cost of capital is 12%. Assume that there are no income taxes. Required: 1. Compute the payback period for the new equipment. 2. Compute the ARR. Round the percentage to two decimal places. 3. CONCEPTUAL CONNECTION Compute the NPV and IRR for the project. Use 14% as your first guess for IRR. Should Dr. Avard purchase the new equipment? Should she be concerned about payback or the ARR in making this decision? 4. CONCEPTUAL CONNECTION Before finalizing her decision. Dr. Avard decided to call two plastic surgeons who have been using the new procedure for the past 6 months. The conversations revealed a somewhat less glowing report than she received at the conference. The new procedure reduced the time required by about 25% rather than the advertised 50%. Dr. Avard estimated that the net operating cash flows of the procedure would be cut by one-third because of the extra time and cost involved (salvage value would be unaffected). Using this information, recompute the NPV of the project. What would you now recommend?Net Present Value and Competing Alternatives Stillwater Designs has been rebuilding Model 100, Model 120, and Model 150 Kicker sub-woofers that were returned for warranty action. Customers returning the subwoofers receive a new replacement. The warrant)' returns are then rebuilt and resold (as seconds). Tent sales are often used to sell the rebuilt speakers. As part of the rebuilding process, the speakers are demagnetized so that metal pieces and shavings can be removed. A demagnetizing (demag) machine is used to achieve this objective. A product design change has made the most recent Model 150 speakers too tall for the demag machine. They no longer fit in the demag machine. Stillwater Designs is currently considering two alternatives. First, a new demag machine can be bought that has a different design, eliminating the fit problem. The cost of this machine is 600,000, and it will last 5 years. Second, Stillwater can keep the current machine and sell the 150 speakers for scrap, using the old demag machine for the Model 100 and 120 speakers only. A rebuilt speaker sells for 295 and costs 274.65 to rebuild (for materials, labor, and overhead cash outlays). The 274.65 outlay includes the annual operating cash effects of the new demag machine. If not rebuilt, the Model 150 speakers can be sold for 4 each as scrap. There are 10,000 Model 150 warranty returns per year. Assume that the required rate of return is 10%. Required: 1. Determine which alternative is the best for Stillwater Designs by using NPV analysis. 2. CONCEPTUAL CONNECTION Determine which alternative is best for Stillwater Designs by using an IRR analysis. Explain why NPV analysis is a better approach.Kildare Medical Center, a for-profit hospital, has three investment opportunities: (1) adding a wing for in-patient treatment of substance abuse, (2) adding a pathology laboratory, and (3) expanding the outpatient surgery wing. The initial investments and the net present value for the three alternatives are as follows: Although the hospital would like to invest in all three alternatives, only 1.5 million available. Required: 1. Rank the projects on the basis of NPV, and allocate the funds in order of this ranking. What project or projects were selected? What is the total NPV realized by the medical center using this approach? 2. CONCEPTUAL CONNECTION Assume that the size of the lot on which the hospital is located makes the substance abuse wing and the outpatient surgery wing mutually exclusive. With unlimited capital, which of those two projects would be chosen? With limited capital and the three projects being considered, which projects would be chosen? 3. CONCEPTUAL CONNECTION Form a group with two to four other students, and discuss qualitative considerations that should be considered in capital budgeting evaluations. Identify three such considerations.Foster Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of trenching machines (to replace an existing manual system). The outlay required is 3,500,000. The NC equipment will last 5 years with no expected salvage value. The expected incremental after-tax cash flows (cash flows of the NC equipment minus cash flows of the old equipment) associated with the project follow: Foster has a cost of capital equal to 10%. The above cash flows are expressed without any consideration of inflation. Required: 1. Compute the payback period. 2. Calculate the NPV and IRR of the proposed project. 3. CONCEPTUAL CONNECTION Inflation is expected to be 5% per year for the next 5 years. The discount rate of 10% is composed of two elements: the real rate and the inflationary element. Since the discount rate has an inflationary component, the projected cash flows should also be adjusted to account for inflation. Make this adjustment, and recalculate the NPV. Comment on the importance of adjusting cash flows for inflationary effects.Cost of Capital, Net Present Value Leakam Companys product engineering department has developed a new product that has a 3-year life cycle. Production of the product requires development of a new process that requires a current 100,000 capital outlay. The 100,000 will be raised by issuing 60,000 of bonds and by selling new stock for 40,000. The 60,000 in bonds will have net (after-tax) interest payments of 3,000 at the end of each of the 3 years, with the principal being repaid at the end of Year 3. The stock issue carries with it an expectation of a 17.5% return, expressed in the form of dividends at the end of each year (with 7,000 in dividends expected for each of the next 3 years). The sources of capital for this investment represent the same proportion and costs that the company typically has. Finally, the project will produce after-tax cash inflows of 50,000 per year for the next 3 years. Required: 1. Compute the cost of capital for the project. (Hint: The cost of capital is a weighted average of the two sources of capital, where the weights are the proportion of capital from each source.) 2. CONCEPTUAL CONNECTION Compute the NPV for the project. Explain why it is not necessary to subtract the interest payments and the dividend payments and appreciation from the inflow of 50,000 in carrying out this computation.I know that its the thing to do, insisted Pamela Kincaid, vice president of finance for Colgate Manufacturing. If we are going to be competitive, we need to build this completely automated plant. Im not so sure, replied Bill Thomas, CEO of Colgate. The savings from labor reductions and increased productivity are only 4 million per year. The price tag for this factoryand its a small oneis 45 million. That gives a payback period of more than 11 years. Thats a long time to put the companys money at risk. Yeah, but youre overlooking the savings that well get from the increase in quality, interjected John Simpson, production manager. With this system, we can decrease our waste and our rework time significantly. Those savings are worth another million dollars per year. Another million will only cut the payback to about 9 years, retorted Bill. Ron, youre the marketing managerdo you have any insights? Well, there are other factors to consider, such as service quality and market share. I think that increasing our product quality and improving our delivery service will make us a lot more competitive. I know for a fact that two of our competitors have decided against automation. Thatll give us a shot at their customers, provided our product is of higher quality and we can deliver it faster. I estimate that itll increase our net cash benefits by another 2.4 million. Wow! Now thats impressive, Bill exclaimed, nearly convinced. The payback is now getting down to a reasonable level. I agree, said Pamela, but we do need to be sure that its a sound investment. I know that estimates for construction of the facility have gone as high as 48 million. I also know that the expected residual value, after the 20 years of service we expect to get, is 5 million. I think I had better see if this project can cover our 14% cost of capital. Now wait a minute, Pamela, Bill demanded. You know that I usually insist on a 20% rate of return, especially for a project of this magnitude. Required: 1. Compute the NPV of the project by using the original savings and investment figures. Calculate by using discount rates of 14% and 20%. Include salvage value in the computation. 2. Compute the NPV of the project using the additional benefits noted by the production and marketing managers. Also, use the original cost estimate of 45 million. Again, calculate for both possible discount rates. 3. Compute the NPV of the project using all estimates of cash flows, including the possible initial outlay of 48 million. Calculate by using discount rates of 14% and 20%. 4. CONCEPTUAL CONNECTION If you were making the decision, what would you do? Explain.Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at 860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of 8 years and is projected to produce cash operating savings of 225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16%. Required: 1. Compute the NPV of the new system. 2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was 60,000 more than expected due to higher installation costs, and (2) the annual cost savings were 20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision? 3. CONCEPTUAL CONNECTION Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal audit department indicating that cash inflows also had increased by a net of 60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2. 4. CONCEPTUAL CONNECTION Why is a postaudit beneficial to a firm?52P 53P Manny Carson, certified management accountant and controller of Wakeman Enterprises, has been given permission to acquire a new computer and software for the companys accounting system. The capital investment analysis showed an NPV of 100,000. However, the initial estimates of acquisition and installation costs were made on the basis of tentative costs without any formal bids. Manny now has two formal bids, one that would allow the firm to meet or beat the original projected NPV and one that would reduce the projected NPV by 50,000. The second bid involves a system that would increase both the initial cost and the operating cost. Normally, Manny would take the first bid without hesitation. However, Todd Downing, the owner of the firm presenting the second bid, is a close friend. Manny called Todd and explained the situation, offering Todd an opportunity to alter his bid and win the job. Todd thanked Manny and then made a counteroffer. Todd: Listen, Manny, this job at the original price is the key to a successful year for me. The revenues will help me gain approval for the loan I need for renovation and expansion. If I dont get that loan, I see hard times ahead. The financial stats for loan approval are so marginal that reducing the bid price may blow my chances. Manny: Losing the bid altogether would be even worse, dont you think? Todd: True. However, if you award me the job, Ill be able to add personnel. I know that your son is looking for a job, and I can offer him a good salary and a promising future. Additionally, Ill be able to take you and your wife on that vacation to Hawaii that weve been talking about. Manny: Well, you have a point. My son is having an awful time finding a job, and he has a wife and three kids to support. My wife is tired of having them live with us. She and I could use a vacation. I doubt that the other bidder would make any fuss if we turned it down. Its offices are out of state, after all. Todd: Out of state? All the more reason to turn it down. Given the states economy, it seems almost criminal to take business outside. Those are the kind of business decisions that cause problems for people like your son. Required: Evaluate the ethical behavior of Manny. Should Manny have called Todd in the first place? Would there have been any problems if Todd had agreed to meet the lower bid price? Identify the parts of the Statement of Ethical Professional Practice (Chapter 1) that Manny may be violating, if any.55C 1MTC NoFat manufactures one