Part A - MULTIPLE CHOICE and TRUE/FALSE. Choose the one alternative that best completes the statement or answers the question.
1. Consider the following statements:
I. The Securities and Exchange Commission has congressional authority to set accounting policies in the United States.
II. US GAAP and IFRS are not converging.
a. Only Statement I is true.
b. Only Statement II is true.
c. Both Statements I and II are true.
d. Both Statements I and II are false.
2. How are revenues and expenses recognized under the accrual basis of accounting?
a. Revenues are recognized when cash is received and expenses are recognized when cash is paid.
b. Revenues and expenses are recognized equally over a twelve month period.
c. Revenues and expenses are recognized based on the choices of management.
d. Revenues are recognized in the accounting period when the sale is made and expenses are recognized in the period in which they relate to the sale of the product.
3. The statement of cash flows is useful for analyzing the performance of an organization because:
a. It is the primary source in financial statements for learning about how cash is generated.
b. A focus on net income can be misleading if a company has a healthy profit, but is not converting profit into cash.
c. It reveals why a company was able to generate a profit.
d. a and b.
4. A change in retained earnings from one year end to the next can result from cash flows related to both operating and financing activities. (True/false)
5. Which of the following would cause the recognition of a liability?
a. Credit extended by suppliers.
b. Receipt of cash in advance of providing services.
c. Recognition of expense prior to the actual payment of cash.
d. All of the above.
6. How should a company report total comprehensive income?
a. On the face of its income statement.
b. In a separate statement of comprehensive income.
c. In its statement of stockholders' equity.
d. All of the above ways are acceptable.
7. Which statement best describes the retained earnings account?
a. The retained earnings account is equal to the cash account less dividends paid.
b. Retained earnings are funds a company has chosen to reinvest in the operations of a business rather than pay out to stockholders in dividends.
c. Retained earnings represent unused cash of the firm.
d. The retained earnings account is the measurement of all distributed earnings.
8. The measurement of Balanced Scorecard objectives
a. creates focus for the future.
b. communicates organizational goals to all employees.
c. focuses shareholders on strategic implementation of company's outcomes.
d. All of the above are correct.
e. a and b.
9. All of the following are measures of an organization's ability to deliver its value proposition except:
a. the price paid to suppliers for material to produce the organization's product.
b. the level of satisfaction for a meal in a restaurant.
c. the frequency of product returns by customers.
d. the defect rate in the manufacturing process.
10. The major reason for using practical capacity as the denominator for activity driver calculations is to:
a. avoid distortions created by the assignment of unused capacity costs to the products produced or customers served.
b. simplify the calculations of the activity cost drivers.
c. reduce the cost of unused capacity.
d. place less emphasis on the cost of unused capacity.
11. The terms "direct cost" and "indirect cost" are commonly used in management accounting. Classifying a cost as either direct or indirect depends upon:
a. the behavior of the cost in response to volume changes
b. whether the cost is expended in the period in which it is incurred
c. whether the cost can be related readily to resources consumed for a cost object
d. whether an expenditure is unavoidable because it cannot be changed regardless of any action taken
e. a and c.
12. Which of the following is NOT an option to transform breakeven or loss customers into profitable ones?
a. Use more discipline in granting discounts and allowances.
b. Improve the process used to produce, sell, deliver and service the customer.
c. Use less menu-based pricing that allows customers to select features and services it wishes to pay for.
d. Improve margins by lowering costs.
13. Internal failure costs consists of all the following except:
a. Repair costs in the field.
b. Waste.
c. Net cost of scrap.
d. Product recalls.
e. a and d.
14. Committed costs are those that the organization agrees must be set aside to cover product costs through the three major stages of the life cycle. (True/False)
15. Which of the following statements about Kaizen costing is false?
a. Cost reduction targets are set and applied on an annual basis.
b. Cost reductions apply to all variable costs.
c. Workers are assumed to have the best knowledge to improve processes and reduce costs.
d. Cost-variance analysis compares target kaizen costs with actual cost reduction amounts.
Part B - Short Answer
1. Assume that Zebra Company has no opening inventory. The following purchases of inventory occurred during the year:
Date Purchases (units) Purchase Price per Unit
Jan 2 2 $3
Feb. 15 3 $5
March 30 4 $7
July 29 6 $6
October 30 5 $4
Required: Assume Zebra sells 10 items on October 31 and uses the periodic LIFO method of inventory valuation. What amount would appear as cost of goods sold on the income statement?
