Questions and Answers of Financial And Managerial Accounting The Basis For Business Decisions

Define standard costs and briefly indicate how they may be used by management in planning and control. LO3
Briefly list some of the advantages of using a standard cost system. LO3
What is wrong with the following statement: “There are three basic kinds of cost systems: job order, process, and standard.” LO3
Once standard costs are established, what conditions would require that stand¬ards be revised? LO3
List the variances from standard cost that are generally computed for materials, direct labor, and factory overhead. LO3
What is meant by a favorable labor usage variance? How is the labor usage variance computed? LO3
Define each of the following terms: normal volume, fixed costs, and idle capacity loss. LO3
Explain the cause of an unfavorable and of a favorable overhead volume vari¬ance. LO3
Why is an unfavorable overhead volume variance sometimes called an idle capac¬ity loss? LO3
Would a production foreman be equally responsible for an unfavorable materials price variance and an unfavorable materials quantity variance? Explain. LO3
"The cost of waste and inefficiency cannot be regarded as an asset.” Explain how this statement supports the use of standard costs in the valuation of goods in process and finished goods
What would be the purposes of preparing a budget for a business of any size? LO3
Describe the major steps in the preparation of a master budget. LO3
Describe three ways in which budgets serve management. LO3
What is a flexible budget? Explain how a flexible budget increases the usefulness of budgeting as a means of evaluating performance. LO3
Why is it important for management to focus attention on cost-volume-profit relationships? LO6
What is a volume index and why is it important in analyzing cost behavior? LO6
A is a variable cost; B is a fixed (nonvariable) cost; and C is a semivariable cost.How would you expect each of these total dollar costs to vary with changes in production volume? How would they
What important relationships are shown on a profit-volume (break-even) graph? LO6
Kris Company has an average contribution margin of 35%. What target sales volume per month is necessary to produce a monthly operating income of$22,000, if fixed (nonvariable) expenses are $118,000
Why is the profit-volume formula a more flexible analytical tool than a profitvolume graph? LO6
Define margin of safety and relevant range of activity. LO6
A top executive of a major steel company was recently quoted as follows: “The industry finds itself at the highest break-even point in our history. In the past we could make a profit operating at
An executive of U.S. Steel Corporation put the blame for lower net income for a recent fiscal period on the “shift in product mix to higher proportion of export sales.” Sales for the period
Why is it helpful to know the approximate amount of contribution margin gener¬ated from the use of a scarce resource such as a machine-hour or an hour of direct labor? LO6
The president of an airline blamed a profit squeeze on “unwise and unjustifiable promotional fares.” He pointed out that 50% of the company’s revenue came from “discount fares.” Explain why
An economist writing in the Wall Street Journal stated that inflation is caused by a shortage of supply in relation to demand. The article suggested that busi¬ness executives should try to maintain
In a recent report to stockholders, the management of a large corporation stated that lower sales volume, coupled with higher material and labor costs, resulted in a first-quarter loss of $131,000,
Comment on the following position taken by a business executive: “Since rele¬vant quantitative information is difficult to obtain and is subject to some degree of error, I’d rather make
What is the difference between a sunk cost and an out-of-pocket cost? LO1
Define opportunity costs and explain why they represent a common source of error in making cost analyses. LO1
Briefly discuss the type of information you would want before deciding to discon¬tinue the production of a major line of products. LO1
Explain why the book value of existing equipment is not relevant in deciding whether the equipment should be scrapped (without realizing any proceeds) or continued in use. LO1
The Calcutta Corporation produces a large number of products. The costs per unit for one product, a fishing reel, are shown below: LO1 Prime costs ( direct materials and direct labor ) . $7.00
What is capital budgeting? Why are capital budgeting decisions crucial to the long-run financial health of a business enterprise? LO1
What is the major shortcoming of using the payback period as the only criterion in making capital budgeting decisions? LO1
What factors should an investor consider in appraising the adequacy of the rate of return from a specific investment proposal? LO1
Discounting a future cash flow at 15% results in a lower present value than does discounting the same cash flow at 10%. Explain why. LO1
What factors determine the present value of a future cash flow? LO1
Discounting cash flows takes into consideration one characteristic of the earnings stream which is ignored in the computation of return on average investment.What is this characteristic and why is it
List the three basic features of variable ( direct ) costing. LO1
During the current year the inventory of finished product of a manufacturing firm declined. In which case would the company’s reported income be larger: if it used variable costing, or if it used
The Bombay Company reports an only.” Explain what is meant by “manufacturing margin” and why the income statement containing this term is not issued to outsiders. LO1
List three advantages and three disadvantages of using variable (direct) costing. LO1
What is a cost accounting system? LO8
What are the two major objectives of cost accounting? LO8
Why is it difficult to measure the precise cost of a product or a service produced by a business enterprise? LO8
What is meant by the phrase, “different costs for different purposes”? Illustrate by explaining how a factory superintendent’s salary might be treated differently, as a cost, for different
Differentiate between product costs and period costs. LO8
What factors should be taken into account in deciding whether to use a job order cost system or a process cost system in any given manufacturing situation? LO8
Describe the three kinds of charges on a job cost sheet. For what general ledger control account do job cost sheets constitute supporting detail? LO8
Explain why it is advantageous to use predetermined overhead rates in associat¬ing factory overhead with output. LO8
Gerox Company applies factory overhead on the basis of machine-hours, using a predetermined overhead rate. At the end of the current year the factory over¬head account has a credit balance. What are
What are the characteristics of a process cost system? LO8
What is meant by the term equivalent full units? How is this concept used in computing average unit costs? LO8
When must the equivalent full units of production figure for materials be com¬puted separately from that for processing costs? Explain. LO8
If a department has no beginning inventory of goods in process but has 10,000 units in process at month-end, will the equivalent full units of work performed be greater or smaller than the number of
Briefly describe the purposes of a cost report in a process cost system. LO8
In a process cost system, is the average unit cost of work performed during the month always exactly equal to the average unit cost of goods completed during the month? Explain. LO8
List several ways in which business owners may legally alter the amount of taxes they pay. LO2
What is meant by the expression “tax planning”? LO2
What are the four major classes of taxpayers under the federal income tax law? LO2
It has been claimed that corporate income is subject to double taxation. Ex¬plain the meaning of this expression. LO2
Taxes are characterized as progressive, proportional, or regressive with respect to any given base. Describe an income tax rate structure that would fit each of these characterizations. LO2
State whether you agree with the following statements and explain your reason¬ ing: . .a A person in a very high tax bracket who makes a cash contribution to a college will reduce his or her tax
State in equation form the federal income tax formula for individuals, beginning with total income and ending with taxable income. LO2
Avery and Baker are both high-income single taxpayers who have exactly the same amount of taxable income. However, Avery is subject to a marginal tax rate far lower than the marginal rate for Baker.