product, olestra, and sells it to large potato chip manufacturers as the key ingredient in nonfat snack foods, including Ruffles, Lays, Doritos, and Tostitos brand products. For each of the past 3 years, sales of olestra have been far less than the expected annual volume of 125,000 pounds. Therefore, the company has ended each year with significant unused capacity. Due to a short shelf life, NoFat must sell every pound of olestra that it produces each year. As a result, NoFats controller, Allyson Ashley, has decided to seek out potential special sales offers from other companies. One company, Patterson Union (PU)a toxic waste cleanup companyoffered to buy 10,000 pounds of olestra from NoFat during December for a price of 2.20 per pound. PU discovered through its research that olestra has proven to be very effective in cleaning up toxic waste locations designated as Superfund Sites by the U.S. Environmental Protection Agency. Allyson was excited, noting that This is another way to use our expensive olestra plant! The annual costs incurred by NoFat to produce and sell 100,000 pounds of olestra are as follows: In addition, Allyson met with several of NoFats key production managers and discovered the following information: The special order could be produced without incurring any additional marketing or customer service costs. NoFat owns the aging plant facility that it uses to manufacture olestra. NoFat incurs costs to set up and clean its machines for each production run, or batch, of olestra that it produces. The total setup costs shown in the previous table represent the production of 20 batches during the year. NoFat leases its plant machinery. The lease agreement is negotiated and signed on the first day of each year. NoFat currently leases enough machinery to produce 125,000 pounds of olestra. PU requires that an independent quality team inspects any facility from which it makes purchases. The terms of the special sales offer would require NoFat to bear the 1,000 cost of the inspection team. Based solely on financial factors, explain why NoFat should accept or reject PUs special sales offer.3MTC NoFat manufactures one product, olestra, and sells it to large potato chip manufacturers as the key ingredient in nonfat snack foods, including Ruffles, Lays, Doritos, and Tostitos brand products. For each of the past 3 years, sales of olestra have been far less than the expected annual volume of 125,000 pounds. Therefore, the company has ended each year with significant unused capacity. Due to a short shelf life, NoFat must sell every pound of olestra that it produces each year. As a result, NoFats controller, Allyson Ashley, has decided to seek out potential special sales offers from other companies. One company, Patterson Union (PU)a toxic waste cleanup companyoffered to buy 10,000 pounds of olestra from NoFat during December for a price of 2.20 per pound. PU discovered through its research that olestra has proven to be very effective in cleaning up toxic waste locations designated as Superfund Sites by the U.S. Environmental Protection Agency. Allyson was excited, noting that This is another way to use our expensive olestra plant! The annual costs incurred by NoFat to produce and sell 100,000 pounds of olestra are as follows: In addition, Allyson met with several of NoFats key production managers and discovered the following information: The special order could be produced without incurring any additional marketing or customer service costs. NoFat owns the aging plant facility that it uses to manufacture olestra. NoFat incurs costs to set up and clean its machines for each production run, or batch, of olestra that it produces. The total setup costs shown in the previous table represent the production of 20 batches during the year. NoFat leases its plant machinery. The lease agreement is negotiated and signed on the first day of each year. NoFat currently leases enough machinery to produce 125,000 pounds of olestra. PU requires that an independent quality team inspects any facility from which it makes purchases. The terms of the special sales offer would require NoFat to bear the 1,000 cost of the inspection team. Assume for this question that NoFat rejected PUs special sales offer because the 2.20 price suggested by PU was too low. In response to the rejection, PU asked NoFat to determine the price at which it would be willing to accept the special sales offer. For its regular sales, NoFat sets prices by marking up variable costs by 10%. If Allyson decides to use NoFats 10% markup pricing method to set the price for PUs special sales offer, a. Calculate the price that NoFat would charge PU for each pound of olestra. b. Calculate the relevant profit that NoFat would earn if it set the special sales price by using its markup pricing method. (Hint: Use the estimate of relevant costs that you calculated in response to Requirement 1b.) c. Explain why NoFat should accept or reject the special sales offer if it uses its markup pricing method to set the special sales price.NoFat manufactures one product, olestra, and sells it to large potato chip manufacturers as the key ingredient in nonfat snack foods, including Ruffles, Lays, Doritos, and Tostitos brand products. For each of the past 3 years, sales of olestra have been far less than the expected annual volume of 125,000 pounds. Therefore, the company has ended each year with significant unused capacity. Due to a short shelf life, NoFat must sell every pound of olestra that it produces each year. As a result, NoFats controller, Allyson Ashley, has decided to seek out potential special sales offers from other companies. One company, Patterson Union (PU)a toxic waste cleanup companyoffered to buy 10,000 pounds of olestra from NoFat during December for a price of 2.20 per pound. PU discovered through its research that olestra has proven to be very effective in cleaning up toxic waste locations designated as Superfund Sites by the U.S. Environmental Protection Agency. Allyson was excited, noting that This is another way to use our expensive olestra plant! The annual costs incurred by NoFat to produce and sell 100,000 pounds of olestra are as follows: In addition, Allyson met with several of NoFats key production managers and discovered the following information: The special order could be produced without incurring any additional marketing or customer service costs. NoFat owns the aging plant facility that it uses to manufacture olestra. NoFat incurs costs to set up and clean its machines for each production run, or batch, of olestra that it produces. The total setup costs shown in the previous table represent the production of 20 batches during the year. NoFat leases its plant machinery. The lease agreement is negotiated and signed on the first day of each year. NoFat currently leases enough machinery to produce 125,000 pounds of olestra. PU requires that an independent quality team inspects any facility from which it makes purchases. The terms of the special sales offer would require NoFat to bear the 1,000 cost of the inspection team. Assume for this question that Allysons relevant analysis reveals that NoFat would earn a positive relevant profit of 10,000 from the special sale (i.e., the special sales alternative). However, after conducting this traditional, short-term relevant analysis, Allyson wonders whether it might be more profitable over the long term to downsize the company by reducing its manufacturing capacity (i.e., its plant machinery and plant facility). She is aware that downsizing requires a multiyear time horizon because companies usually cannot increase or decrease fixed plant assets every year. Therefore, Allyson has decided to use a 5-year time horizon in her long-term decision analysis. She has identified the following information regarding capacity downsizing (i.e., the downsizing alternative): The plant facility consists of several buildings. If it chooses to downsize its capacity, NoFat can immediately sell one of the buildings to an adjacent business for 30,000. If it chooses to downsize its capacity, NoFats annual lease cost for plant machinery will decrease to 9,000. Therefore, Allyson must choose between these two alternatives: Accept the special sales offer each year and earn a 10,000 relevant profit for each of the next 5 years or reject the special sales offer and downsize as described above. Assume that NoFat pays for all costs with cash. Also, assume a 10% discount rate, a 5-year time horizon, and all cash flows occur at the end of the year. Using an NPV approach to discount future cash flows to present value, a. Calculate the NPV of accepting the special sale with the assumed positive relevant profit of 10,000 per year (i.e., the special sales alternative). b. Calculate the NPV of downsizing capacity as previously described (i.e., the downsizing alternative). c. Based on the NPV of Requirements 5a and 5b, identify and explain which of these two alternatives is best for NoFat to pursue in the long term.1DQ 2DQ Why should the incremental cost of a risk response alternative be considered when deciding how best to respond to an important risk?4DQ Explain how performance measurement can help improve an organization's business sustainability efforts.Identify and discuss the four kinds of quality costs.Discuss the benefits of quality cost reports that simply list the quality costs for each category.8DQ 9DQ When will the average unit cost be used for value streams?How do international issues affect the role of the management accountant?What it a foreign trade zone, and what advantages does it offer U.S. companies?13DQ 14DQ 15DQ A fire insurance policy on a manufacturing plant is an example of a risk reduction alternative that would reduce which component of the inherent risk of a plant fire a. Likelihood only b. Impact only c. Both likelihood and impact d. Neither likelihood nor impact 2MCQ 3MCQ Which of the following risk response items would not be affected by an increase in the cost of managing a strategic alliance partnership that was formed to reduce a top organizational risk? a. Risk response net benefit b. Risk response cost c. Risk response benefit d. All of these. e. None of these.Beginning with strategy, which of the following items lists the areas of the business sustainability cycle in the correct order in which they should be performed? (Note: Not all areas are contained in each list.) a. Sustainability assurance, sustainability reporting, risk management, performance measurement b. Performance measurement, risk management, sustainability reporting, stakeholder engagement c. Stakeholder engagement, risk management, sustainability assurance, performance measurement d. Risk management, stakeholder engagement, sustainability reporting, sustainability assurance e. Stakeholder engagement, risk management, performance measurement, sustainability reporting In which areas of an organizations value chain can important business sustainability risks or opportunities arise? I. Research Development II. Customer Service III. Manufacturing IV. Warehousing Distribution a. I only b. II only c. III only d. II and IV e. I, II, III, and IV 7MCQ Which of the following items (correctly describes an important difference (in most countries and business environments) between traditional financial reporting and corporate sustainability reporting? a. Corporate sustainability reporting is required, while traditional financial reporting is not required. b. Corporate sustainability reporting is voluntary, but the contents of any such report are required to be verified by an independent third party. whereas traditional financial reporting is required and its contents must be verified by an independent third party. c. No published reporting standards exist for organizations to follow when preparing and issuing corporate sustainability reports, whereas published reporting standards do exist for organizations to follow when preparing and issuing traditional financial reports. d. None of these.Which of the following is a prevention cost? a. Inspection of materials. b. Continuing supplier verification. c. Prototype inspection. d. Recalls.10MCQ 11MCQ 12MCQ 13MCQ A manufacturing cell within a value stream has three processes and the following associated processing times: Drilling: 12 minutes Inserting: 6 minutes Finishing: 2 minutes How many units can the cell produce per hour (on a continuous running basis)? a. 10 units per hour b. 3 units per hour c. 5 units per hour d. 30 units per hour 15MCQ 16MCQ 17MCQ 18MCQ 19MCQ 20BEA Quality Cost Report Whitley Company had total sales of 1,000,000 for the year ending 20X1. The costs of quality are given below. Required: 1. Prepare a quality cost report, classifying costs by category and expressing each category as a percentage of sales. What message does the cost report provide? 