Questions and Answers of Accounting What The Numbers Mean

1. The level of ROI that must be earned to permit the firm to meet its interest obligations and provide the owners their expected return; the discount rate used in the present value calculations of
5. The operating condition when some available production resources are not being utilized.Following are a number of key terms and concepts introduced in the chapter, along with a list of
14. A capital budgeting analytical technique that relates the present value of the returns (cash inflows) from an investment to the present value of the cost (cash outflows) of the investment, given
1. The meaning and application of the following cost terms: differential, allocated, sunk, and opportunity.
2. How costs are determined to be relevant for short-run decisions.
3. How to analyze relevant costs for the following decisions: sell or prooess further, special pricing, target costing, make or buy, continue or discontinue a segment, and product mix.
4. The attributes of capital budgeting that make it a significantly different activity from operational budgeting.
5. Why present value analysis is appropriate in capital budgeting.
6. The concept of cost of capital and why it is used in capital budgeting.
7. The use of and differences between various capital budgeting techniques: net present value, present value ratio, and internal rate of return.
8. How issues concerning estimates, income taxes, and the timing of cash flows and investments are treated in the capital budgeting process.
9. How the payback period of a capital expenditure project is calculated.
10. Why the accounting rate of return of a project is calculated and how it can be used most appropriately.
11. Why not all management decisions are made strictly on the basis of quantitative analysis techniques.
1. What does it mean to state that a cost is a sunk cost?
2. What does it mean to state that a cost is a relevant cost?
3. What does it mean when a firm has an offer to sell its product or service at a special price and is operating with idle capacity?
4. What does it mean when a cost is avoidable in the make or buy decision?
5. What does it mean when fixed expenses allocated to a segment are considered to be common corporate expenses?
6. What does it mean to have a capital budget?
7. What does it mean to state that present value analysis is appropriate for capital bhdgeting?
8. What does it mean to calculate the net present value of a proposed capital invest¬ ment?
9. What does it mean if the net present value of a proposed capital expenditure is positive?
10. What does it mean to state that the net present value calculation technique is easier to use than the internal rate of return calculation method?
11. What does it mean to state that both the payback method and the accounting rate of return method are flawed because they do not recognize the time value of money?
12. What does it mean to integrate the capital budget into the operating budget?
2. A cost that has been incurred and that cannot be unincurred or reversed by some future action.Following are a number of key terms and concepts introduced in the chapter, along with a list of
3. A capital budgeting analytical technique that calculates the length of time for the cash flows from an investment to equal the investment.Following are a number of key terms and concepts
4. The process of comparing the assumptions used in a capital budgeting analysis with the actual results of the investment.Following are a number of key terms and concepts introduced in the chapter,
6. The process of analyzing proposed investments in plant and equipment and other long-lived assets.Following are a number of key terms and concepts introduced in the chapter, along with a list of
7. An economic concept relating to income forgone because an alternative to earn income was not pursued.Following are a number of key terms and concepts introduced in the chapter, along with a list
8. A capital budgeting analytical technique that solves for the time-adjusted rate of return on an investment over its life.Following are a number of key terms and concepts introduced in the chapter,
9. The ratio of the present value of cash flows to the investment; used to rank proposed capital expenditures by profitability.Following are a number of key terms and concepts introduced in the
10. The acquisition of resources or services from outside the organization as opposed to producing those resources or services internally.Following are a number of key terms and concepts introduced
11. A capital budgeting analytical technique that calculates the rate of return on the investment based on the financial statement impacts of the investment.Following are a number of key terms and
12. A cost that has been assigned to a product or activity using some sort of arithmetic process.Following are a number of key terms and concepts introduced in the chapter, along with a list of
13. A cost that will differ based on the selection of an alternative activity.Following are a number of key terms and concepts introduced in the chapter, along with a list of corresponding
15. A cost classification used in analyzing costs of decision alternatives.Following are a number of key terms and concepts introduced in the chapter, along with a list of corresponding definitions.
