Incremental Analysis and Decision-making Costs

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Incremental Analysis and Decision-making Costs"

Transcription

1 Management Accounting 161 Incremental Analysis and Decision-making Costs Nature of Incremental Analysis Decision-making is essentially a process of selecting the best alternative given the available information for comparison of strengths and weaknesses of each alternative. If there exists no alternative to the current course of action, then there is no decision to be made. However, it is rare regarding any course of action for there not be alternatives. In personal decision-making, factors other than income and expenses such as qualitative factors may be more important than cost in deciding. However, in business decisions are generally made by identifying the alternative with the most revenue or the least cost. Incremental analysis is a decision-making tool in which the relevant costs and revenues of one alternative are compared to the relevant costs and revenues of another alternative. Relevant costs may be defined as those future costs that are different between alternatives. Costs that are the same are considered irrelevant. Incremental analysis is sometimes called differential costing, marginal costing, or relevant costing. Incremental analysis is basically a worksheet technique in which the relevant costs of one alternative are listed in one column and the relevant costs of another alternative are listed in an adjacent column. Frequently, an optional third column is used to show the difference in the costs. The differences in relevant costs are called incremental costs. Technically, incremental cost may be defined as the difference between the sum of the relevant costs of two alternatives. In short, it is a tool for choosing between two alternatives. The best decision is the one with the least amount of relevant costs or the greatest relevant revenue. Incremental analysis is not an optimization technique. Rather it is a tool for using appropriate cost concepts to measure and evaluate the relevant cost inputs. It is basic tool for measuring the difference in revenues or costs between two alternatives. Incremental analysis is a tool which first requires that the appropriate costs be identified and then measured.

2 162 CHAPTER NINE Incremental Analysis and Decision-making Costs Under appropriate circumstances, incremental analysis is a tool for evaluating decision alternatives such as: Keep or replace Make or buy Sell now or process further Lease space or continue operations Continue or discontinue product line Accept or reject special offer Change credit terms Open new territory Buy or lease As a tool, incremental analysis can be used in all areas of a business. The tool is just as useful in the area of marketing as it is in the area of production. The objective in using incremental analysis is to identify the alternative with the least relevant cost or the most relevant revenue. The difference in the sum of relevant costs is either called incremental cost or net benefit. Consequently, the alternative with a favorable incremental cost (sometimes called net benefit) is the desirable alternative. Since this tool relies strictly on estimated costs/revenues and because the margin of error can be significant, different computations of incremental cost should be made based on different cost assumptions. Both optimistic and pessimistic arrays of cost data should be used. Incremental analysis is an ideal tool for what-if analysis. The basic problem with incremental analysis, as commonly used, is that the time period in which costs are incurred or revenue realized is usually ignored. Consequently, a major weakness of the technique is that the time value of money is not considered. Technically, there is a major different between two identical costs if one is incurred at the beginning of a period and the other is incurred at the end of the period. For many of the decisions listed above, the use of present value concepts may be appropriate. Therefore, The Management/Accounting Simulation incremental analysis software program that comes with the student software package is innovative in that it has present value and net-of-tax cash flow options. The use of present value with incremental analysis is discussed more in depth at the end of this chapter. Also, chapter 12 presents an in depth discussion of using present value in incremental analysis. Relevant and Irrelevant Costs The most important concept to understand in using incremental analysis is relevant costs. In any decision involving two alternatives, the irrelevant cost may always be ignored. Only relevant costs must be identified and included in the analysis. Relevant costs are often defined as follows: 1. Those future costs that will be different under available alternatives. 2. Those costs that would be changed by making the decision. 3. Costs that will be different between two alternatives.

3 Management Accounting 163 The key element in these definitions of relevant costs is that between the two alternatives each cost should be different in amount. Secondly, the cost must be a future cost. Historical costs, as will be explained, are always irrelevant and may be safely excluded from the analysis; To illustrate, suppose a company is about to make a decision to purchase six months of office supplies. The needed supplies can be purchased from supplier A for $5,000 and from Supplier B for $4,800. However, Supplier B is in another state and, if the purchase is made from supplier B, the company must pay freight in the amount of $300. Also, the company has $500 of supplies on hand. One approach is to include all costs including irrelevant costs: Supplier A Supplier B Difference Cost of supples to be purchased $5,000 $4,800 $200 Cost of supplies on hand Freight 300 (300) $5,500 $5,600 ($100) In the above analysis, the cost of supplies to be purchased is relevant because there is a difference of $200 in favor of buying from supplier B. The cost of supplies on hand is irrelevant for two reasons: (1) the cost is the same and (2) it is a past cost already made. Supplies on hand are not a future cost, even though it will be a future expense. Regardless from which supplier the supplies are purchased, the same amount of past supplies cost will appear as an operating expense in the future. In a similar manner, incremental revenue is the difference in future revenue that would result by choosing one alternative over another. Again, the revenue must be a future revenue and the revenue between the two choices must be different in amounts. To illustrate, assume that we have the opportunity to rent some unused office space for $500 a month to two prospective tenants, Tenant A and Tenant B. Prospective Tenant A is willing also to pay for an estimated utility bill of $50 per month but tenant B is not. Tenant A Tenant B Difference Monthly rental revenue $500 $500 $ 0 Payment of utilities $ 50 0 $ 50 $550 $500 $ 50 The above comparison of revenue clearly shows the monthly rental revenue of $500 to be irrelevant as to which tenant is accepted for occupancy because it is rent that is the same between both alternatives. The inclusion of the monthly revenue