2. Prepare a bar graph and pie chart that illustrate each categorys contribution to total quality costs. Comment on the significance of the distribution.Andresen Company had the following quality costs for the years ended June 30, 20X1 and 20X2: At the end of 20X1, management decided to increase its investment in control costs by 50% for each categorys items, with the expectation that failure costs would decrease by 20% for each item of the failure categories. Sales were 6,000,000 for both 20X1 and 20X2. Required: 1. Calculate the budgeted costs for 20X2, and prepare an interim quality performance report. 2. Comment on the significance of the report. How much progress has Andresen made?Norris Company implemented a quality improvement program and tracked the following for the 5 years: By cost category of sales for the same period of time: Required: 1. Prepare a bar graph (hat reveals the trend in quality cost as a percentage of sales (time on horizontal axis and percentages on the vertical). Comment on the message of the graph. 2. Prepare a bar graph for each cost category as a percentage of sales. What does this graph tell you?Mabbut Company has the following departmental manufacturing layout for one of its plants: A consulting firm recommended a value stream with the following manufacturing cell: Required: 1. Calculate the total time it takes to produce a batch of 10 units using the traditional departmental manufacturing layout. 2. Using cellular manufacturing, how much time is saved producing the same batch of 10 units? Assuming the cell operates continuously, what is the production rate? Which process controls this production rate? 3. Assume the processing time of Welding is reduced to 6 minutes, while the times of the other processes stay the same. What is the production rate now, and how long will it take to produce a batch of 10 units if the cell is in a continuous production mode?During the week of May 10, Hyrum Manufacturing produced and shipped 16,000 units of its aluminum wheels: 4,000 units of Model A and 12,000 units of Model B. The cycle time for Model A is 1.09 hours and for Model B is 0.47 hour. The following costs and production hours were incurred: Required: 1. Assume that the value-stream costs and total units shipped apply only to one model (a single-product value stream). Calculate the unit cost, and comment on its accuracy. 2. Assume that Model A is responsible for 40% of the materials cost. Calculate the unit cost for Models A and B, and comment on its accuracy. Explain the rationale for using units shipped instead of units produced in the calculation. 3. Calculate the unit cost for the two models, using DBC. Explain when and why this cost is more accurate than the unit cost calculated in Requirement 2.26BEA 27BEB Quality Cost Report Loring Company had total sales of 2,400,000 for fiscal 20X1. The costs of quality-related activities are given below. Required: 1. Prepare a quality cost report, classifying costs by category and expressing each category as a percentage of sales. What message does the cost report provide? 2. Prepare a bar graph and pie chart that illustrate each categorys contribution to total quality costs. Comment on the significance of the distribution.Cassara, Inc., had the following quality costs for the years ended December 31, 20X1 and 20X2: At the end of 20X1, management decided to increase its investment in control costs by 40% for each categorys items, with the expectation that failure costs would decrease by 25% for each item of the failure categories. Sales were 12,000,000 for both 20X1 and 20X2. Required: 1. Calculate the budgeted costs for 20X2, and prepare an interim quality performance report. 2. Comment on the significance of the report. How much progress has Cassara made?Pintura Company implemented a quality improvement program and tracked the following for the five years: By cost category as a percentage of sales for the same period of time: Required: 1. Prepare a bar graph that reveals the trend in quality cost as a percentage of sales (time on the horizontal axis and percentages on the vertical). Comment on the message of the graph. 2. Prepare a bar graph for each cost category as a percentage of sales. What does this graph tell you?Gumbrecht Company has the following departmental manufacturing layout for one of its plants: A consulting firm has recommended a value stream with the following manufacturing cell: Required: 1. Calculate the total time it takes to produce a batch of 20 units using the traditional departmental manufacturing layout. 2. Using cellular manufacturing, how much time is saved producing the same batch of 20 units? Assuming the cell operates continuously, what is the production rate? Which process controls this production rate? 3. Assume the processing time of Casting is reduced to 9 minutes, while the times of the other processes stay the same. What is the production rate now, and how long will it take to produce a batch of 20 units if the cell is in a continuous production mode?During the week of August 21, Parley Manufacturing produced and shipped 4,000 units of its machine tools: 1,500 units of Tool SK1 and 2,500 units of Tool SK3. The cycle time for SK1 is 0.73 hour, and the cycle time for SK3 is 0.56 hour. The following costs were incurred: Required: 1. Assume that the value-stream costs and total units shipped apply only to one model (a single-product value stream). Calculate the unit cost, and comment on its accuracy. 2. Assume that Tool SK1 is responsible for 60% of the materials cost. Calculate the unit cost for Tool SK 1 and Tool SK3, and comment on its accuracy. Explain the rationale for using units shipped instead of units produced in the calculation. 3. Calculate the unit cost for the two models, using DBC. Explain when and why this cost is more accurate than the unit cost calculated in Requirement 2.33BEB 34E 35E Crazy Fan Guard Company provides security services to popular live sporting event venues. Crazy Fan management has identified one of its top risks as the possibility that restrictions on premium close seating options will severely decrease its sales revenue by lessening the demand for its security services. The table below displays a description of this top risk, an inherent risk assessment, three risk response alternatives, and finally, a residual risk assessment. Crazy Fan Guards management accounting team estimates that the incremental cost of implementing response A is 2,200,000, and the incremental cost of implementing response B is 700,000. Required: 1. Calculate the benefit of each risk response alternative A through C. 2. Calculate the net benefit of each risk alternative A through C. 3. CONCEPTUAL CONNECTION Using net benefit as the criterion, explain the best risk response alternative that Crazy Fan Guard Company management should implement.Jacks Apps Company researches, develops, and sells traditional applications (i.e., apps) for middle-aged mobile phone device users. In an attempt to tap into the large young adult app market to boost sales and advertising revenues. Jacks CFO, Daniel, is considering hiring students from area high schools and universities to drastically increase the innovativeness of the companys apps. Specifically, Daniel hopes that Jacks new student employee pool will make Jack's next wave of phone apps inventions popular with young adults by providing innovative services, such as exchanging payments for late-night food deliveries, arranging informal dating and other social gatherings, exchanging perspectives on different professors, and identifying unusual debit card purchase patterns to assist with early fraud detection notification. Based on cost estimates from Jacks finance team and surveys of its new target customers (i.e., New Customer Financial Survey), Daniel estimates that this new customer market would increase Jacks annual net income by 10,000,000. In addition to the New Customer Financial Survey. Jacks management team conducted a Business Sustainability Analysis. Specifically, the stakeholder engagement portion of the Business Sustainability Analysis revealed that four of Jacks most important stakeholder groups (advertisers, regulators, employees, and customers) would react stronglysome favorably and others unfavorablyto the decision to push its app business in the direction of the young adult market. Specifically, ten percent of its existing advertisers would drop Jacks as a client, thereby reducing its annual advertising revenue of 10,000,000. Also, confidential discussions with competitors suggest that the new fraud detection app would require sensitive customer information that Jacks would be unable to protect perfectly from data hackers, thereby resulting in annual fines of 1,500,000 from regulators. In addition, employee engagement meetings indicated that they would strongly favor the expansion into the young adult market. Daniel estimates that improved employee morale would significantly increase their productivity and creativity, thereby increasing annual sales revenue by 2,000,000. Finally, focus groups with existing customers revealed that they would highly value the increased workforce diversity of Jacks hiring a large number of talented young female employees with an expertise in technology. Daniel estimates that this positive customer sentiment would translate into an additional 3,000,000 in annual traditional apps sales. Required: 1. Using the New Customer Financial Survey and the Business Sustainability Analysis calculate the net change in Jacks Apps Companys net income that would be expected from pursuing the young adult app market. 2. Based on the calculation in Requirement 1, should Jacks Apps pursue the young adult app market? Explain your answer. 3. CONCEPTUAL CONNECTION Describe two additional considerations that Jacks Apps Company management might be wise to consider before making a final decision on whether or not to pursue the young adult apps market.38E 39E Classify the following quality costs as prevention costs, appraisal costs, internal failure costs external failure costs: 1. Scrap (created by defective units) 2. Certifying a vendor to ensure that quality pans are provided 3. Stopping work to control process malfunction 4. Replacing a defective product for a customer 5. Goods returned because they were defective 6. Inspecting a subassembly 7. Inspecting and testing prototypes 8. Reinspecting a reworked product 9. Packaging inspection 10. Lost sales because of recalled products 11. Recall to repair defective products 12. Process acceptance 13. Internal audit to ensure that quality guidelines and processes are being followed 14. Repairing products in the field 15. Providing engineering assistance to selected suppliers to improve their product quality 16. Correcting a design error discovered during product development 17. Settling a bodily injury lawsuit caused by a defective product 18. Customer complaint department 19. Quality control circles 20. Continuing supplier verification 21. Redesigning a product to eliminate a product defect 22. Lost sales because of product quality concerns Bradshaw Company reported sales of 5,000,000 in 20X1. At the end of the fiscal year (June 30, 20X1), the following quality costs were reported: Required: 1. Prepare a quality cost report. 2. Prepare a graph (pie chart or bar graph) that shows the relative distribution of quality costs, and comment on the distribution. 