Assignment Solutions on Financial and Management Accounting
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1. The major focus of accounting information is to facilitate decision making.
a. As an investor in a company, what would be your primary objective?
b. As a manager of a company, what would be your primary objective?
c. Is the same accounting information likely to be equally useful to you in these two different roles?
2. Solomon Raga, controller for Addis Industries, was reviewing production cost reports for the One amount in these reports continued to bother him was advertising. During the year, the company had instituted an expensive advertising campaign to sell some of its slower- moving products. It was still too early to tell whether the advertising campaign was successful.
There had been much internal debate as how to report advertising cost. The vice president of finance argued that advertising costs should be reported as a cost of production, just like direct materials and direct labor. He therefore recommended that this cost be identified as manufacturing overhead and reported as part of inventory costs until sold. Others disagreed. Solomon believed that this cost should be reported as an expense of the current period, so as not to overstate net income.
Others argued that it should be reported as prepaid advertising and reported as a current asset.
The president finally had to decide the issue. He argued that these costs should be reported as inventory. His arguments were practical ones. He noted that the company was experiencing financial difficulty and expensing this amount in the current period might jeopardize a planned bond offering. Also, by reporting the advertising costs as inventory rather than as prepaid advertising, less attention would be directed to it by the financial community.
Instructions
- Who are the stakeholders in this situation?
- What are the ethical issues involved in this situation?
- What would you do if you were Solomon?
3. Moon Corporation and Star Corporation are in the same line of business and both were recently organized, so it may be assumed that the recorded costs for assets are close to current market
The balance sheets for the two companies are as follows at July 31, 2011:
Moon Corporation
Balance sheet
July 31, 2011
Assets Liabilities & Owners’ Equity
Cash . . . . . . . . . . . . . . . . $ 18,000 Liabilities:
Accounts Receivable . . . 26,000 Notes Payable
Land . . . . . . . . . . . . . . . . 37,200 (due in 60 days)……………. $ 12,400
Building. . . . . . . . . . . . . . 38,000 Accounts Payable……………… 9,600
Office Equipment . . . . . . 1,200 Total liabilities……………….. $ 22,000
Stockholders’ equity:
Capital Stock…………. $60,000 Retained Earnings…………………….. 38,400 98,400
Total . . . . . . . . . . . . . . . . $120,400 Total…………………………………….. $120,400
Star Corporation
Balance sheet
July 31, 2011
Assets Liabilities & Owners’ Equity
Cash . . . . . . . . . . . . . . . . $ 4,800 Liabilities:
Accounts Receivable . . . 9,600 Notes Payable
Land . . . . . . . . . . . . . . . . 96,000 (due in 60 days)……………. $ 22,400
Building. . . . . . . . . . . . . . 60,000 Accounts Payable……………… 43,200
Office Equipment . . . . . . 12,000 Total liabilities………………. $ 65,600
Stockholders’ equity:
Capital Stock…………. $72,000 Retained Earnings…………………….. 44,800 116,800
Total . . . . . . . . . . . . . . . . $182,400 Total…………………………………….. $182,400
Instructions
(a) Assume that you are a banker and that each company has applied to you for a 90 -day loan of $12,000. Which would you consider to be the more favorable prospect? Explain your answer fully.
(b) Assume that you are an investor considering purchasing all the capital stock of one or both of the For which business would you be willing to pay the higher price? Do you see any indication of a financial crisis that you might face shortly after buying either company? Explain your answer fully.
4. MM Corporation has collected the following information after its first year of sales. Sales were Birr 1,500,000 on 100,000 units; selling expenses Birr 250,000 (40% variable and 60% fixed); direct materials Birr 511,000; direct labor Birr 290,000; administrative expenses Birr 270,000 (20% variable and 80% fixed); manufacturing overhead Birr 350,000 (70% variable and 30% fixed). Top management has asked you to do a CVP analysis so that it can make plans for the coming year. It has projected that unit sales will increase by 10% next year.
Instructions:
(a) Compute
- The contribution margin for the current year and the projected year, and
- The fixed costs for the current year. (Assume that fixed costs will remain the same in the projected year)
(b) Compute the break-even point in units and sales Birr for the first
(c) The company has a target net income of Birr 200, What is the required sale in BIRR for the company to meet its target?
(d) If the company meets its target net income number, by what percentage could its sales fall before it is operating at a loss? That is, what is its margin of safety ratio?
(e) The company is considering a purchase of equipment that would reduce its direct labor costs by Birr104,000 and would change its manufacturing overhead costs to 30% variable and 70% fixed (assume total manufacturing overhead cost is Birr 350,000, as above). It is also considering switching to a pure commission basis for its sales staff. This would change selling expenses to 90% variable and 10% fixed (assume total selling expense is Birr250, 000, as above).
Compute:
- The contribution margin and
- The contribution margin ratio, and recomputed
- The break-even point in sales
Comment on the effect, each of management’s proposed changes has, on the break-even point.
5. BYP Seats manufactures swivel seats for customized It currently manufactures 10,000 seats per year, which it sells for Birr 500 per seat. It incurs variable costs of Birr 200 per seat and fixed costs of Birr 2, 000,000. It is considering automating the upholstery process, which is now largely manual. It estimates that if it does so, its fixed costs will be Birr 3, 000,000, and its variable costs will decline to Birr100 per seat.
Instructions:
- Compute contribution margin ratio, break-even point in Birr, margin of safety ratio, and degree of operating leverage based on current
- Compute contribution margin ratio, break-even point in Birr, margin of safety ratio, and degree of operating leverage assuming the new upholstery system is
- Discuss the implications of adopting the new