List some differences in the tax rules for corporations in contrast to those for individuals. LO2
Helen Bame, M.D., files her income tax return on a cash basis. During the cur¬rent year she collected $12,600 from patients for medical services rendered in prior years, and billed patients $77,000
Joe Gilmore, a single man, files his income tax return on a cash basis. During the current year $800 of interest was credited to him on his savings account; he withdrew this interest on January 18 of
From an individual taxpayer’s viewpoint, it is better to have a $10,000 net long¬term capital gain than $10,000 of ordinary income; however, ordinary losses are usually more advantageous than net
Even when a taxpayer uses the accrual method of accounting, taxable income may differ from accounting income. Give four examples of differences between the tax treatment and accounting treatment of
Under what circumstances is the accounting procedure known as income tax allocation appropriate? Explain the purpose of this procedure. LO2
List some tax factors to be considered in deciding whether to organize a new business as a corporation or as a partnership. LO2
Explain how the corporate income tax makes debt financing in general more attractive than financing through the issuance of preferred stock. LO2
a What groups are interested in the financial affairs of publicly owned corpora- tions?b List some of the more important sources of financial information for investors. LO3
In financial statement analysis, what is the basic objective of observing trends in data and ratios? What is an alternative standard of comparison? LO3
In financial analysis, what information is produced by computing a ratio that is not available in a simple observation of the underlying data? LO3
Explain the distinction between a percentage change and a component percent¬age. LO3
“Although net income declined this year as compared with last year, it increased from 3% to 5% of net sales.” Are sales increasing or decreasing? LO3
Differentiate between horizontal and vertical analysis. LO3
Assume that Chemco Corporation is engaged in the manufacture and distribu¬tion of a variety of chemicals. In analyzing the financial statements of this corpo¬ration, why would you want to refer to
What is the objective of financial analysis? What types of information may be relevant in evaluating the future profitability of a company? LO3
What single ratio do you think should be of greatest interest to: LO3 a a banker considering a short-term loan?b a common stockholder?c an insurance company considering a long-term mortgage loan?
Modern Company earned a 16% return on its total assets. Current liabilities are 10% of total assets. Long-term bonds carrying a 13% coupon rate are equal to 30%of total assets. There is no preferred
In deciding whether a company’s equity ratio is favorable or unfavorable, credi¬tors and stockholders may have different views. Why? LO3
Company A has a current ratio of 3 to 1. Company B has a current ratio of 2 to 1. Does this mean that A’s operating cycle is longer than B’s? Why? LO3
An investor states, “I bought this stock for $50 several years ago and it now sells for $100. It paid $5 per share in dividends last year so I’m earning 10% on my investment.” Criticize this
Company C experiences a considerable seasonal variation in its business. The high point in the year’s activities comes in November, the low point in July.During which month would you expect the
Both the inventory turnover and accounts receivable turnover increased from 10 times to 15 times from Year 1 to Year 2, but net income decreased. Can you offer some possible reasons for this? LO3
Is the rate of return on investment (ROI) intended primarily to measure liquid¬ity, solvency, or some other aspect of business operations? Explain. LO3
Mention three financial amounts to which corporate profits can logically be compared in judging their adequacy or reasonableness. LO3
Under what circumstances would you consider a corporate net income of$1,000,000 for the year as being unreasonably low? Under what circumstances would you consider a corporate profit of $1,000,000 as
What is a responsibility accounting system? LO5
Distinguish between a cost center and a profit center. LO5
What are some uses that management may make of departmental accounting information? LO5
The College Bookstore has employed Kay Barton as its new manager. In the past the income statement of the bookstore has shown only total revenue and operat¬ing expenses. The new manager wants to
Jill Stone, the manager of a retail store, states that the selling prices in her business are established by adding 50% to merchandise cost. LO5 a If this statement is factual, what rate of gross
Give three examples of items representing indirect expenses to the departments within a large department store, such as Sears or Penneys. For each example of an indirect expense, indicate a
Explain the distinction between direct expenses and indirect expenses as these terms are used in relation to expense allocation among departments. LO5

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