4 164 CHAPTER NINE Incremental Analysis and Decision-making Costs does not help make the decision; otherwise the amount is still important. However, the payment of utilities is clearly relevant because of the difference in willingness to pay between prospective tenant A and tenant B. The decision criterion when using incremental analysis is simply this: the alternative should be chosen that has the least total relevant cost or the greatest total relevant revenue. The key to using incremental analysis correctly is the ability to distinguish between relevant costs and revenues. Examples of relevant and irrelevant costs are the following: Relevant Irrelevant Future costs that are not the same Allocated fixed cost Opportunity costs (e.q., depreciation) Trade-in allowance Future costs that are the same Cost of new assets Historical costs (Sunk costs) Sunk Costs - Two costs that are often misunderstood or used incorrectly in incremental analysis are sunk costs and opportunity costs. Sunk costs are, first of all, always irrelevant costs. They maybe excluded in any analysis or cost comparison review. Sunk costs are historical costs; that is, past expenditures. Because they are expenditures already made the expenditure can not be changed. To incur or not incur is not an option now. Examples of a sunk cost are cost of fixed assets such as buildings or equipment. By the same token, depreciation is also a sunk cost. The book value of a fixed asset (cost - accumulated depreciation) is also a sunk cost. To illustrate, assume that an asset currently in use (old asset) has a book value of $1,000 and that this piece of equipment is tentatively under review for replacement. The purchase price of the new asset is $5,000 and is estimated to have a useful life of 10 years. The old asset can also last 10 years with some repairs now and then. The operating expenses of the old asset is now $800 per year but the new asset is projected to have only an operating expenses of $200 per year. The old asset has no trade-in value. The alternatives are to keep the old asset or to replace it. The replacement should take place if the relevant costs of replacing is less than the relevant costs of keeping. 10 Years Basis Keep Old Asset Purchase New Asset Difference Cost of new asset $ 5,000 ($5,000) Book value of old asset $ 1,000 1,000 0 Operating expenses $ 8,000 2,000 6,000 $ 9,000 $ 8,000 $1,000 The difference of $1,000 is a net benefit of purchasing and replacing the old asset with the new asset. However, since the book value of the old asset is shown in both columns and is, therefore, the same between both alternatives, the book value of the old asset is irrelevant. You may wonder how this is so? If the old asset is kept, then

5 Management Accounting 165 the book value of $1,000 will be shown on the books as depreciation cost over the remaining life of the old asset. If the new asset is purchased, then the book value of the old asset will be recorded as a $1,000 loss. In either event, an expense of $1,000 during the next 10 years will be recorded. Whether the old asset is replaced or not, the cost of the old asset results in a deduction from revenue in the same amount either as depreciation or a loss from the trade-in. Opportunity Costs - Opportunity costs are always relevant to making decisions; however, the concept of opportunity cost is somewhat abstract and difficult to understand because it is not an out-of-pocket cost. Following are some commonly used definitions of opportunity cost: 1. Earnings that would be realized if the available resources would be put to some other use. 2. Alternative earnings that might have been obtained if the productive good, service, or capacity had been applied to some other alternative use. The definition preferred in this chapter is the following: opportunity cost is the amount of revenue forgone (given up) by not choosing one alternative over another. The key word for understanding opportunity cost is not cost but revenue forgone. For example if you decide to take a vacation rather than invest $5,000 in a savings account that earns 6% per annum, then the opportunity cost is the interest you could have earned. At 6% interest you could have earned $300 for a full year. Therefore, the decision to take a vacation should include as a cost the interest that was not earned Other examples of opportunity cost may be given. If you have been given a choice of two jobs and job A pays $60,000 per year and job B pays $55,000 per year, then the opportunity cost of accepting job A is $55,000. Other things equal, you are only $5,000 better off financially with job A. If you own land that could be sold for $100,000 and the land is not now earning any income other than appreciation in value, then there is an opportunity cost of not earning interest. Assuming you could earn at a minimum 6% interest in a CD, the opportunity cost of keeping the land and not selling is $6,000 per year. Interest in the amount of $6,000 is being forgone each year in favor of the land appreciating in value. You own a building that you can easily rent for $10,000 a month. If you decide to use the building to open a business for yourself, then you incur an opportunity cost in the amount of $10,000, (rent given up, forgone, or sacrificed) by going into business. If you are a student and you spend 30 hours a week in class and in studying, there is an opportunity cost of being a student. The opportunity cost is the income you could be earning by working rather than attending class or studying. Fixed and Variable Costs - Costs in management accounting are often assumed to be either fixed or variable. The classification of a cost as either fixed or variable does not necessarily mean the cost is relevant or irrelevant. Whether a fixed cost or a variable cost is relevant or irrelevant depends on the whether the cost is different

