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Principles of Accounting Univ.-Prof. Dr. habil. Michael Grüning [email protected]

Review Problems Financial Accounting 2 Assets The subsequent list contains various objects. 1. 2. 3. 4. 5. 6. 7. 8.

Inventory current assets Accounts receivable Asset Customers’ promises to buy products in the future (mutually unexecuted contract) Rented office building No - dont own it dont control it Brand name (an item that cannot be touched) Bought - yes ; generated - no Human resources No A contract to deliver an item in the future (mutually unexecuted contract) No Future profits No

No

Required State and explain which of the above are assets!

Liabilities The subsequent list contains various objects. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Signing a contract to buy product in the future (executory contract) No Receipt of payment in advance for future service Yes Taxes payable Yes Future taxes No Product warranties Signing a contract with employees to provide medical insurance and pension benefits Yes Employee pensions to be paid in the future Yes Filing of a lawsuit against the company No (because we dont know how likely it is to loose Hiring a senior executive on a long-term contract No (because employee need to come to work to pay the salary) Wall Street Journal sells one year subscription Yes United Airlines sells a ticket Yes

Required State and explain which of the above are liabilities!

Principles of Accounting: Review Problem s Financial Accounting 2, page 1 of 2

Transactions affecting the Balance Sheet This is the Balance Sheet of firm ABC on January 2014. Assets Short-Term Assets Cash Accounts Receivable Inventory Prepaid Insurance

Liabilities and Shareholders’ Equity Short-Term Liabilities 500 € Accounts Payable 200 € Current Portion of Mortgage Payable 600 € 200 € Long-Term Liabilities Mortgage Payable

800 € 500 €

5,000 €

Long-Term Assets Prepaid Insurance Truck Building Land

400 € Shareholders’ Equity 600 € Owners’ Investment 500 € Retained Earnings 5,300 €

2,000 € 0€

Total

8,300 € Total

8,300 €

The following transactions occur in year 2014: 1. 2. 3. 4. 5. 6.

The shareholder invests 1,000 € in the firm. Owners investment 1000 up; cash 1000 up The firm purchases another truck for 500 €. cash lowers by 500; Truck increase by 500 The firm purchases (short-term) insurance for the building for 100 €. cash lowers by 100; Prepaid insurance up by 100 The firm orders goods for 300 € to be paid 30 days after delivery. No liability because not received goods ye The firm receives these goods. Accounts payable up 300; inventory up 300 The firm repays the current portion of mortgage payable. Current portion of mortgage payable -500 ; Cash -500

Required How does the Balance Sheet is affected by each of the above transactions?

Principles of Accounting: Review Problem s Financial Accounting 2, page 2 of 2

Principles of Accounting Univ.-Prof. Dr. habil. Michael Grüning [email protected]

Review Problems Financial Accounting 3 Revenue Recognition The subsequent list contains various transactions and events. 1. Best Buy delivers $500,000 worth of washing machines in December to customers who don’t have to pay until February. 500.000$ revenue in Dec 2. Tyco collects $300,000 cash in December for toy sales made in October. Revenue in Oct 3. Company leases space to a tenant for the months of December and January for $20,000, all of which is paid for in cash in December. 10.000$ in Dec 4. Boeing receives an order for a $400,000 jet in December to be delivered the following July. 5. Peoplesoft issues 20,000 shares of stock and receives $10/share, which is $2/share more than they expected. Nothing (dividends payments or any transactions with shareholders are not taken into accou 6. Enron sets up a pilot program with Blockbuster to deliver video on demand to consumers, via a technology that doesn’t yet exist. They sell the next 10 years of cash flow to CIBC for $115.2 million and guarantee the full value of the investment if the venture fails to make money. No revenue as the risk is not being transfered

Nothing

Required State and explain how much revenue is recognized in December!

Expense Recognition The subsequent list contains various transactions and events. 1. 2. 3. 4. 5.