3. Assuming sales of 5,000,000, by how much would profits increase if quality improves so that quality costs are only 3% of sales?The controller of Emery, Inc. has computed quality costs as a percentage of sales for the past 5 years (20X1 was the first year the company implemented a quality improvement program). This information is as follows: Required: 1. Prepare a trend graph for total quality costs. Comment on what the graph has to say about the success of the quality improvement program. 2. Prepare a graph that shows the trend for each quality cost category. What does the graph have to say about the success of the quality improvement program? Does this graph supply more insight than the total cost trend graph does? 3. Prepare a graph that compares the trend in relative control costs versus relative failure costs. Comment on the significance of this trend.Erba Inc. has the following departmental layout for producing an herbal supplement: After a detailed study, the head of the plants industrial engineering department recommended that the following cellular manufacturing layout replace the current departmental structure: Required: 1. Calculate the time required to produce a batch of 12 bottles using a batch processing departmental structure. 2. Calculate the time to process 12 units using cellular manufacturing. 3. How much manufacturing time will the cellular manufacturing structure save for a batch of 12 units? 4. How many units can the cell produce per hour, assuming the cell is producing on a continuous basis? 5. What must happen so that the cell can produce 12 units per hour, assuming the cell produces on a continuous basis?A value stream has three activities and two products. The units produced and shipped per week are 50 of the limited model (Model K), characterized by special additional features, and 150 of the regular model (Model R), with only basic features. The conversion cost resource consumption patterns are shown as follows: Required: 1. Calculate the ABC product cost (conversion cost) for Models K and R. 2. Calculate the value-stream average product cost (conversion cost). Assuming reasonable stability in the consumption patterns of the products and product mix, assess how well the products are grouped, based on similarity. 3. Calculate the cycle time for each product by dividing the total hours used for each product by the units produced of each product. Now calculate the DBC cost for each product. Comment on the significance of DBC for this setting.A Box Scorecard was prepared for a value stream: Required: 1. How many nonfinancial measures are used to evaluate performance? Why are nonfinancial measures used? 2. Classify the operational measures as time-based, quality-based, or efficiency-based. Discuss the significance of each category for lean manufacturing. 3. What is the role of the Planned Future State column? 4. Discuss the capacity category and explain the meaning of each measure and its significance. 5. Discuss the relationship between the financial measures and the measures in the operational and capacity categories.Match each term in Column A with its related definition in Column B. Column A 1. ____________ Maquiladora 2. ____________ Import 3. ____________ Joint venture 4. ____________ Export 5. ____________ MNC Column B a. A company that does business in more than one country in such volume that its well-being and growth rest in more than one country. b. A company purchases materials or parts from another company that is located in a foreign country. c. A company sells its product to purchasers located in foreign countries. d. A type of partnership in which investors from one country co-own the enterprise with investors from another country. e. A manufacturing plant located in Mexico that processes imported materials and reexports them to the United States.Match each term in Column A with its related definition in Column B. Column A 1. ____________ Spot rate 2. ____________ Currency appreciation 3. ____________ Translation risk 4. ____________ Transaction risk 5. ____________ Exchange rate Column B a. The rate at which one currency can be traded for another currency. b. The possibility that future cash transactions will be affected by changing exchange rates. c. A month ago, 1 U.S. was worth 8.5 Mexican pesos. Today, 1 is worth 9.0 Mexican pesos. The U.S. dollar has undergone what? d. The degree to which a firms financial statements are exposed to exchange rate fluctuation. e. The exchange rate of one currency for another for immediate delivery (today).48E Refer to Exercise 13-48. Suppose that Kamber is considering building a new plant inside a foreign trade zone to replace its chemical manufacturing plant. Required: 1. How much duty will be paid per year by the factory located inside the foreign trade zone? 2. How much in duty and duty-related carrying costs will be saved by relocating inside the foreign trade zone? Kamber, Inc., owns a factory located close to, but not inside, a foreign trade zone. The plant imports volatile chemicals that are used in the manufacture of chemical reagents for laboratories. Each year, Kamber imports about 14,200,000 of chemicals subject to a 30% tariff when shipped into the United States. About 15% of the imported chemicals are lost through evaporation during the manufacturing process. In addition, Kamber has a carrying cost of 10% per year associated with the duty payment. On average, the chemicals are held in inventory for 9 months. Required: 1. How much duty is paid annually by Kamber? 2. What is the carrying cost associated with the payment of duty?50E 51P 52P Dorsey Scott MU Company manufactures and bottles a collection of health-oriented fruity beverages. Dorseys CFO. Rozella, recently signed a series of new contracts with several dozen large universities to serve as the sole external beverage supplier on these campuses. Although the company has never internally conducted or externally disclosed any sustainability activities. Dorseys CEO. Les, has a strong hunch that the company would be wise to look into the idea of sustainability, given its recent significant growth in the university market. Therefore, Les and Rozella assigned Dorseys team of five interns to spend their summer internships creating Dorsey s first corporate sustainability report. Required: 1. CONCEPTUAL CONNECTION Briefly explain the most likely reason(s) that Les believes Dorsey would be wise to begin looking into sustainability at this time. 2. CONCEPTUAL CONNECTION List and describe three challenges that the internship team might face in creating Dorsey s first corporate sustainability report. 3. CONCEPTUAL CONNECTION List and describe three benefits that Dorsey or its key stakeholders might enjoy as a result of Dorsey creating and issuing its first corporate sustainability report.Danna Wise, president of Tidwell Company, recently returned from a conference on quality and productivity. At the conference, she was told that many American firms have quality costs totaling 20 to 30% of sales. The quality experts at the conference convinced her that a company could increase its profitability by improving quality. However, she was of the opinion that the quality of Tidwell Company was much less than 20%probably more in the 4 to 6% range. However, because the potential for increasing profits was so great if she was wrong, she decided to request a preliminary estimate of the total quality costs currently being incurred. She asked her controller for a summary of quality costs, with the costs classified into four categories: prevention, appraisal, internal failure, or external failure. She also wanted the costs expressed as a percentage of both sales and profits. The controller had his staff assemble the following information from the past year, 20X1: a. Sales revenue, 37,240,000; net income, 4,000,000. b. During the year, customers returned 40,000 units needing repair. Repair cost averages 9 per unit. c. Twelve inspectors are employed, each earning an annual salary of 80,000. The inspectors are involved only with final inspection (product acceptance). d. Total scrap is 200,000 units. Of this total, ninety percent is quality related. The cost of scrap is about 10 per unit. e. Each year, approximately 800,000 units are rejected in final inspection. Of these units, seventy-five percent can be recovered through rework. The cost of rework is 1.80 per I unit. f. A customer cancelled an order that would have increased profits by 600,000. The customers reason for cancellation was poor product performance. g. The company employs 10 full-time employees in its complaint department. Each earns 48,600 a year. h. The company gave sales allowances totaling 180,000 due to substandard products being sent to the customer. i. The company requires all new employees to take its 4-hour quality training program. The estimated annual cost of the program is 120,000. Required: 1. Prepare a simple quality cost report classifying costs by category. 2. Compute the quality cost-sales ratio. Also, compare the total quality costs with total profits. Should Danna be concerned with the level of quality costs? 3. Prepare a pie chart for the quality costs. Discuss the distribution of quality costs among the four categories. Are they properly distributed? Explain. 4. Discuss how the company can improve its overall quality and at the same time reduce total quality costs. 5. By how much will profits increase if quality costs are reduced to 3% of sales?55P In 20X1, Don Blackburn, president of Price Electronics, received a report indicating that quality costs were 31% of sales. Faced with increasing pressures from imported goods. Don resolved to take measures to improve the overall quality of the companys products. After hiring a consultant in 20X1, the company began an aggressive program of total quality control. At the end of 20X5, Don requested an analysis of the progress the company had made in reducing and controlling quality costs. The accounting department assembled the following data: Required: 1. Compute the quality costs as a percentage of sales by category and in total for each year. 2. Prepare a multiple-year trend graph for quality costs, both by total costs and by category. Using the graph, assess the progress made in reducing and controlling quality costs. Does the graph provide evidence that quality has improved? Explain. 3. Using the 20X1 quality cost relationships (assume all costs are variable), calculate the quality costs that would have prevailed in 20X4. By how much did profits increase in 20X4 because of the quality improvement program? Repeat for 20X5.Brasher Company is transitioning to a lean manufacturing system and has just finalized two order fulfillment value streams. One of the value streams has two products, and the other has four products. The two-product value stream produces precision machine parts and the four-product value stream produces machine tools. Before moving to the value-stream structure. Brasher had a well-developed ABC system (one that used all duration drivers) and had experienced good success with the more accurate product costs. Management wanted to be sure that the average costing approach of value-stream costing did not produce distorted product costs. Accordingly, expected weekly activity data were provided for the two-product value streams to see how well average costing worked (see below); however, management did not want to continue using ABC because of its intense data demands and the cost of updating as changes unfolded due to lean practices. In the table below, the driver for each activity is a duration driver. Order processing, for example, uses hours available for processing orders; purchasing uses hours available for processing purchases, etc. During the week, the machine parts value stream expects to produce and ship 10,000 units of M15 and 30,000 units of M78. Since materials cost is calculated separately, the main concern is with the unit conversion cost. Required: 1. Calculate the average unit conversion cost for the two machine parts. 2. Calculate the conversion cost per unit for each part, using ABC. Comparing ABC unit cost with the average cost, what would you recommend? 