1. A sunk cost is a cost thata. is always relevant in decision making.b. can be relevant in decision making depending on the circumstances.c. is never relevant in decision making.d. can be recovered
2. An opportunity cost isa. income forgone because an opportunity to earn income was not pursued.b. never relevant in decision making.c. a cost that cannot be avoided.d. a cost that has been incurred
3. In considering whether to accept a special order at a price that is less than the normal selling price of the product when the additional sales will use present idle capacity, which of the
4. In a make or buy decision, management should consider all of the following excepta. opportunity costs of making internally.b. costs that are avoidable by buying outside the company.c. costs common
5. Chuck’s investment proposal would be inferior to Edna’s proposal if it was expected to have aa. longer payback period.b. higher accounting rate of return.c. higher internal rate of return.d.
7. Kafka, Inc., estimates that it can generate $4,600 per year in additional cash inflows for the next five years if it modernizes its equipment at a cost of $15,000. The company’s minimum desired
8.Using the present value factors in your text, the estimated annual cash inflow from the following investment proposal would be (rounded)investmentcost. $13,000 Net presentvalue. $ 3,300 Life of
9.The payback period of the investment in equipment is approximatelya. 3.0 years.b. 4.0 years.c. 4.8 years.d. 8.0 years.
10.The accounting rate of return is approximatelya. 12.5%.b. 20.8%.c. 25.0%.d. 33.3%.
Argon Chemical Company manufactures a chemical com¬ pound that is sold for $29 per gallon. A new variant of the chemical has been discov¬ ered, and if the basic compound were processed into the new
Sell or process further? Mizzou Mining Company mines an iron ore called Alpha. During the month of December, 400,000 tons of Alpha were mined and processed at a cost of $742,500. As the Alpha ore is
Accept special sales order? Integrated Circuits, Inc. (ICI), is presently operating at 60% of capacity and manufacturing 60,000 units of a patented electronic compo¬ nent. The cost structure of the
Accept special sales order? AAA Lock Manufacturing Co. makes and sells sev¬ eral models of locks. The cost records for the ZForce lock show that manufacturing costs total $29.00 per lock. An
Target costing Eagle Ltd., a manufacturer of digital cameras, is considering entry into the digital binocular market. Eagle currently does not produce binoculars of any style, so this venture would
Target costing Rainbow Cruises operates a week-long cruise tour through the LO 2, 3 Hawaiian Islands. Passengers currently pay $1,800 for a two-person cabin, which is an all-inclusive price that
The make or buy decision Kirkwood Engine, Inc., produces engines for the water- LO 2, 3 craft industry. An outside manufacturer has offered to supply several component parts used in the engine
The make or buy decision Sycamore Company uses a certain part in its manu- LO 2, 3 facturing process that it buys from an outside supplier for $29 per part plus another $4 for shipping and other
The product mix decision Product A has a contribution margin of $300 per unit and requires six hours of machine time. Product B requires eight hours of machine time and provides $400 of contribution
The product mix decision ABC Company produces Product X, Product Y, and Product Z. All three products require processing on specialized finishing machines. The capacity of these machines is 3,600
Review problem—time value of money applications An investor has asked for your help with the following time value of money applications. Use the appropriate factors from Table 6-4 or Table 6-5 to
Review problem—time value of money applications Use the appropriate factors from Table 6-4 or Table 6-5 to answer the following questions.Required:a. Staley Co.’s common stock is expected to have
Present value analysis—effects of estimation errors Capital budgeting analysis LO 7 involves the use of many estimates.Required:For each of the following estimation errors, state whether the net
Present value analysis—cost of capital National Leasing is evaluating the cost of LO 6 capital to use in its capital budgeting process. Over the recent past, the company has averaged a return on
Calculate NPV—compare to IRR Sunbelt Manufacturing Ltd. is considering the investment of $95,000 in a new machine. The machine will generate cash flow of $21,000 per year for each year of its
Calculate NPV—compare to IRR The following data have been collected by a task El 6.18 force of eapital budgeting analysts at Seger Ltd. concerning the drilling and produc- lq 7 9 tion of known