GM buys engines worth $2,000,000 in December for cash. No because engines not used yet, still has a value of 2mio GM uses the engines to make cars at a total cost of $10,000,000 in December.no, because still have the value of the ca GM sells cars costing $8,000,000 in December for $15,000,000. 800.000$ in dec GM incurs $180,000 in salaries for its marketing staff in December. 180.000$ GM pays its auditor $50,000 in December for services to be rendered in December and January. 25.000$ in Dec 6. GM buys a $500,000 machine press in December. No, but later depreciation 7. GM pays $1,200,000 in cash dividends in December. No, because not considered in revenues (transaction to shareholders Required State and explain how much expense is recognized in December!

Principles of Accounting: Review Problems Financial Accounting 3, page 1 of 1

Principles of Accounting Univ.-Prof. Dr. habil. Michael Grüning [email protected]

Review Problems Financial Accounting 4 Types of Cash Flow The subsequent list contains various transactions. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Payment of accounts payable O Proceeds from issuing common stock I Collection of accounts receivable O I, if machine is non current asset Sale of a machine O, if machine is current asset Payment of dividends F Payment of interest on debt O Purchase of land I Issue common stock to acquire land F Purchase of a patent I Purchase of common stock as an investment I, cause not our stocks Receipt of dividends on that investment in stock I of building Purchase a building with proceeds of a bank loan I, purchase F, bank loan Sum is 0

Required State and explain if the items are recognized as Operation Cash Flow, Investing Cash Flow or Financing Cash Flow!

Principles of Accounting: Review Problems Financial Accounting 4, page 1 of 1

Principles of Accounting Univ.-Prof. Dr. habil. Michael Grüning [email protected]

Review Problems Management Accounting 02 Analysis of costs by behaviour for decision-making (IM 2.3) The Northshire Hospital Trust operates two types of specialist X-ray scanning machines, XR1 and XR50. Details for the next period are estimated as follows: administrative costs and costs for sales not included

Machine Running time Variable running costs (excluding plates) Fixed costs

direct costs

XR1 1,100 hour 27,500 € 20,000 €

XR50 2,000 hours 64,000 € 97,500 €

A brain scan is normally carried out on machine type XR1: this task uses special X-ray plates costing 40 € each and takes four hours of machine time. Because of the nature of the process, around capacity costs = fix cost 10% of the scans produce blurred and therefore useless results. Brain scans can also be done on machine type XR50 and would take only 1.8 hours per scan with a reduced reject rate of 6%. However, the cost of the X-ray plates would be 90 € per scan. Required a. Calculate the product cost of a satisfactory brain scan on machine type XR1! b. Advise which type should be used, is available on both types of machine! dont have to care about capacity but keep in mind opportunity costs (in this case not cause we dont give up an opportunit product cost is the false term to answer the question - need to think about relevant cos what costs should be considered to answer the question? -> which one is cheaper? when capacity is a shortage we need to consider fix cost

Principles of Accounting: Review Problems Management Accounting 02, page 1 of 1

Principles of Accounting Univ.-Prof. Dr. habil. Michael Grüning [email protected]

Review Problems Management Accounting 03 Computation of three different overhead absorption rates and a cost-plus selling price (IM 3.6) A manufacturing company has prepared the following budgeted information for the forthcoming year: Direct material Direct labour Direct expenses Production overhead Administrative overhead Budgeted activity levels include: Budgeted production units Machine hours Labour hours

800,000 € 200,000 € 40,000 € 600,000 € 328,000 € 600,000 units 50,000 hours 40,000 hours

It has recently spent heavily upon advanced technological machinery and reduced its workforce. As a consequence it is thinking about . The administrative overhead is to be absorbed as a percentage of factory cost. Required a. Prepare pre-determined overhead absorption rates for production overheads based upon the three different bases for absorption mentioned above. b. Outline the reasons for calculating a pre-determined overhead absorption rate. c. Select the overhead absorption rate that you think the organization should use giving reasons for your decision. d. The company has been asked to price job AX, this job requires the following: Direct material Direct labour Direct expenses Machine hours Labour hours

3,788 € 1,100 € 422 € 120 hours 220 hours

Compute the price for this job using the absorption rate selected in c. above, given that the company profit margin is equal to 10% of the price.