3. Calculate the conversion cost per unit, using DBC (first calculating the cycle time for each product). Based on this outcome, what would you recommend to the management of Brasher Company?Merkley Company, a manufacturer of machine parts, implemented lean manufacturing at the end of 20X1. Three value streams were established: one for new product development and two order fulfillment value streams. One of the value streams set a goal to increase its ROS to 45% of sales by the end of the year. During the year, the value stream made significant improvements in several areas. The Box Scorecard below was prepared, with performance measures for the beginning of the year, midyear, and end of year. Although the members of the value stream were pleased with their progress, they were disappointed in the financial results. They were still far from the targeted ROS of 45%. They were also puzzled as to why the improvements made did not translate into significantly improved financial performance. Required: 1. From the scorecard, what was the focus of the value-stream team for the first 6 months? The second 6 months? What are the implications of these changes? 2. Using information from the scorecard, offer an explanation for why the financial results were not as good as expected.Paladin Company manufactures plain paper fax machines in a small factory in Minnesota Sales have increased by 50% in each of the past 3 years, as Paladin has expanded its market from the United States to Canada and Mexico. As a result, the Minnesota factory is at capacity. Beryl Adams, president of Paladin, has examined the situation and developed the following alternatives: 1. Add a permanent second shift at the plant. However, the semiskilled workers who assemble the fax machines are in short supply, and the wage rate of 15 per hour would probably have to be increased across the board to 18 per hour in order to attract sufficient workers from out of town. The total wage increase (including fringe benefits) would amount to 125,000. The heavier use of plant facilities would lead to increased plant maintenance and small tool cost. 2. Open a new plant and locate it in Mexico. Wages (including fringe benefits) would average 3.50 per hour. Investment in plant and equipment would amount to 300,000. 3. Open a new plant and locate it in a foreign trade zone, possibly in Dallas. Wages would be somewhat lower than in Minnesota, but higher than in Mexico. The advantages of postponing tariff payments on imported parts could amount to 50,000 per year. Required: Advise Beryl of the advantages and disadvantages of each of her alternatives.Custom Shutters. Inc., manufactures plantation shutters according to customer order. The company has a reputation for producing excellent quality shutters that fit virtually any size or shape of window. Sales are made in all 50 states. On July 1. Custom Shutters received orders from contractors in Switzerland and Japan. Lee Mills, president and co-owner of Custom Shutters, was delighted. The Swiss order is for shutters priced at 64,000. The order is due in Geneva on September 1, with payment due in full on October 1. The Japanese order is for shutters priced at 124,000. It is due in Tokyo on August 1, with payment due in full on October 1. Both orders are to be paid in the customer s currency. The Swiss customer has a reputation in the industry for late payment, and it could take as long as 6 months. Lee has never received payment in foreign currency before. He had his accountant prepare the following table of exchange rates. Required: 1. If the price of the shutters is set using the spot rate as of July 1, how many francs does Lee expect to receive on October 1? How many yen does he expect on October 1? 2. Using the number of francs and yen calculated in Requirement 1, how many dollars does Lee expect to receive on October 1? Will he receive that much? What is the value of hedging in this situation?61P Corporate sustainability reports vary greatly across companies and industries. Select two companies that interest you and conduct an online search to find their corporate sustainability report. (If one or both of the companies you selected do not issue a corporate sustainability report, then select a different company that does issue such a report.) You can either scroll through the corporate sustainability reports for the two companies you selected or you can download them onto your computer and scroll through the downloaded reports. Required: 1. Identify and briefly explain three similarities between the two corporate sustainability reports. 2. Identify and briefly explain three differences between the two corporate sustainability reports. 3. CONCEPTUAL CONNECTION What do you believe is the greatest strength of each corporate sustainability report? 4. CONCEPTUAL CONNECTION What do you believe is the greatest weakness of each corporate sustainability report? 5. CONCEPTUAL CONNECTION Assume that you are able to provide the executive team at each company with one suggestion for improving its next corporate sustainability report. Briefly explain your suggestion for each companys executive team.Luna Company is a printing company and a subsidiary of a large publishing company. Luna is in its fourth year of a 5-year, quality improvement program. The program began in 20X1 as a result of a report by a consulting firm that revealed that quality costs were about 20% of sales. Concerned about the level of quality costs, Lunas top management began a 5-year plan in 20X1 with the objective of lowering quality costs to 10% of sales by the end of 20X5. Sales and quality costs for each year are as follows: Quality costs by category are expressed as a percentage of sales as follows: The detail of the 20X5 budget for quality costs is also provided. Actual quality costs for 20X4 and 20X5 are as follows: Required: 1. Prepare an interim quality cost performance report for 20X5 that compares actual quality costs with budgeted quality costs. Comment on the firms ability to achieve its quality goals for the year. 2. Prepare a single-period quality performance report for 20X5 that compares the actual quality costs of 20X4 with the actual costs of 20X5. How much did profits change because of improved quality? 3. Prepare a graph that shows the trend in total quality costs as a percentage of sales since the inception of the quality improvement program. 4. Prepare a graph that shows the trend for all four quality cost categories for 20X1 through 20X5. How does this graph help management know that the reduction in total quality costs is attributable to quality improvements? 5. Assume that the company is preparing a second 5-year plan to reduce quality costs to 2.5% of sales. Prepare a long-range quality cost performance report that compares the costs for 20X5 with those planned for the end of the second 5-year period. Assume sales of 45 million at the end of 5 years. The final planned relative distribution of quality costs is as follows: proofreading, 50%; other inspection, 13%; quality training, 30%; and quality reporting, 7%. Assume that all prevention costs are fixed and all other costs are variable (with respect to sales).Lindell Manufacturing embarked on an ambitious quality program that is centered on continual improvement. This improvement is operationalized by declining quality costs from year to year. Lindell rewards plant managers, production supervisors, and workers with bonuses ranging from 1,000 to 10,000 if their factory meets its annual quality cost goals. Len Smith, manager of Lindells Boise plant, felt obligated to do everything he could to provide this increase to his employees. Accordingly, he has decided to take the following actions during the last quarter of the year to meet the plants budgeted quality cost targets: a. Decrease inspections of the process and final product by 50% and transfer inspectors temporarily to quality training programs. Len believes this move will increase the inspectors awareness of the importance of quality; also, decreasing inspection will produce significantly less downtime and less rework. By increasing the output and decreasing the costs of internal failure, the plant can meet the budgeted reductions for internal failure costs. Also, by showing an increase in the costs of quality training, the budgeted level for prevention costs can be met. b. Delay replacing and repairing defective products until the beginning of the following year. While this may increase customer dissatisfaction somewhat, Len believes that most customers expect some inconvenience. Besides, the policy of promptly dealing with customers who are dissatisfied could be reinstated in 3 months. In the meantime, the action would significantly reduce the costs of external failure, allowing the plant to meet its budgeted target. c. Cancel scheduled worker visits to customers plants. This program, which has been very well received by customers, enables Lindell workers to see just how the machinery they make is used by the customer and also gives them first-hand information on any remaining problems with the machinery. Workers who went on previous customer site visits came back enthusiastic and committed to Lindells quality program. Lindells quality program staff believes that these visits will reduce defects during the following year. Required: 1. Evaluate Lens ethical behavior. In this evaluation, consider his concern for his employees. Was he justified in taking the actions described? If not, what should he have done? 2. Assume that the company views Lens behavior as undesirable. What can the company do to discourage it? 3. Assume that Len is a CMA and a member of the IMA. Refer to the ethical code for management accountants in Chapter 1. Were any of these ethical standards violated?Paterson Company, a U.S.-based company, manufactures and sells electronic components worldwide. Virtually all its manufacturing takes place in the United States. The company has marketing divisions throughout Europe, including France. Debbie Kishimoto, manager of this division, was hired from a competitor 3 years ago. Debbie, recently informed of a price increase in one of the major product lines, requested a meeting with Jeff Phillips, marketing vice president. Their conversation follows. Debbie: Jeff, I simply dont understand why the price of our main product has increased from 5.00 to 5.50 per unit. We negotiated an agreement earlier in the year with our manufacturing division in Philadelphia for a price of 5.00 for the entire year. I called the manager of that division. He said that the original price was still acceptablethat the increase was a directive from headquarters. Thats why I wanted to meet with you. I need some explanations. When I was hired, I was told that pricing decisions were made by the divisions. This directive interferes with this decentralized philosophy and will lower my divisions profits. Given current market conditions, there is no way we can pass on the cost increase. Profits for my division will drop at least 600,000 if this price is maintained. I think a midyear increase of this magnitude is unfair to my division. Jeff: Under normal operating conditions, headquarters would not interfere with divisional decisions. But as a company, we are having some problems. What you just told me is exactly why the price of your product has been increased. We want the profits of all our European marketing divisions to drop. Debbie: What do you mean that you want the profits to drop? That doesnt make any sense. Arent we in business to make money? Jeff: Debbie, what you lack is corporate perspective. We are in business to make money, and thats why we want European profits to decrease. Our U.S. divisions are not doing well this year. Projections show significant losses. At the same time, projections for European operations show good profitability. By increasing the cost of key products transferred to Europeto your division, for examplewe increase revenues and profits in the United States. By decreasing your profits, we avoid paying taxes in France. With losses