6 166 CHAPTER NINE Incremental Analysis and Decision-making Costs between the two alternatives. However, variable costs are always relevant, if there is a different in volume between the two alternatives. For example, assume that machine B is being considered to replace machine A and that the purchase of machine B would increase production capacity and also sales by 50%. If current production and sales is 1,000 units (full capacity) and selling price is $100, then production and sales would increase to1,500 units. Currently, cost of goods sold is $80 per unit. Based on these assumptions, the following analysis may be prepared: Machine A Machine B Difference (Volume = 1,000) (Volume = 500) (500) Sales ($10,000) ($15,000) $5,000 Cost of goods sold $ 8,000 $12,000 ( $4,000) ($ 2,000) ($ 3,000) $1,000 Note: For simplistic purposes, the cost of machine B was ignored. However, in order to make the decision, the cost of machine B must be included as a relevant cost. In this particular case, both sales and cost of goods sold are relevant. However, had volume not been greater with the machine B, then sales and cost of goods sold would have been the same and, therefore, irrelevant. Then other cost or revenue factors would have had to be found to make the decision. Whether a fixed cost or variable cost is relevant then depends more on the circumstances than the nature of the cost. Incremental Analysis Model The basic incremental analysis model used in this program may be mathematically summarized as follows: IC = RC a i - RC b i i = 1,n RC a i - relevant costs of alternative A RC b i - relevant costs of alternative B n - number of relevant cost items Incremental analysis is a flexible tool. Data may computed and presented for the life of a decision alternative on a per period basis such as a month or year. This procedure would require the relevant cost items to be divided either by the number of years of the number of months in the life of the assets under consideration. Incremental analysis does not require that irrelevant data be included. However, at the option of the analyst irrelevant costs may be included. The inclusion of irrelevant data will in no way affect the ultimate decision. The action of classifying an expense as irrelevant or relevant does not mean that the irrelevant cost is not important. In fact, in the execution of the decision, it may be very important. To illustrate, assume that you are about to go to a movie and you are in the midst of choosing which movie theater to attend. You have narrowed your

7 Management Accounting 167 choices to movie A and movie B and you want to see the movie which will cost the least. You have made the following cost analysis: Movie A Movie B Difference Cost of popcorn $3.00 $3.50 ($.50) Large drink $3.50 $4.25 ($.75) Transportation cost $ $.25 $7.50 $8.50 ($ 1.00) The net benefit of attending movie A is $1.00. The cost of tickets is $8.00, the same at each movie theater. Therefore, since the ticket cost is the same, you have correctly omitted this irrelevant cost from your analysis. Consequently, you decide in favor of movie A and you put $7.50 in your pocket. However, at this point taking only $7.50 would be a mistake since the total cost of attending movie A would be $ The execution of the decision requires this amount. The cost of the tickets is only irrelevant in making the decision but not irrelevant in the execution of the decision. Use of Present Value in Incremental Analysis The above discussion of incremental analysis was based on the assumption that the timing of expenditures was not important and, therefore, can be ignored. In most instances, this is most likely true, however, there may be decisions where even though two alternatives involve identical future costs, the timing of when the expenditures are actually made is the important factor. The student software package for The Management/Accounting Simulation contains a set of management accounting tools. One of these tools is an incremental analysis tool that contains a present value option. When present value and net-of-tax options are selected, this program becomes a highly sophisticated tool requiring considerable skill to use. Each cost or revenue must be analyzed in terms of the following questions: 1. Does this cost affect both pre-tax net cash flow and taxable income? For example, a disallowed expense for tax purposes would affect pre-tax net cash flow but not taxable income. For example, the incurrence of a $200 disallowed expenditure for tax purposes would decrease pre-tax net cash flow. However this disallowance would not cause a change in taxable income. In other words, additional expenditures for disallowed tax deductions would not change taxable income. 2. Does this cost affect only taxable income? Some cost items such as depreciation or losses have no affect on pre-tax net cash flow. However, after-tax net cash flow is increased by such items. Also, tax credits affect net cash flow after-tax but not before. Items that affect only taxable income must be explicitly designated as having such affect. Since the present value calculations are always based on cash flows, then the tax treatment of cost items is critically important. Tax treatment of items can either

