Prepare a cash flow forecast for audiofile

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Reference no: EM131035595

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.

Reference no: EM131035595

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