Principles of Accounting: Review Problems Management Accounting 03, page 1 of 1

Principles of Accounting Univ.-Prof. Dr. habil. Michael Grüning [email protected]

Review Problems Management Accounting 05 FIFO method and losses in process (5.20, 7th ed.) A company operates several production processes involving the mixing of ingredients to produce bulk animal feedstuffs. One such products is mixed in two separate process operations. The information below is of the costs incurred in, and output from, Process 2 during the period just completed. Transfers from Process 1 Raw materials costs Conversion costs Opening work in process Production: Opening work in process (100 % complete, apart from Process 2 conversion costs which were 50 % complete) Transfers from Process 1 Completed output Closing work in process (100 % complete, apart from Process 2 conversion costs which were 75 % complete)

187,704 € 47,972 € 63,176 € 3,009 € 1,200 units 112,000 units 105,400 units 1,600 units

Normal wastage of materials (including product transferred from Process 1), which occurs in the early stages of Process 2 (after all materials have been added), is expected to be 5 per cent of input.

Required a. Prepare the Process 2 account for the period, using FIFO principles. b. Explain how, and why, your calculations would have been different if wastage occurred at the end of the process.

Principles of Accounting: Review Problems Management Accounting 05, page 1 of 1

Principles of Accounting Univ.-Prof. Dr. habil. Michael Grüning [email protected]

Review Problems Management Accounting 07 Preparation of variable and absorption costing statements (IM 7.3) Solo Limited makes and sells a single product. The following data relate to periods 1 to 4. Variable cost per unit Selling price per unit Fixed manufacturing costs per period

30 € 55 € 6,000 €

Normal activity is 500 units and production and sales for the four periods are as follows:

Sales Production

Period 1 units 500 units 500 units

Period 2 units 400 units 500 units

Period 3 units 550 units 450 units

Period 4 units 450 units 500 units

There were no opening stocks at the start of period 1. Required a. Prepare operating statements for EACH of the periods 1 to 4, based on marginal costing principles. b. Prepare operating statements for EACH of the periods 1 to 4, based on absorption costing principles. c. Comment briefly on the results obtained in each period AND in total by the two systems.

Principles of Accounting: Review Problems Management Accounting 07, page 1 of 1

Principles of Accounting Univ.-Prof. Dr. habil. Michael Grüning [email protected]

Review Problems Management Accounting 08 Non-graphical CVP analysis and the acceptance of a special order (IM 8.8) Video Technology Plc was established in 1987 to assemble video cassette recorders (VCRs). There is now increased competition in its markets and the company expects to find it difficult to make an acceptable profit next year. You have been appointed as an accounting technician at the company, and have been given a copy of the draft budget for the next financial year.

Draft budget for 12 months to 30 November 2001 Sales income Cost of sales Variable assembly materials Variable labour Factory overheads (variable) (fixed) Gross profit Selling overheads (commission) (fixed) Administration overheads (fixed) Net profit

million € 960.0 374.4 192.0 172.8 43.0 38.4 108.0 20.0

782.2 177.8

166.4 11.4

The following information is also supplied to you by the company’s financial controller, Edward Davies: 1. planned sales for the draft budget in the year to 30 November 2001 are expected to be 25 per cent less than the total of 3.2 million VCR units sold in the year to 30 November 2000; 2. the company operates a Just-In-Time stock control system, which means it holds no stocks of any kind; 3. if more than 3 million VCR units are made and sold, the unit cost of material falls by 4 € per unit; 4. sales commission is based on the number of units sold and not on turnover; 5. the draft budget assumes that the factory will only be working at twothirds of maximum capacity; 6. sales above maximum capacity are not possible. Edward Davies explains that the Board is not happy with the profit projected in the draft budget, and that the sales director, Anne Williams, has produced three proposals to try and improve matters.

Principles of Accounting: Review Problems Management Accounting 08, page 1 of 2

Proposal A involves launching an aggressive marketing campaign: – this would involve a single additional fixed cost of 14 million € for advertising; – there would be a revised commission payment of 18 € per unit sold; – sales volume would be expected to increase by 10 per cent above the level projected in the draft budget, with no change in the unit selling price. Proposal B involves a 5 per cent reduction in the unit selling price: – this is estimated to bring the sales volume back to the level in the year to 30 November 2000. Proposal C involves a 10 per cent reduction in the unit selling price: – fixed selling overheads would also be reduced by 45 million €; – if proposal C is accepted, the sales director believes sales volume will be 3.8 million units. Required a. For each of the three proposals, calculate the: – change in profits compared with the draft budget; – break-even point in units and turnover. b. Recommend which proposal, if any, should be accepted on financial grounds. c. Identify three non-financial issues to be considered before a final decision is made. Edward Davies now tells you that the company is considering a new export order with a proposed selling price of 3 million €. He provides you with the following information: 1. The order will require two types of material: – material A is in regular use by the company. The amount in stock originally cost 0.85 million €, but its standard cost is 0.9 million €. The amount in stock is sufficient for the order. The current market price of material A to be used in the order is 0.8 million €; – material B is no longer used by the company and cannot be used elsewhere if not used on the order. The amount in stock originally cost 0.2 million € although its current purchase price is 0.3 million €. The amount of material B in stock is only half the amount required on the order. If not used on the order, the amount in stock could be sold for 0.1 million €; 2. direct labour of 1.0 million € will be charged to the order. This includes 0.2 million € for idle time, as a result of insufficient orders to keep the workforce fully employed. The company has a policy of no redundancies, and spreads the resulting cost of idle time across all orders; 3. variable factory overheads are expected to be 0.9 million €; 4. fixed factory overheads are apportioned against the order at the rate of 50 per cent of variable factory overheads; 5. no sales commission will be paid. Required d. Prepare a memo for Edward Davies: – showing whether or not the order should be accepted at the proposed selling price; – identifying the technique(s) you have used in reaching this conclusion.

Principles of Accounting: Review Problems Management Accounting 08, page 2 of 2

Principles of Accounting Univ.-Prof. Dr. habil. Michael Grüning [email protected]

Review Problems Management Accounting 09 Preparation of a cost estimate involving the identification of relevant costs (IM 9.3) You are the management accountant of a publishing and printing company which has been asked to quote for the . The work would be carried out of the company. Because of existing commitments, some to complete the printing of the programme. A trainee accountant has produced the following cost estimate based upon the resources as specified by the production manager: Direct materials: paper (book value) inks (purchase price) Direct labour: skilled 250 hours at 4.00 € unskilled 100 hours at 3.50 € Variable overhead 350 hours at 4.00 € Printing press depreciation 200 hours at 2.50 € Fixed production costs 350 hours at 6.00 € Estimating department costs

5,000 € 2,400 € 1,000 € 350 € 1,400 € 500 € 2,100 € 400 € 13,150 €

You are aware that considerable publicity could be obtained for the company if you are able to win this order and the price quoted must be very competitive. The following are relevant to the cost estimate above:

they are there anyway for 200 hours, we just need them for 150 thats why irrelevant cost

1. The paper to be used is currently in stock at a value of 5,000 €. It is of an unusual colour which has not been used for some time. The replacement price of the paper is 8,000 €, while the scrap value of that in stock is 2,500 €. The production manager does not foresee any alternative use for the paper if it is not used for the village fair programmes. 2. The inks required are not held in stock. They would have to be purchased in bulk at a cost of 3,000 €. 80% of the ink purchased would be used in printing the programme. No other use is foreseen for the remainder. 3. Skilled direct labour is in short supply, and to accommodate the printing of the programmes, 50% of the time required would be worked at weekends, for which a premium of rate is paid. The normal hourly rate is 4.00 € per hour. 4. Unskilled labour is presently under-utilized, and at present . If the printing work is carried out at a weekend, 25 unskilled hours would have to occur at this time, but the employees concerned would be given two hours’ time off (for which they would be paid) in lieu of each hour worked. 5. Variable overhead represents the cost of operating the printing press and binding machines. Principles of Accounting: Review Problems Management Accounting 09, page 1 of 2

6. When not being used by the company, the printing press is hired to outside companies for 6.00 € per hour. This earns a contribution of 3.00 € per hour. There is unlimited demand for this facility 7. Fixed production costs are those incurred by and absorbed into production, using an hourly rate based on budgeted activity. 8. The cost of the estimating department represents time spent in discussion with the village fair committee concerning the printing of its programme. Required a. Prepare a revised cost estimate using the opportunity cost approach, showing clearly the minimum price that the co...