on other U.S. operations to offset the corresponding increase in domestic profits, we avoid paying taxes in the United States as well. The net effect is a much-needed increase in our cash flow. Besides, you know how hard it is in some of these European countries to transfer out capital. This is a clean way of doing it. Debbie: Im not so sure that its clean. I cant imagine the tax laws permitting this type of scheme. There is another problem, too. You know that the companys bonus plans are tied to a divisions profits. This plan could cost all of the European managers a lot of money. Jeff: Debbie, you have no reason to worry about the effect on your bonusor on our evaluation of your performance. Corporate management has already taken steps to ensure no loss of compensation. The plan is to compute what income would have been if the old price had prevailed and base bonuses on that figure. Ill meet with the other divisional managers and explain the situation to them as well. Debbie: The bonus adjustment seems fair, although I wonder if the reasons for the drop in profits will be remembered in a couple of years when Im being considered for promotion. Anyway, I still have some strong ethical concerns about this. How does this scheme relate to the tax laws? Jeff: We will be in technical compliance with the tax laws. In the United States, Section 482 of the Internal Revenue Code governs this type of transaction. The key to this law, as well as most European laws, is evidence of an arms-length price. Since youre a distributor, we can use the resale price method to determine such a price. Essentially, the arms-length price for the transferred good is backed into by starting with the price at which you sell the product and then adjusting that price for the markup and other legitimate differences, such as tariffs and transportation. Debbie: If I were a French tax auditor, I would wonder why the markup dropped from last year to this year. Are we being good citizens and meeting the fiscal responsibilities imposed on us by each country in which we operate? Jeff: Well, a French tax auditor might wonder about the drop in markup. But, the markup is still within reason, and we can make a good argument for increased costs. In fact, weve already instructed the managers of our manufacturing divisions to legitimately reassign as many costs as they can to the European product lines. So far, they have been very successful. I think our records will support the increase that you are receiving. You really do not need to be concerned with the tax authorities. Our tax department assures me that this has been carefully researchedits unlikely that a tax audit will create any difficulties. Itll all be legal and above board. Weve done this several times in the past with total success. Required: 1. Do you think that the tax-minimization scheme described to Debbie Kishimoto is in harmony with the ethical behavior that should be displayed by top corporate executives? Why or why not? What would you do if you were Debbie? 2. Apparently, the tax department of Paterson Company has been strongly involved in developing the tax-minimization scheme. Assume that the accountants responsible for the decision are CMAs and members of the IMA, subject to the IMA standards of ethical conduct. Review the IMA standards for ethical conduct in Chapter 1. Are any of these standards being violated by the accountants in Patersons tax department? If so, identify them. What should these tax accountants do if requested to develop a questionable taxminimization scheme?1DQ 2DQ Of the three categories on the statement of cash flows, which do you think provides the most useful information? Explain.4DQ Why is it better to report the noncash investing and financing activities in a supplemental schedule rather than to include these activities on the body of the statement of cash flows?6DQ 7DQ Explain how a company can report a loss and still have a positive net operating cash flow.In computing the periods net operating cash flows, why are increases in current liabilities and decreases in current assets added back to net income?10DQ In computing the periods net operating cash flows, why are noncash expenses added back to net income?Explain the reasoning for including the payment of dividends in the financing section of the statement of cash flows.What are the advantages in using worksheets when preparing a statement of cash flows?14DQ Cash inflows from operating activities come from a. payment for raw materials. b. gains on the sale of operating equipment. c. collection of sales revenues. d. issuing capital stock. e. issuing bonds.2MCQ 3MCQ Sources of cash include a. profitable operations. b. the issuance of long-term debt. c. the sale of long-term assets. d. the issuance of capital stock. e. All of these.Uses of cash include a. cash dividends. b. the sale of old equipment. c. the purchase of long-term assets. d. only a and b e. only a and c.6MCQ 7MCQ Which of the following adjustments to net income is needed to obtain cash flows? a. Eliminate gains on sale of equipment. b. Deduct from net income all noncash expenses (e.g., depreciation and amortization). c. Deduct from net income any increases in current liabilities. d. Add to net income any increases in inventories. e. All of these.An increase in accounts receivable is deducted from net income to obtain operating cash flows because a. cash collections increased due to increasing sales. b. cash collections from customers were less than the revenues reported. c. cash collections decreased due to declining sales. d. cash collections from customers were greater than the revenues reported. e. None of these.An increase in inventories is deducted from net income to arrive at operating cash flow because a. cash payments to customers were larger than the purchases made during the period. b. purchases are larger than the cost of goods sold by the amount that inventories increased. c. cash payments to customers were less than the purchases made during the period. d. purchases are less than the cost of goods sold by the amount that inventories increased. e. All of these.The gain on sale of equipment is deducted from net income to arrive at operating cash flows because a. the sale of long-term assets is an operating activity. b. the gain reveals the total cash received. c. all of the cash received from the sale is reported in the operating section. d. All of these. e. None of these.Which of the following is an investing activity? a. Issuance of a mortgage b. Increase in accounts receivable c. Purchase of land d. Increase in inventories e. All of these.Which of the following is a financing activity? a. Increase in inventories b. Purchase of land c. Increase in accounts receivable d. Issuance of a mortgage e. All of these.14MCQ A worksheet approach to preparing the statement of cash flows a. is a useful aid. b. uses a spreadsheet format. c. offers an efficient and logical way of organizing the data. d. allows an easy extraction of the needed data. e. All of these.In a completed worksheet, a. the debit column contains the cash inflows. b. the debit column contains the cash outflows. c. the credit column contains the cash inflows. d. the credit column contains only operating cash flows. e. None of these.17BEA 18BEA 19BEA 20BEA Swasey Company earned net income of 1,800,000 in 20X2. Swasey provided the following information: Required: Compute the financing cash flows for the current year.22BEA 23BEA During 20X2, Norton Company had the following transactions: a. Cash dividends of 20,000 were paid. b. Equipment was sold for 9,600. It had an original cost of 36,000 and a book value of 18,000. The loss is included in operating expenses. c. Land with a fair market value of 50,000 was acquired by issuing common stock with a par value of 12,000. d. One thousand shares of preferred stock (no par) were sold for 14 per share. Norton provided the following income statement (for 20X2) and comparative balance sheets: Required: Prepare a worksheet for Norton Company.25BEB 26BEB Roberts Company provided the following partial comparative balance sheets and the income statement for 20X2. Required: Compute operating cash flows using the indirect method.28BEB 29BEB 30BEB 31BEB During 20X2, Evans Company had the following transactions: a. Cash dividends of 6,000 were paid. b. Equipment was sold for 2,880. It had an original cost of 10,800 and a book value of 5,400. The loss is included in operating expenses. c. Land with a fair market value of 15,000 was acquired by issuing common stock with a par value of 3,600. d. One thousand shares of preferred stock (no par) were sold for 4.20 per share. Evans provided the following income statement (for 20X2) and comparative balance sheets: Required: Prepare a worksheet for Evans Company.Stillwater Designs is a private company and outsources production of its Kicker speaker lines. Suppose that Stillwater Designs provided you the following transactions: a. Sold a warehouse for 750,000. b. Reported a profit of 100,000. c. Retired long-term bonds. d. Paid cash dividends of 350,000. e. Obtained a mortgage for a new building from a local bank. f. Purchased a new robotic system. g. Issued a long-term note payable. h. Purchased a 40% interest in a company. i. Reported a loss for the year. j. Negotiated a long-term loan. Required: Classify each of these transactions as an operating activity, an investing activity, or a financing activity. Also, indicate whether the activity is a source of cash or a use of cash.34E Jarem Company showed 189,000 in prepaid rent on December 31, 20X1. On December 31, 20X2, the balance in the prepaid rent account was 226,800. Rent expense for 20X2 was 472,500. Required: 1. What amount of cash was paid for rent in 20X2? 2. CONCEPTUAL CONNECTION What adjustment in prepaid expenses is needed if the indirect method is used to prepare Jarems statement of cash flows?During the year, Hepworth Company earned a net income of 61,725. Beginning and ending balances for the year for selected accounts are as follows: There were no financing or investing activities for the year. The above balances reflect all of the adjustments needed to adjust net income to operating cash flows. Required: 1. Prepare a schedule of operating cash flows using the indirect method. 2. Suppose that all the data are used in Requirement 1 except that the ending accounts payable and cash balances are not known. Assume also that you know that the operating cash flow for the year was 20,475. What is the ending balance of accounts payable? 3. CONCEPTUAL CONNECTION Hepworth has an opportunity to buy some equipment that will significantly increase productivity. The equipment costs 25,000. Assuming exactly the same data used for Requirement 1, can Hepworth buy the equipment using this years operating cash flows? If not, what would you suggest be done?During 20X1, Craig Company had the following transactions: a. Purchased 300,000 of 10-year bonds issued by Makenzie Inc. b. Acquired land valued at 105,000 in exchange for machinery. c. Sold equipment with original cost of 810,000 for 495,000; accumulated depreciation taken on the equipment to the point of sale was 270,000. d. Purchased new machinery for 180,000. e. Purchased common stock in Lemmons Company for 82,500. Required: 1. Prepare the net cash from investing activities section of the statement of cash flows. 