8 168 CHAPTER NINE Incremental Analysis and Decision-making Costs increase or decrease the amount of cash after tax. The effect of taxes on cash flows and cash flows before and after taxes is discussed in chapter 12. The Keep or Replace Decision The keep or replace decision is very common in most businesses. Some examples of the keep or replace decision are the following: 1. Keep old car or replace with a new car 2. Keep old computer or buy a new computer 3. Keep old copy machine or buy a new copy machine 4. Keep old factory equipment or replace with new If replacements results in an substantial increase in net income immediately or within a few years, then replacement should be seriously considered and most likely made. In making this kind of decision, the following steps are involved: Step1 Obtain cost data for both the Keep Decision and the Replace Decision. a. Cost of old (book value) b. Cost of new equipment c. Trade-in allowance of old equipment d. Salvage value of new equipment e. Operating costs of old and new equipment Step 2 Prepare a work sheet with columns showing the relevant costs of the Keep decision and the Replace decision. Step 3 Compute incremental cost (sometimes called net benefit). Only relevant costs need be included in the analysis; however, no harm is done by including the irrelevant costs. The book value of the old asset is always irrelevant and may be excluded, if desired. Trade-in allowance is always relevant. The analysis may be made on a per year basis or a total years basis. If made on a per year basis, then the cost of the new asset must be divided by its useful life. An illustrative Example of the Keep or Replace Decision The K. L. Widget company is seriously contemplating replacing some old cutting department equipment with more modern and efficient equipment. The book value of the old equipment is $50,000. The new equipment, if purchased, will cost $100,000. A $10,000 trade-in allowance will be granted by the seller of the new equipment. The salvage value of the new equipment at the end of its life in 10 years is estimated to be $5,000. The salvage value of the old asset, if kept, is $2,000. The operating cost of the old equipment has been averaging around $13,000 per year. The new equipment is expected to reduce the operating cost to an average of $2,000 per year. The new equipment, if purchased, will be purchased totally on credit and the total amount of interest that would be paid in 10 years is approximately $25,000.

9 Management Accounting 169 One approach to using incremental analysis would be as follows: Total Life Basis (10 years) Keep Old Buy New Equipment Equipment Difference Cost of old equipment (book value) $ 50,000 $ 50,000 0 Cost of new equipment $ 100,000 ($ 100,000) Trade-in allowance ($ 10,000) $ 10,000 Salvage value ($ 2,000) ($ 5,000) $ 3,000 Operating costs (total 10 years) $ 130,000 $ 20,000 $ 10,000 Interest on loan $ 25,000 ($ 25,000) $ 178,000 $ 180,000 ($ 2,000) In the above example, notice that the book value of the old equipment was included. However, this cost may be excluded since it is irrelevant to the decision. In the above example: a. The relevant costs of keeping is $128,000. b. The relevant cost of buying new equipment is $130,000. c. The irrelevant cost included in both alternatives is $50,000 d. The net benefit or incremental cost of keeping the old equipment is $2,000. e. Sunk cost in the analysis is $50,000 (book value of old equipment). Suppose in the above example management had decided to use cash on hand to buy the new equipment. Would the answer be different concerning interest. No, if internal financing is used, then the opportunity cost of the on hand cash used must be included. Let us assume that the company can earn 6% interest. In this event, the interest given up or sacrificed would approximately be the same as the interest paid. Practical Applications of Incremental Analysis Incremental analysis is a practical and commonly used tool by both individuals and businesses regarding many different kinds of decisions. As individuals, we weigh the cost of many decisions such as what car to buy, whether or own a home or rent, and continue to paint our house or put on vinyl siding. The same is true in business. Incremental analysis is used in all functions of the business on a daily basis both formally and informally. The use of incremental analysis does not guarantee that the best decision has been made; However, it does provide a framework for organizing relevant data and looking at the decision to be made from a broader and more analytical perspective. Summary Incremental analysis can be a powerful tool in evaluating various type of decisions. