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Joel LenoirManagerial AccountingFinal Exam

Problem 12- 28 Sell or process further

given informationdecorative containerother ingredientsdirect laborvariable MOHtotal variable manufacturing cost

fixed manufacturing overheadmaster candy makers salarydepreciation of equipmenttotal fixed manufacturing cost

selling price of a container of candies (final sales value after further processing)selling price of 3/4 pound of honey (less sales value at the split-off point)incremental revenue per container

incremental variable costsdecorative containerother ingredientsdirect laborvariable MOHcommissionsincremental variable cost per container

incremental contribution margin

avoidable costs if the honey is not processed into candiesmast candy makers salarysales person fixed compensationavoidable fixed costs

number of containers sold to justify further processing

6,000 containers is based on the .98 contribution margin per container of candy. Thus the avoidable costs of not continuing processing are divided by the cm per container to figure how many containers must be sold to at least cover these costs and everything after that is extra revenue compared to selling honey raw.

to demonstrate this these are the sales of candies and equivalent sales of raw honeysales of candies:containers sold per monthsales revenueincremental variable costsincremental contribution margin

less avoidable fixed coststotal contribution

sales of eqivalent amounts of raw honeypounds sold per monthsales revenue

From this it can be seen that if the sales are less than 6,000 containers then it is more profitable to sell raw honey but after the 6,000 containers are soldselling candies is more profitable than raw honey

Case 13-35 Net present value analysis of a lease or buy decision

given informationpurchase option:purchase costimmediate paymentamount to be paid off over 4 yearsannual payments over 4 yearsannual operating costs (taxes, insurance, maintenance, repairs)resale value of building and property

lease option:security depositfirst lease paymentlease payments over the next 19 yearsproperty taxes and insurance paid for by Guardianannual maintenance and repairs costreturn of the security deposit

itempurchase option:initial paymentannual paymentsannual operating costsresale value of building and propertypresent value of cash flows

lease option:initial security depositfirst lease paymentannual lease paymentsannual maintenance and repairs costreturn of the security depositpresent value of cash flows

net present value favoring the lease option:

Although both present values are negative, the decision is based on the lesser cost. The lease option has a smaller negative present value, the problem with the purchase option is that it requires the use of a lot more funds immediately, as opposed to smaller payments spread over

a longer time. The other problem with the purchase approach as outlined in the problem is that it ignored the value of money over time, it simplyadded up all the costs to purchase and used that to justify purchase opposed to leasing. After determining the present value of both options, it can now be seen that the lease option is the better decision to make because the present value is worth more than that of the purchasing option.The money used to purchase the building and land could be used elsewhere to make money for the company.

The present value of the projected $5 million that the building would be worth after 20 years is only $520,000 at the 12% factor.

14-14 Prepare and interpret a statement of cash flows, free cash flows

given informationcomparative balance sheetassetscurrent assets:cashaccount receivableinventoryprepaid expensestotal current assetslong-term investmentsplant and equipmentless accumulated depreciationnet plant and equipmenttotal assetsliabilities and stockholders' equitycurrent liabilities:accounts payableaccrued liabilitiesincome taxes payabletotal current liabilitiesbonds payabletotal liabilitiesstockholders' equity:common stockretained earningstotal stockholders' equitytotal liabilities and stockholders' equity

Other information for 2011:sold long-term investments costing $30,000sold equipment costing $90,000 and $40,000 in accumulated depreciationpaid a cash dividend during this yearstock was repurchased and retired during this yearno bonds were retired during this year

compute net cash provided by operating activities for 2011

accumulated depreciation account:beginning balance - debits + credits = ending balance$190,000 - $40,000 + credits = $210,000credits = $210,000 - $190,000 + $40,000

credits =

current assetsaccounts receivableinventoryprepaid expenses

current liabilitiesaccounts payableaccrued liabilitiesincome taxes payable

gain on sale of long-term investmentsloss on sale of equipment

calculate net cash provided by operating activities:net incomeadjustments to convert net income to cash basis:depreciationdecrease in accounts receivableincrease in inventorydecrease in prepaid expensesdecrease in accounts payabledecrease in accrued liabilitiesincrease in taxes payablegain on sale of long-term investmentsloss on sale of equipmentnet cash provided by operating activities

prepare a statement of cash flows for 2011

investing and financing activities:

noncurrent assetslong-term investmentsplant and equipment

liabilities and stockholders' equitybonds payblecommon stock

plant and equipment account:beginning balance + debits - credits = ending balance$750,000 + debits - $90,000 = $860,000debits = $860,000 - $750,000 + $90,000debits =

retained earnings account:beginning balance - debits + credits = ending balance$150,000 - debits + $70,000 = $192,000

$220,000 = $192,000 + debitsdebits =

the company did not retire any bonds so the issuance of bonds payable is the $100,000 listed above

Allied CompanyStatement of Cash Flows - Indirect Method

operating activities:net incomeadjustments to convert net income to cash basis:depreciationdecrease in accounts receivableincrease in inventorydecrease in prepaid expensesdecrease in accounts payabledecrease in accrued liabilitiesincrease in taxes payablegain on sale of long-term investmentsloss on sale of equipmentnet cash provided by operating activities

investing activities:proceeds from sale of long-term investmentsproceeds from sale of equipmentadditions to plant and equipmentnet cash used in investing activities

financing activities:issuance of bonds payabledecrease in common stockcash dividends to stockholdersnet cash provided by financing activities

net decrease in cash balancecash balance, beginningcash balance, ending

Free cash flow:free cash flow = net cash provided by operating activities - capital expenditures - dividends

net cash provided by operating activitiescapital expenditures for plant, property, and equipmentcash dividendsfree cash flow

15-19 Incomplete statements, analysis of ratios

given information

current ratioacid-test ratioaccount receivable turnoverinventory turnoverdebt-to-equity ratiotimes interest earnedearnings per share return on total assets

account balances beginning new fiscal yearaccounts receivableinventorytotal assets

calculation of current assetscurrent ratiocurrent liabilitiescurrent ratio = current assets / current liabilitescurrent assets = current liabilities * current ratiocurrent assets

calculation of net income before taxes and interest expense and net incometimes interest earnedtimes interest earned = earnings before interest and income taxes / interest expenseearnings before interest and income taxes = times interest earned * interest expense net income before taxes = earnings before interest and taxes - interest expenseincome taxes = net income before taxes * tax rate (40%)net income = net income before taxes - income taxes

calculation of accounts receivableaccounts receivable turnoverbeginning accounts receivableaccounts receivable turnover = sales on account / average accounts receivablesales on account average accounts receivable = (beginning + ending balance)/2average accounts receivable = sales on account / accounts receivable turnoverending balance = (average accounts receivable * 2) - beginning balance

calculation of inventoryinventory turnoverbeginning inventoryinventory turnover = cost of goods sold / average inventorycost of goods soldaverage inventory = (beginning + ending balance)/2average inventory = cost of goods sold / inventory turnoverending balance = (average inventory * 2) - beginning balance

calculation of total assetsreturn on assets

beginning total assetsreturn on assets = (net income + (interest expense - (1 * tax rate))) / average total assetsnet incomeinterest expense1 - tax rateaverage total assets = (beginning + ending)/2average total assets = net income before interest and taxes / return on assetsending balance = (average total assets * 2) - beginning balance

calculation of common stockearnings per share = (net income - preferred dividends)/average number of common shares outstandingnet incomeaverage number of common shares outstanding = net income / earnings per sharecommon stock = average number of common shares outstanding * par value per share

calculation of stockholders' equitydebt-to-equity ratiodebt-to-equity ratio = total liabilities / stockholders' equitytotal liabilities = current liabilities + bonds payable (10%)bonds payabletotal liabilities stockholders' equity = total liabilities / debt-to-equity ratio

Tanner CompanyBalance Sheet December 30

current assets:cashaccounts receivable, netinventorytotal current assetsplant and equipment, nettotal assets

current liabilitiesbonds payable, 10%total liabilitiesstockholders' equity:common stock, $2.50 par valueretained earningstotal stockholders' equitytotal liabilities and stockholders' equity

Tanner CompanyIncome Statement

For the Year Ended December 31salescost of goods soldgross margin

selling and administration expensesnet operating incomeinterest expensenet income before taxesincome taxes (40%)net income

0.400.250.200.100.95

3,880 400 4,280

4.402.252.15

0.400.250.200.100.221.17

0.98

3,880 2,000 5,880

6,000

6,000 containers is based on the .98 contribution margin per container of candy. Thus the avoidable costs of not continuing processing are divided by the cm per container to figure how many containers must be sold to at least cover these costs and everything after that is extra revenue compared

5,000 6,000 7,000 22,000 26,400 30,800 5,850 7,020 8,190 16,150 19,380 22,610

5,880 5,880 5,880 10,270 13,500 16,730

3,750 4,500 5,250 11,250 13,500 15,750

From this it can be seen that if the sales are less than 6,000 containers then it is more profitable to sell raw honey but after the 6,000 containers are sold

