1. The vice president of the manufacturing company for which you are the accountant has suggested to the president that all prices should be established on the basis of direct costing. Respond to this suggestion. 2. Assume that the company where you are employed has a substantial amount of unused plant capacity. A foreign company has offered to purchase a large quantity of your company’s product, but at a price of 12 percent less than the product’s normal selling price. What types of information are needed to arrive at a decision about whether to accept the order? 3. Suppose that your company is considering the purchase of a new machine to use in its production process. The cost of the machine is $295,000. If the purchase is made, an old machine currently used will be scrapped. It has no net salvage value because the cost to remove it equals its market value. The old machine has a book value of $150,000, and management is reluctant to take the loss that would result if this machine is scrapped. Discuss the types of information that management would need to make a decision about purchasing the new asset. Give special attention to the problem of the old asset’s book value. 4. Suppose that your company has been manufacturing a part used in its finished product. The total manufacturing cost of the part is $35. An outside supplier has offered to provide the part for $32. Describe the measurable data that management would need in making a decision about whether to accept the supplier’s offer. Eliminating a Region Brad’s employer, an eastern-based firm, is going through tough times. Downsizing is the only way to keep the company from going bankrupt. Brad has been given the assignment to eliminate an unprofitable region. His analysis has shown that the southwest region has a positive contribution margin but a net loss due to fixed costs. The western region has a positive contribution margin and a net loss. The eastern region has a positive contribution margin and a net income. The northeastern region has a positive contribution margin but a net loss. Brad further discovers that the net losses of the western and southwestern regions are due to fixed costs. Further investigation finds that the fixed costs can be separated into regional costs and corporate costs. In Brad’s investigation, the eastern region, though having all the costs of a corporate office, has lower fixed costs, making it a profitable region. Brad finds that Joe Black, the manager of the eastern region, has decided to allocate all the corporate office expenses to the other three divisions to make his region appear more profitable. More analysis indicates that if the corporate offices are allocated evenly to all four regions, the eastern region would have a net loss and the other regions would have a small net income. What should Brad do? Should Joe have the ability to allocate costs to other regions? Analyzing Financial Data Refer to The Home Depot, Inc., 2018 Annual Report (for the fiscal year ended February 3, 2019) in Appendix A. Locate the Selected Financial Data. Review the information for the following data points: a. Inventory turnover b. Number of stores c. Sales per square foot d. Average ticket ($) 1. For each of the above data points, calculate the increase or decrease from fiscal 2014 to fiscal 2018. 2. What was the percentage change in average ticket ($) from fiscal 2017 to fiscal 2018? Choosing a Machine Knowing the right questions to ask and information to obtain is important in making the correct decision. Your company has just decided to purchase a new machine. This machine will double production, decrease the material waste, and increase profits by 20 percent. However, it is double the size of the old one and takes twice as many workers to run. Your group has been given the task to decide whether to purchase this machine or stay with the current old machine. What questions would you need to ask to make your decision?
> Describe the flow of authority and responsibility in a corporate entity.
> Who makes the day-to-day decisions necessary for a corporation to operate?
> What does the term “restricted agency” mean?
> What is meant by the “par value of stock”?
> What is the role of the transfer agent?
> Lawrence’s Company operates a real estate abstract, title, and insurance company. Below are selected transactions and events that occurred during the years 20X1 to 20X4. Using those transactions and events, follow the instructions given. INSTRUCTIONS 1.
> What is the purpose of the minute book?
> How are the members of a corporation’s board of directors selected?
> How does par value differ from stated value?
> What are some benefits of a subchapter S corporation?
> If there is only one class of stock, what is it called?
> What are the corporation’s bylaws?
> Where is the usual place for organizers of a new corporation to acquire a corporate charter?
> Selling stock on a subscription basis involves considerable recordkeeping. Why does a corporation sell its shares in this way?
> What is the difference between the Common Stock Subscribed account and the Subscriptions Receivable—Common Stock account?
> What is convertible preferred stock?
> In a review of the annual reports of Pierce Wholesale Company and International Distributors, you note that Pierce Wholesale uses straight-line depreciation and International Distributors uses the declining-balance method. 1. Are these companies violatin
> When common stock without a par value or a stated value is issued, what amount is credited to the capital stock account when the stock is issued?
> What is cumulative preferred stock?
> What is participating preferred stock?
> What is the control account for the individual shareholder accounts in the common stockholders’ ledger?
> How are organization costs accounted for?
> What role does the registrar of a corporation serve?
> What are organization costs?
> What is the difference between a dissolution and liquidation?
> What is a stock subscription?
> Why would a new corporation issue no-par stock with a stated value, rather than par-value Stock?
> What are the major disadvantages of the partnership form of business entity?
> One of Wells Company’s retail outlets was destroyed by fire on March 18. All merchandise was burned. The company has fire insurance on its merchandise inventory. It will therefore file a claim for recovery of the cost of the lost invent
> List the major advantages of the partnership form of business over a corporation.
> What information appears on a statement of partners’ equities?
> The two partners in a business often pay personal bills by writing checks on the business bank account. Is this a good business practice? Explain. How should such payments be recorded?
> Explain how the partnership accounts for the sale by a partner of a portion of his partnership interest to another individual.
> What are typical considerations that affect the way income is allocated among partners?
> List the steps required to dissolve a partnership.
> Why should the assets and liabilities of an existing partnership be revalued when a new partner is to be admitted by the investment of cash in the organization?
> Explain what the term “mutual agency” means in regard to a partnership.
> Explain how the net income of a partnership is allocated if it is less than the salary and interest allowances.
> Sadler Computer Supply Company has just been destroyed by fire. Fortunately, however, the computerized accounting records had been “backed up” and were in a remote computer location so that the records were not destroyed. The company does not use the ret
> Are partners’ salaries considered to be expenses of the partnership? Explain.
> What is the advantage of a limited partnership?
> How does the balance sheet of a partnership differ from that of a sole proprietorship?
> Is Allowance for Doubtful Accounts brought forward from the general ledger of a sole proprietorship when the firm’s assets and liabilities are being transferred to the partnership? Why?
> Why are assets of an existing sole proprietorship revalued when they are transferred to a partnership?
> Does a partnership pay federal income tax? Explain.
> Does a partnership continue to exist after the death of a partner? Explain.
> Explain the use of a drawing account in a partnership.
> Which of these, if any, is not “real property”? a. land b. a building c. a motor home being used as an office d. pavement for a parking lot
> Name three or more events, developments, or situations that indicate impairment of property, plant, and equipment may exist.
> 1. In discussing a firm’s latest financial statements, a manager says that it is the “results on the bottom line” that really count. What does the manager mean? 2. If a firm’s expenses equal or exceed its revenue, what actions might management take? 3. H
> What information related to the company’s property, plant, and equipment must be presented in the financial statements and in the notes to the financial statements?
> Under what circumstances is the units-of-production method of depreciation especially desirable?
> What is the basic test for determining whether impairment does, in fact, exist?
> Which method will give you a higher amount of depreciation expense in the later years of an asset’s life, straight-line or declining-balance? Explain.
> Is MACRS used for federal income tax rules acceptable under GAAP?
> How is the amount of impairment to be recorded determined?
> What are the rules for determining the amount of cost in each category of intangibles in Question 22 to be removed from the asset account during each accounting period?
> What are the two categories of intangible assets for the purposes of disposing of their capitalized costs?
> What accounting treatment is given to most research costs?
> Are gains and losses on trade-in transactions recognized and recorded under GAAP?
> 1. How would the distinction between fixed and variable costs help management in forecasting cash needs for the business? 2. Explain how a flexible budget can be used by management to help control costs. 3. Briefly explain to management the reasons why v
> Explain how the sum-of-the-years’-digits method would be applied to an asset with a life of six years.
> What are the requirements for recording an intangible asset such as goodwill?
> Explain how to measure the gain or loss when an old asset is traded in on a new one.
> What is the name of the process by which costs of a natural resource deposit are removed from the asset account as the resources are produced?
> Explain how double-declining-balance depreciation is computed on an asset with a life of six years.
> Which, if any, of the depreciation methods discussed in this chapter ignore(s) salvage value?
> Name two accelerated depreciation methods.
> What is meant by the term “personal property”?
> Explain how straight-line depreciation is computed.
> A company purchased some land on which an old building is located. The building has to be torn down to enable construction of a new building. Which, if any, of the following costs related to the old building should be capitalized as part of the land cost
> 1. The directors of the firm where you work have asked you to explain whether the job order cost accounting system or the process cost accounting system provides the more accurate costs for each unit of product. What will you tell them? 2. What are the b
> What is meant by “capitalized costs”?
> What account is debited and what account is credited to record depreciation on trucks?
> What is meant by the first-in, first-out assumption?
> What is meant by the term net realizable value as it is used in the lower of cost or net realizable value rule?
> Explain how the lower of cost or net realizable value method is applied on a group basis.
> Is the value of inventory likely to be lower if the cost or net realizable value rule is applied on an item-by-item basis, on a group basis, or to the inventory as a whole?
> In a period of rising prices, is the LIFO method or the FIFO method likely to yield the larger inventory cost?
> A company uses the LIFO inventory method to determine cost. One of the managers complains that this is improper. He states: “We always sell our oldest products first. So we should be using first-in, first-out inventory costing.” What would you say in res
> Explain the retail method of inventory estimation.
> Suggest two situations where it may be necessary or desirable to estimate the inventory without a physical count.
> 1. Assume that you are an accountant for a manufacturing firm. At the end of one year, there is a large overapplied overhead amount. How would you explain to management why this balance might exist? 2. The president of a fairly large manufacturing compan
> What accounting principle or constraint underlies the lower of cost or net realizable value rule for inventory valuation.
> What impact does the ending inventory have on net income for the period covered by the financial statements?
> Does the maintenance of a perpetual inventory eliminate the need for taking physical inventory? Explain.
> Why is a perpetual inventory easier to maintain today than it would have been 50 years ago?
> Under what circumstances is the specific identification method for determining cost of inventory items logical?
> Explain briefly the average cost method.
> Suggest some specific controls that management must provide over inventory in a business that sells diamonds.
> What is meant by “discounting a note receivable”?
> What is a dishonored note receivable?
> How, if at all, does computation of the maturity value of an interest-bearing note receivable differ from that for an interest-bearing note payable?
> 1. Why do managers need special manufacturing records and a separate statement reporting the costs involved in producing goods? 2. How can an inventory be taken if work in process items are in varying stages of completion at the end of the accounting per
> Explain why records must be kept of the due dates of all notes payable.
> Are notes payable likely to be given in borrowing money? The purchase of merchandise? The purchase of equipment? Why?
> How are notes payable maturing less than one year from the balance sheet date shown on the balance sheet?
> What is meant by “discounting a note payable”?
> What is the maturity value of a $9,000 note, bearing interest at 9 percent, and due 105 days after date of issue of the note?
> How does a note receivable differ from an account receivable?