2. CONCEPTUAL CONNECTION Usually, the net cash from investing activities is negative. How can Craig cover this negative cash flow? What other information would you like to have to make this decision?Tidwell Company experienced the following during 20X1: a. Sold preferred stock for 480,000. b. Declared dividends of 150,000 payable on March 1, 20X2. c. Borrowed 575,000 from a bank on a 2-year note. d. Purchased 80,000 of its own common stock to hold as treasury stock. e. Repaid 5-year bonds issued for 400,000 that mature and are due in December. Required: Prepare the net cash from financing activities section of the statement of cash flows.39E Oliver Company provided the following information for the years 20X1 and 20X2: Refer to the information for Oliver Company above and on the previous page.41E 42E 43E Solpoder Corporation has the following comparative financial statements: Dividends of 17,100 were paid. No equipment was purchased or retired during the current year. Required: Prepare a statement of cash flows using the indirect method.Solpoder Corporation has the following comparative financial statements: Dividends of 17,100 were paid. No equipment was purchased or retired during the current year. Required: Prepare a statement of cash flows using the direct method.The following financial statements were provided by Roberts Company: At the end of 20X2, Roberts purchased some additional equipment for 20,000. Required: Prepare a statement of cash flows using the indirect method.47P 48P Booth Manufacturing has provided the following financial statements. Other information includes: (a) equipment with a book value of 125,000 was sold for 175,000 (original cost was 225,000) and (b) dividends of 225,000 were declared and paid. Required: Calculate operating cash flows using the direct method.The following balance sheets and income statement were taken from the records of Rosie-Lee Company: Additional transactions were as follows: a. Sold equipment costing 21,600, with accumulated depreciation of 16,200, for 3,600. b. Issued bonds for 90,000 on December 31. c. Paid cash dividends of 36,000. d. Retired mortgage of 108,000 on December 31. Required: 1. Prepare a schedule of operating cash flows using (a) the indirect method and (b) the direct method. 2. Prepare a statement of cash flows using the indirect method.The following balance sheets and income statement were taken from the records of Rosie-Lee Company: Additional transactions were as follows: a. Sold equipment costing 21,600, with accumulated depreciation of 16,200, for 3,600. b. Issued bonds for 90,000 on December 31. c. Paid cash dividends of 36,000. d. Retired mortgage of 108,000 on December 31. Required: Prepare a statement of cash flows using a worksheet similar to the one shown in Example 14.8 (p. 804). Use the indirect method to prepare the statement.Balance sheets for Brierwold Corporation follow: Additional transactions were as follows: a. Purchased equipment costing 50,000. b. Sold equipment costing 60,000, with a book value of 25,000, for 40,000. c. Retired preferred stock at a cost of 110,000. (The premium is debited to Retained Earnings.) d. Issued 10,000 shares of common stock (par value, 4) for 10 per share. e. Reported a loss of 15,000 for the year. f. Purchased land for 50,000. Required: Prepare a statement of cash flows using the indirect method.Balance sheets for Brierwold Corporation follow: Additional transactions were as follows: a. Purchased equipment costing 50,000. b. Sold equipment costing 60,000, with a book value of 25,000, for 40,000. c. Retired preferred stock at a cost of 110,000. (The premium is debited to Retained Earnings.) d. Issued 10,000 shares of common stock (par value, 4) for 10 per share. e. Reported a loss of 15,000 for the year. f. Purchased land for 50,000. Required: Prepare a statement of cash flows using the worksheet approach. Use the indirect method to prepare the statement.54P 55P The following balance sheets were taken from the records of Blalock Company: Additional transactions were as follows: a. Sold equipment costing 12,000, with accumulated depreciation of 9,000, for 2,000. b. Retired bonds at a price of 60,000 on December 31. c. Earned net income for the year of 68,000; paid cash dividends of 20,000. Required: Prepare a statement of cash flows using the indirect method.The following balance sheets were taken from the records of Blalock Company: Additional transactions were as follows: a. Sold equipment costing 12,000, with accumulated depreciation of 9,000, for 2,000. b. Retired bonds at a price of 60,000 on December 31. c. Earned net income for the year of 68,000; paid cash dividends of 20,000. Required: Prepare a statement of cash flows using the worksheet approach. Use the indirect method to prepare the statement.The comparative balance sheets and income statement of Piura Manufacturing follow. Additional transactions for 20X2 were as follows: a. Cash dividends of 8,000 were paid. b. Equipment was acquired by issuing common stock with a par value of 6,000. The fair market value of the equipment is 32,000. c. Equipment with a book value of 12,000 was sold for 6,000. The original cost of the equipment was 24,000. The loss is included in operating expenses. d. Two thousand shares of preferred stock were sold for 4 per share. Required: 1. Prepare a schedule of operating cash flows using (a) the indirect method and (b) the direct method. 2. Prepare a statement of cash flows using the indirect method. 3. Prepare a statement of cash flows using a worksheet similar to the one shown in Example 14.8 (p. 804). 4. Form a group with two to four other students, and discuss the merits of the direct and indirect methods. Which do you think investors might prefer? Should the FASB require all companies to use the direct method?Name the two major types of financial statement analysis discussed in this chapter.2DQ Explain how creditors, investors, and managers can use common-size analysis as an aid in decision making.What are liquidity ratios? Leverage ratios? Profitability ratios.5DQ 6DQ 7DQ A high inventory turnover ratio provides evidence that a company is having problems with stockouts and disgruntled customers. Do you agree? Explain.A loan agreement between a bank and a customer specified that the debt ratio could not exceed 60%. Explain the purpose of this restrictive agreement.10DQ Explain why an investor would be interested in a companys debt ratio.12DQ 13DQ When a company participates in a stock buyback program, it means that the company is buying shares of its own stock and taking them off the market. With this simple definition in mind, how would a companys stock buyback program affect its Earnings per Share?Explain the significance of the inventory turnover ratio in a JIT manufacturing environment.In a JIT manufacturing environment, the current ratio and the quick ratio are virtually the same. Do you agree? Why?1MCQ 2MCQ Fractions or percentages computed by dividing one account or line-item amount by another are called a. returns. b. industry averages. c. common-size statements. d. dividend yields. e. ratios.4MCQ Pedee Companys inventory turnover in days is 80 days. Which of the following actions could help to improve that ratio? a. Increase the sales price. b. Increase manufacturing costs. c. Reduce the cost of goods sold. d. Reduce average inventory. e. All of these.6MCQ 7MCQ 8MCQ A small pizza restaurant, founded and owned by the Martinelli sisters, would be expected to have which of the following? a. Low inventory turnover and high gross margin b. Low accounts receivable turnover and low gross margin c. High price-earnings ratio d. High inventory turnover and low gross margin e. All of these.10MCQ 11BEA Scherer Company provided the following income statements for its first 3 years of operation: Refer to the information for Scherer Company on the previous page. Required: Prepare common-size income statements by using net sales as the base. (Note: Round answers to the nearest whole percentage.)Chen Company has current assets equal to 5,000,000. Of these, 1,000,000 is cash, 2,250,000 is accounts receivable, 500,000 is inventory, and the remainder is marketable securities. Current liabilities total 4,000,000. Required: Note: Round answers to two decimal places. 1. Calculate the current ratio. 2. Calculate the quick ratio (acid-test ratio).Last year, Nikkola Company had net sales of 2.299.500,000 and cost of goods sold of 1,755,000,000. Nikkola had the following balances: Refer to the information for Nikkola Company above. Required: Note: Round answers to one decimal place. 1. Calculate the average accounts receivable. 2. Calculate the accounts receivable turnover ratio. 3. Calculate the accounts receivable turnover in days.Last year, Nikkola Company had net sales of 2,299,500,000 and cost of goods sold of 1,755,000,000. Nikkola had the following balances: Refer to the information for Nikkola Company above. Required: Note: Round answers to one decimal place. 1. Calculate the average inventory. 2. Calculate the inventory turnover ratio. 3. Calculate the inventory turnover in days. 4. CONCEPTUAL CONNECTION Based on these ratios, does Nikkola appear to be performing well or poorly?Paxton Company provided the following income statement for last year: Required: Calculate the times-interest-earned ratio. (Note: Round the answer to one decimal place.)Ernst Companys balance sheet shows total liabilities of 32,500,000, total stockholders equity of 8,125,000, and total assets of 40,625,000. Required: Note: Round answers to two decimal places. 1. Calculate the debt ratio. 2. Calculate the debt-to-equity ratio.18BEA 19BEA The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows: Includes both state and federal taxes. Brief Exercise 15-20 Calculating the Average Common Stockholders Equity and the Return on Stockholders Equity Refer to the information for Somerville Company on the previous pages. Required: Note: Round answers to four decimal places. 1. Calculate the average common stockholders equity. 2. Calculate the return on stockholders equity.The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows: Includes both state and federal taxes. Refer to the information for Somerville Company on the previous pages. Required: Note: Round answers to two decimal places. 1. Compute the number of common shares. 2. Compute earnings per share.The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows: Includes both state and federal taxes. Refer to the information for Somerville Company on the previous pages. Also, assume that the price per common share for Somerville is 8.10. Required: Compute the price-earnings ratio. (Note: Round the answer to two decimal places.)The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows: Includes both state and federal taxes. Refer to the information for Somerville Company on the previous pages. Also, assume that the market price per common share is 8.10. Required: Note: Round answers to four decimal places. 1. Compute the dividends per share. 2. Compute the dividend yield. 3. Compute the dividend payout ratio.Jasmine Company provided the following income statements for its first 3 years of operation: Refer to the information for Jasmine Company above. Required: Prepare common-size income statements by using Year 1 as the base period. (Note: Round answers to the nearest whole percentage.)Jasmine Company provided the following income statements for its first 3 years of operation: Refer to the information for Jasmine Company above. Required: Prepare common-size income statements by using net sales as the base. (Note: Round answers to the nearest whole percentage.)LoLo Lemon Company has current assets equal to 500,000. Of these, 300,000 is cash, 75,000 is accounts receivable, 125,000 is inventory, and the remainder is marketable securities. Current liabilities total 425,000. Required: Note: Round answers to two decimal places. 1. Calculate the current ratio. 2. Calculate the quick ratio (acid-test ratio).Last year, Tobys Hats had net sales of 45,000,000 and cost of goods sold of 29,000,000. Tobys had the following balances: Refer to the information for Tobys on the previous page. Required: Note: Round answers to one decimal place. 1. Calculate the average accounts receivable. 2. Calculate the accounts receivable turnover ratio. 3. Calculate the accounts receivable turnover in days.Last year, Tobys Hats had net sales of 45,000,000 and cost of goods sold of 29,000,000. Tobys had the following balances: Refer to the information for Tobys on the previous page. Required: Note: Round answers to one decimal place. 1. Calculate the average inventory. 2. Calculate the inventory turnover ratio. 