Interpretation of present value analysis and payback The Wrenchrite Garage is El6.19 considering an investment in a new tune-up computer. The cost of the computer is LO 6, 7, 9 $36,000. A cost
Interpretation of present value analysis—calculate annual cash flow Lake Regional Hospital is considering the acquisition of a new diagnostic scanning ma¬ chine. The investment required to get the
Relevant costs, special sales order—idle versus full capacity The Loop Beverage Co. produces a premium root beer that is sold throughout its chain of restaurants in the Midwest. The company is
Relevant costs, special sales order—idle versus full capacity Hull Motors, Inc. (HMI), produces small gasoline-powered motors for use in lawn mowers. The com¬ pany has been growing steadily over
Continue or discontinue a segment? Mario opened a chain of businesses several years ago that provide quick oil changes and other minor services in conjunction with a convenience operation consisting
Continue or discontinue a segment? The segmented income statement for XYZ Company for the year ended December 31, 2008, follows:XYZ COMPANY Segmented Income Statement For the Year Ended December 31,
Calculate NPV, present value ratio, and payback LaRussa Company is consider¬ ing the investment of $280,000 in a new machine. It is estimated that the new machine will generate additional cash flow
Calculate NPV, present value ratio, and payback. TopCap Co. is evaluating the purchase of another sewing machine that will be used to manufacture sport caps. The invoice price of the machine is
Present value ratios index Information about four investment proposals is sum¬ marized here:Proposal investment Required Net Present Value 1.$40,000 $24,000 2. 48,000 19,200 3. 24,000 12,000 4.
Calculate NPV—rank projects using present value ratios The following capital PI 6.28 expenditure projects have been proposed for management’s consideration at Heard, LO 6 Inc., for the upcoming
Accounting rate of return and NPV Puzo Publications uses the accounting rate of PI 6.29 return method to evaluate proposed capital investments. The company’s desired rate of LO 6, 7, 10, 11 return
Accounting rate of return, payback, and NPV Busy Beaver Corp. is interested in 9, 10, 11 reviewing its method of evaluating capital expenditure proposals using the account¬ ing rate of return
Case study—NPV of opening a small business Loma Myers has recently retired as LO 7 a flight attendant and is interested in opening a fitness center and health spa exclusively for women in Grand
Comprehensive problem—quantitative and qualitative analysis The following data have been collected by capital budgeting analysts at Sunrise Beach, Inc., concerning an investment in an expansion of
Capital budget expenditure analysis, Internet assignment Annual reports provide significant information about an organization’s capital budget and capi¬ tal budgeting process. Intel Corporation
The FASB’s Conceptual Framework project.
The plan of the book.
What transactions are.
Flow to calculate and interpret margin and turnover using the DuPont model.
The meaning of the bookkeeping terms youma/, ledger, T-account, account balance, debit, credit, and closing the books.
What is included in the cash and cash equivalents amount reported on the balance sheet.
The features of a system of internal control and why internal controls are important.
The bank reconciliation procedure.
How short-term marketable securities are reported on the balance sheet.
How accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.
How notes receivable and related accrued interest are reported on the balance sheet.
How inventories are reported on the balance sheet.
The alternative inventory cost-flow assumptions and their respective effects on the income statement and balance sheet when price levels are changing.
The impact of inventory errors on the balance sheet and income statement.
What prepaid expenses are and how they are reported on the balance sheet.
How the cost of land, buildings, and equipment is reported on the balance sheet.
How the terms capitaiize and expense are used with respect to property, plant, and equipment.
Alternative methods of calculating depreciation for financial accounting purposes and the relative effect of each on the income statement (depreciation expense) and the balance sheet (accumulated
Why depreciation for income tax purposes is an important concern of taxpayers and how tax depreciation differs from financial accounting depreciation.
The accounting treatment of maintenance and repair expenditures.
The effect on the financial statements of the disposition of noncurrent assets, either by sale or abandonment.
The difference between an operating lease and a capital lease.

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