2. Consider the following information:
Cascabel Corporation
Balance Sheet
December 31, 2016
Assets Liabilities and Stockholders' Equity
Current assets Current liabilities
Cash $2 Accounts payable $36
Short-term investments 10 Accrued liabilities 25
Accounts receivable 52 Total current liabilities 61
Inventory 57 Deferred income taxes 20
Other current assets 8 Long-term debt 82
Total current assets 129 Total liabilities 163
Long-term assets Stockholders' Equity
Net PPE 65 Common stock 110
Goodwill 130 195 Retained earnings 51
Total stockholders' equity 161
Total assets $324 Total liabilities and equity $324
Cascabel Corporation
Income Statement
For the Year Ended December 31, 2016
Net sales $345
Cost of goods sold 248
Gross profit 97
Operating expenses 74
Operating profit 23
Interest expense 8
Earnings before taxes 15
Income tax expense 4
Net income $11
Required: Calculate Cascabel's cash conversion cycle
3. Required: Analyze the following common size balance sheets:
2016 2015
Current Assets
Cash 3% 5%
Accounts receivable 20 18
Inventory 35 30
Total current assets 58 53
Property, plant and equipment 30 40
Other assets 12 7
Total assets 100% 100%
Current Liabilities
Accounts payable 25% 20%
Short-term debt 38 33
Total current liabilities 63 53
Long-term debt 22 17
Total liabilities 85 70
Stockholders' Equity
Common stock 14 20
Retained earnings 1 10
Total stockholders' equity 15 30
Total liabilities and stockholders' equity 100% 100%
4. Yak Corporation reported the following information:
a. Net income for the year was $52 million.
b. Purchases of equipment were $12 million.
c. Customer accounts receivable decreased by $6 million.
d. Dividends paid to common shareholders were $10 million.
e. Depreciation expense was $18 million.
f. Income tax payable decreased by $3 million.
g. Long-term debt decreased by $14 million.
h. Accounts payable increased by $8 million.
i. Inventories decreased by $5 million.
j. Opening cash balance was $4 million.
Required: Calculate cash flow from operating, investing, and financing activities, and the ending cash balance.
5. Able Manufacturing uses departmental cost driver rates to allocate manufacturing support costs to products. Manufacturing support costs are allocated on the basis of machine hours in Department A and on the basis of direct labor hours in Department B. At the beginning of 2015, the following estimates were provided for the coming year:
Dept. A Dept. B
Direct labor cost $600,000 $1,800,000
Manufacturing overhead costs $400,000 $600,000
Direct labor-hours 25,000 60,000
Machine-hours 10,000 12,000
The accounting records of the company show the following data for Job #123:
Dept. A Dept. B
Direct labor-hours 10 20
Machine-hours 2 15
Direct material cost $100 $200
Required: Calculate the total manufacturing costs for Job #123.
6. Pete's Publishing Inc. has excess capacity. Company management is approached by a new customer to fill a large one-time order for 1,000 books, a product similar to one offered to regular customers. The following information applies to sales to regular customers:
Sales (100,000 units) $12,000,000
Direct materials $5,000,000
Direct labor 4,000,000
Variable manufacturing support 500,000
Fixed manufacturing support 200,000
Total manufacturing costs 9,700,000
Net income $2,300,000
Required: Calculate the minimum acceptable price per unit of the new order at which overall profit will not change.
7. Bob's Boots Ltd. manufactures three different products -boots, slippers, and runners. Considerable market demand exists for all models. The following per unit data apply:
Boots Slippers Runners
Selling price $150 $20 $85
Direct materials 100 8 40
Direct labor ($20 per hour) 20 5 10
Variable support costs ($4 per machine hour) 10 2 12
Fixed costs 8 4 20
Gross profit 12 1 3
Required: If there is no excess labour capacity, which model(s) should the company produce to maximize profits?
8. Engineers at Jones & Smith Ltd. developed the following standard costs for direct material and direct labor for one of their major products:
Standard quantity Standard price
Direct materials 10 kilograms $5 per kilogram
Direct labor 0.5 hours $30 per hour
During 2015, the company produced and sold 100,000 units using 990,000 kilograms of direct materials at an average cost of $4.95 per kilogram, and total direct labour costs of $1,428,000 (51,000 DLHs incurred).
Required: Calculate the 2015 price and quantity (efficiency) variances, and total variances, for direct material and direct labour.
9. Whyte Trucks Inc. produces large, heavy duty trucks. It is attempting to reduce manufacturing costs. It polled customers with respect to product requirements and obtained the following information:
|
Category
|
Importance
|
|
Driver comfort
|
30
|
|
Fuel efficiency
|
50
|
|
Safety
|
20
|
Whyte identified the following target costs for various truck components:
|
Function group
|
Target cost
|
|
Frame
|
$30,000
|
|
Engine
|
50,000
|
|
Body
|
40,000
|
|
Other
|
80,000
|
Whyte engineers produced the following quality function deployment matrix:
|
|
|
|
|
Function group
|
|
Categories
|
Frame
|
Engine
|
Body
|
Other
|
|
Driver comfort
|
.2
|
|
.2
|
.6
|
|
Fuel efficiency
|
|
.6
|
.3
|
.1
|
|
Safety
|
.3
|
.1
|
.2
|
.4
|
Required: Determine which function groups are candidates for cost reduction.
10. Athabasca Country Living Ltd. builds mobile homes. The company is hoping to improve the processing cycle efficiency of its operations by introducing a JIT manufacturing system. It has collected the following information:
|
Time Category
|
Traditional System
|
JIT System
|
|
Production
|
480 minutes
|
400 minutes
|
|
On-site storage
|
60 minutes
|
45 minutes
|
|
Inspection
|
30 minutes
|
15 minutes
|
Required:
a. Should Athabasca Country Living Ltd. introduce the JIT system? Show your calculations.
b. By how much must production time be reduced to make the introduction of the JIT system worthwhile, all other things being equal? Show your calculations.
Part C - Problems-
Problem 1- Over the years, John Donghas been a very successful investor. He investigates a company thoroughly before purchasing its shares. John is interested in the common stock of ICU Computers Limited. The following data are available for the company:
|
|
2016
|
2015
|
2014
|
|
Current ratio*
|
2.1
|
2.0
|
1.9
|
|
Acid-test ratio
|
1.1
|
1.0
|
.9
|
|
Accounts receivable turnover
|
3.6X
|
3.5X
|
3.0X
|
|
Inventory turnover
|
4X
|
5X
|
6X
|
|
Current liabilities
|
$1M
|
$1M
|
$1M
|
|
Sales
|
$10M
|
$10M
|
$10M
|
|
Gross Profit Ratio
|
30%
|
30%
|
30%
|
|
Dividends paid per share**
|
$4
|
$3
|
$2.50
|
|
Dividend yield ratio
|
5.5%
|
5.5%
|
5.5%
|
|
Dividend payout ratio
|
40%
|
40%
|
40%
|
|
Return on total assets
|
10%
|
12%
|
8%
|
|
Return on common stockholders' equity
|
8%
|
14.5%
|
9%
|
* Current assets consist of cash, accounts receivable, and inventory.
**There were no changes in common stock outstanding over the three-year period.
John would like answers to a number of specific questions this data.
Required: Respond in a complete but concise manner to each of the following questions.
1. Is the market price of the company's stock going up or down?
2. Is the earnings per share increasing or decreasing?
3. Is the company employing financial leverage to the advantage of the common stockholders?
4. Is it becoming easier for the company to pay its bills as they come due?
5. Are customers paying their bills at least as fast now as they did in Year 1?
6. Is the total of accounts receivable increasing, decreasing, or remaining constant?
7. Is the level of inventory increasing, decreasing, or remaining constant?
Problem 2- AudioFile Products Ltd. is a retailer that sells sound systems. The company is planning its cash needs for the month of January, 2017. In the past, AudioFile has had to borrow money during the post-Christmas season to offset a significant decline in sales. The following information has been assembled to assist in preparing a cash flow forecast for January.
a. January 2017 forecasted income statement:
Sales $200,000
Cost of goods sold 150,000
Gross profit 50,000
Variable selling expenses $10,000
Fixed administrative expenses 20,000 30,000
Net income $ 20,000
b. Sales are 10% for cash and 90% on credit.
c. Credit sales are collected over a three-month period with 40% collected in the month of sale, 30% in the following month, and 20% in the second month following sale. 10% of credit sales are never collected. November 2016 sales totaled $300,000 and December sales totaled $500,000.
d. 40% of a month's inventory purchases are paid for in the same month. The remaining 60% are paid in the following month. Accounts payable relate solely to inventory purchases. At December 31, accounts payable totaled $400,000.
e. The company maintains its ending inventory levels at 60% of the cost of the merchandise to be sold in the following month. The merchandise inventory at December 31, 2016 was $90,000. February 2017 sales are budgeted at $150,000. Gross profit percentage is expected to remain unchanged.
f. The company pays $10,000 monthly cash dividends to shareholders.
g. The cash balance at December 31, 2016 was $30,000; the company must maintain a cash balance of at least this amount at the end of each month.
h. The company can borrow on its operating loan in increments of $10,000 at the beginning of each month, up to a total loan balance of $500,000. The interest rate on this loan is 1% per month, payable on the first day of the next month. There is no operating loan at December 31, 2016.
Required: Prepare a cash flow forecast for AudioFile for the month of January 2017. Include appropriate supporting schedules.
Problem 3- Sametime Suppliers Ltd. has been using a traditional activity-based costing (ABC) system. It is switching to time-driven activity-based costing. The current system assigns $2,000,000 of committed resource costs in the accounting department. There are 4,000 hours of useful work time available (practical capacity). Based on interviews with accounting personnel, the following information was gathered:
|
Activity
|
Time Percentage
|
Estimated Cost Driver Quantity
|
Unit Time in Hours
|
|
Processing sales orders
|
35%
|
5,000 sales orders
|
.2
|
|
Processing purchase orders
|
60%
|
10,000 purchase orders
|
.1
|
|
Processing payroll
|
5%
|
50 payroll periods
|
30
|
|
|
100%
|
|
|
Required:
a. Compute the cost driver rates and the costs assigned to each activityusing traditional ABC.
b. Compute the time-driven ABC cost driver rates and the costs assigned to each activity.
c. Draw conclusions from the analyses.