3. Calculate the inventory turnover in days. 4. CONCEPTUAL CONNECTION Based on these ratios, does Tobys appear to be performing well or poorly?Alessandra Makeup Manufactures provided the following income statement for last year: Required: Calculate the times-interest-earned ratio. (Note: Round the answer to one decimal place.)Klynveld Companys balance sheet shows total liabilities of 94,000,000, total stockholders equity of 75,000,000, and total assets of 169,000,000. Required: Note: Round answers to two decimal places. 1. Calculate the debt ratio. 2. Calculate the debt-to-equity ratio.31BEB 32BEB The income statement, statement of retained earnings, and balance sheet for Santiago Systems are as follows: Includes both state and federal taxes. Refer to the information for Santiago Systems above. Required: Note: Round answers to four decimal places. 1. Calculate the average common stockholders equity. 2. Calculate the return on stockholders equity.The income statement, statement of retained earnings, and balance sheet for Santiago Systems are as follows: Includes both state and federal taxes. Refer to the information for Santiago Systems above. Note: Round answers to two decimal places. 1. Compute the number of common shares. 2. Compute earnings per share.The income statement, statement of retained earnings, and balance sheet for Santiago Systems are as follows: Includes both state and federal taxes. Refer to the information for Santiago Systems above. Required: Compute the price-earnings ratio. (Note: Round the answer to two decimal places.)The income statement, statement of retained earnings, and balance sheet for Santiago Systems are as follows: Includes both state and federal taxes. Refer to the information for Santiago Systems on the previous pages. Also, assume that the market price per common share is 20. Required: Note: Round answers to four decimal places. 1. Compute the dividends per share. 2. Compute the dividend yield. 3. Compute the dividend payout ratio.Sundahl Companys income statements for the past 2 years are as follows: Refer to the information for Sundahl Company above. Required: Prepare a common-size income statement for Year 2 by expressing each line item for Year 2 as a percentage of that same line item from Year 1. (Note: Round percentages to the nearest tenth of a percent.)Sundahl Companys income statements for the past 2 years are as follows: Refer to the information for Sundahl Company above. Required: 1. Prepare a common-size income statement for Year 1 by expressing each line item as a percentage of sales revenue. (Note: Round percentages to the nearest tenth of a percent.) 2. Prepare a common-size income statement for Year 2 by expressing each line item as a percentage of sales revenue. (Note: Round percentages to the nearest tenth of a percent.)Cuneo Companys income statements for the last 3 years are as follows: Refer to the information for Cuneo Company above. Required: 1. Prepare a common-size income statement for Year 2 by expressing each line item for Year 2 as a percentage of that same line item from Year 1. (Note: Round percentages to the nearest tenth of a percent.) 2. Prepare a common-size income statement for Year 3 by expressing each line item for Year 3 as a percentage of that same line item from Year 1. (Note: Round percentages to the nearest tenth of a percent.)Cuneo Companys income statements for the last 3 years are as follows: Refer to the information for Cuneo Company above. Required: 1. Prepare a common-size income statement for Year 1 by expressing each line item as a percentage of sales revenue. (Note: Round percentages to the nearest tenth of a percent.) 2. Prepare a common-size income statement for Year 2 by expressing each line item as a percentage of sales revenue. (Note: Round percentages to the nearest tenth of a percent.) 3. Prepare a common-size income statement for Year 3 by expressing each line item as a percentage of sales revenue. (Note: Round percentages to the nearest tenth of a percent.)41E Upton Company has current assets equal to 3,600,000. Of these, 1,100,000 is cash, 1,300,000 is accounts receivable, and the remainder is inventories. Current liabilities total 3,000,000. Required: Note: Round answers to two decimal places. 1. Compute the current ratio. 2. Compute the quick (acid-test) ratio.Montalcino Company had net sales of 54,000,000. Montalcino had the following balances: Required: Note: Round answers to one decimal place. 1. Calculate the average accounts receivable. 2. Calculate the accounts receivable turnover ratio. 3. Calculate the accounts receivable turnover in days.Whalen Company had net sales of 125,500,250,000. Whalen had the following balances: Required: Note: Round answers to two decimal places. 1. Calculate the average accounts receivable. 2. Calculate the accounts receivable turnover ratio. 3. Calculate the accounts receivable turnover in days.45E 46E Bryce Company manufactures pet supplies. However, Bryces electronic accounting system recently crashed and, unfortunately, only a partial recovery of the companys year-end accounting records (which included several profitability ratios) was possible. As a result, Bryces controller, a bright young CMA named Jeanette, must compute various lost financial account balances using the recovered information listed below. Long-term liabilities: 1,500,000 Ending inventory is the same as beginning inventory. Gross margin: 3,000,000 Net sales: 8,000,000 Accounts receivable turnover: 50 Ending accounts receivable is the same as beginning accounts receivable. Total liabilities: 2,000,000 Current ratio: 2.5 Cash: 600,000 Quick ratio: 2.0 Inventory turnover in days: 3.65 Required: 1. Calculate current liabilities. 2. Calculate current assets. 3. Calculate average accounts receivable 4. Calculate marketable securities. 5. Calculate average inventory.48E 49E Juroe Company provided the following income statement for last year: Juroes balance sheet as of December 31 last year showed total liabilities of 10,250,000, total equity of 6,150,000, and total assets of 16,400,000. Required: Note: Round answers to two decimal places. 1. Calculate the times-interest-earned ratio. 2. Calculate the debt ratio. 3. Calculate the debt-to-equity ratio.Juroe Company provided the following income statement for last year: Juroes balance sheet as of December 31 last year showed total liabilities of 10,250,000, total equity of 6,150,000, and total assets of 16,400,000. Required: 1. Calculate the return on sales. (Note: Round the percent to two decimal places.) 2. CONCEPTUAL CONNECTION Briefly explain the meaning of the return on sales ratio, and comment on whether Juroes return on sales ratio appears appropriate.Juroe Company provided the following income statement for last year: Juroes balance sheet as of December 31 last year showed total liabilities of 10,250,000, total equity of 6,150,000, and total assets of 16,400,000. Refer to the information for Juroe Company on the previous page. Also, assume that Juroes total assets at the beginning of last year equaled 17,350,000 and that the tax rate applicable to Juroe is 40%. Required: Note: Round answers to two decimal places. 1. Calculate the average total assets. 2. Calculate the return on assets.Rebert Inc. showed the following balances for last year: Reberts net income for last year was 3,182,000. Refer to the information for Rebert Inc. above. Required: 1. Calculate the average common stockholders equity. 2. Calculate the return on stockholders equity.Rebert Inc. showed the following balances for last year: Reberts net income for last year was 3,182,000. Refer to the information for Rebert Inc. above. Also, assume that the market price per share for Rebert is 51.50. Required: 1. Compute the dollar amount of preferred dividends. 2. Compute the number of common shares. 3. Compute earnings per share. (Note: Round to two decimals.) 4. Compute the price-earnings ratio. (Note: Round to the nearest whole number.)Rebert Inc. showed the following balances for last year: Reberts net income for last year was 3,182,000. Refer to the information for Rebert Inc. above. Also, assume that the dividends paid to common stockholders for last year were 2,600,000 and that the market price per share of common stock is 51.50. Required: 1. Compute the dividends per share. 2. Compute the dividend yield. (Note: Round to two decimal places.) 3. Compute the dividend payout ratio. (Note: Round to two decimal places.)The following selected information is taken from the financial statements of Arnn Company for its most recent year of operations: During the year, Arnn had net sales of 2.45 million. The cost of goods sold was 1.3 million. Required: Note: Round all answers to two decimal places. 1. Compute the current ratio. 2. Compute the quick or acid-test ratio. 3. Compute the accounts receivable turnover ratio. 4. Compute the accounts receivable turnover in days. 5. Compute the inventory turnover ratio. 6. Compute the inventory turnover in days.Grammatico Company has just completed its third year of operations. The income statement is as follows: Selected information from the balance sheet is as follows: Required: Note: Round answers to two decimal places. 1. Compute the times-interest-earned ratio. 2. Compute the debt ratio. 3. CONCEPTUAL CONNECTION Assume that the lower quartile, median, and upper quartile values for debt and times-interest-earned ratios in Grammaticos industry are as follows: How does Grammatico compare with the industrial norms? Does it have too much debt?The following information has been gathered for Malette Manufacturing: Assume that the firm has no common stock equivalents. The tax rate is 34%. Required: 1. Compute the return on assets. 2. Compute the return on common stockholders equity. 3. Compute the earnings per share. 4. Compute the price-earnings ratio. 5. Compute the dividend yield. 6. Compute the dividend payout ratio.Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the companys financial statements for the 2 most recent years. Refer to the information for Kepler Company above. Required: Note: Round all percentages to one decimal place. 1. Compute the percentage change for each item in the balance sheet and income statement. 2. CONCEPTUAL CONNECTION Comment on any significant trends.60P Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the companys financial statements for the 2 most recent years. Refer to the information for Kepler Company on the previous page. Required: Note: Round all answers to two decimal places. 1. Compute the following ratios for each year: (a) current ratio, (b) quick ratio, (c) accounts receivable turnover (in days), and (d) inventory turnover (in days). 2. CONCEPTUAL CONNECTION Has the liquidity of Kepler improved over the past year? Explain why industrial liquidity performance would be useful information in assessing Keplers liquidity performance.Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the companys financial statements for the 2 most recent years. Refer to the information for Kepler Company on the previous page. Required: Note: Round all answers to two decimal places. 1. Compute the following for each year: (a) the times-interest-earned ratio and (b) the debt ratio 2. CONCEPTUAL CONNECTION Does Kepler have too much debt? What other information would help in answering this question?Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the companys financial statements for the 2 most recent years. Required: Note: Round all answers to two decimal places. 1. Compute the following for each year: (a) return on assets, (b) return on stockholders equity, (c) earnings per share, (d) price-earnings ratio, (e) dividend yield, and (f ) dividend payout ratio. 2. CONCEPTUAL CONNECTION Based on the analysis in Requirement 1, would you invest in the common stock of Kepler?Albion Inc. provided the following information for its most recent year of operations. The tax rate is 40%. Required: 1. Compute the following: (a) return on sales, (b) return on assets, (c) return on stockholders equity, (d) earnings per share, (e) price-earnings ratio, (f) dividend yield, and (g) dividend payout ratio. 2. CONCEPTUAL CONNECTION If you were considering purchasing stock in Albion, which of the above ratios would be of most interest to you? Explain.65P 66P 67C

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