14,000,000 6,000,000 8,000,000 2,000,000 200,000 5,000,000

400,000 1,000,000 1,000,000 150,000 50,000 400,000

years amount of cash flows 12% factor present value

now (6,000,000) 1 (6,000,000) 1-4 (2,000,000) 3 (6,074,000) 1-20 (200,000) 7 (1,493,800)20 5,000,000 0 520,000

(13,047,800)

now (400,000) 1 (400,000)now (1,000,000) 1 (1,000,000) 1-19 (1,000,000) 7 (7,366,000) 1-20 (50,000) 7 (373,450)20 400,000 0 41,600

(9,097,850)

3,949,950 3949950

Although both present values are negative, the decision is based on the lesser cost. The lease option has a smaller negative present value, the problem with the purchase option is that it requires the use of a lot more funds immediately, as opposed to smaller payments spread over

a longer time. The other problem with the purchase approach as outlined in the problem is that it ignored the value of money over time, it simplyadded up all the costs to purchase and used that to justify purchase opposed to leasing. After determining the present value of both options, it can now be seen that the lease option is the better decision to make because the present value is worth more than that of the purchasing option.

The present value of the projected $5 million that the building would be worth after 20 years is only $520,000 at the 12% factor.

2011 2010

15,000 33,000 200,000 210,000 250,000 196,000 7,000 15,000 472,000 454,000 90,000 120,000 860,000 750,000 210,000 190,000 650,000 560,000 1,212,000 1,134,000

175,000 230,000 8,000 15,000 42,000 39,000 225,000 284,000 200,000 100,000 425,000 384,000

595,000 600,000 192,000 150,000 787,000 750,000 1,212,000 1,134,000

50,000 44,000

60,000

increase in balance decrease in balance 10,000

(54,000) 8,000

(55,000) (7,000)

3,000

(20,000) 6,000

70,000

60,000 10,000 (54,000) 8,000 (55,000) (7,000) 3,000 (20,000) 6,000 (49,000)

21,000

increase in balance decrease in balance

30,000 (110,000)

100,000 (5,000)

200,000

28,000

Allied CompanyStatement of Cash Flows - Indirect Method

70,000

60,000 10,000 (54,000) 8,000 (55,000) (7,000) 3,000 (20,000) 6,000 (49,000)

21,000

50,000 44,000 (200,000)

(106,000)

100,000 (5,000) (28,000)

67,000

(18,000) 33,000 15,000

21,000 (200,000) (28,000) (207,000)

2.41.12

156

0.8757

4.0514%

160,000 280,000 1,200,000

2.40 250,000

600,000

7

315,000 270,000 108,000 162,000

15 160,000

2,700,000

180,000 200,000

6 280,000

1,800,000

300,000 320,000

14%

1,200,000

162,000 45,000

60%

1,350,000 1,500,000

162,000 40,000 100,000

0.875

450,000 700,000 800,000

Tanner CompanyBalance Sheet December 30

80,000 200,000 320,000 600,000 900,000 1,500,000

250,000 450,000 700,000

100,000 700,000 800,000 1,500,000

Tanner CompanyIncome Statement

For the Year Ended December 31 2,700,000 1,800,000 900,000

585,000 315,000 45,000 270,000 108,000 162,000

Given informationpurchase option:purchase cost 14,000,000 immediate payment 6,000,000 amount to be paid off over 4 years 8,000,000 annual payments over 4 years 2,000,000 annual operating costs (taxes, insurance, maint 200,000 resale value of building and property 5,000,000

lease option:security deposit 400,000 first lease payment 1,000,000 lease payments over the next 19 years 1,000,000 property taxes and insurance paid for by Guard 150,000 annual maintenance and repairs cost 50,000 return of the security deposit 400,000

item years amount of cash flows12% factorpurchase option:initial payment now -6,000,000 1annual payments 1-4 -2,000,000 3annual operating costs 1-20 -200,000 7resale value of building and 20 5,000,000 0present value of cash flows

item years amount of cash flows12% factorlease option:initial security deposit now -400,000 1first lease payment now -1,000,000 1annual lease payments 1-19 -1,000,000 7annual maintenance and repa 1-20 -50,000 7return of the security deposi 20 400,000 0present value of cash flows

present value

-6,000,000-6,074,000-1,493,800

520,000-13,047,800

present value

-400,000-1,000,000-7,366,000

-373,45041,600

-9,097,850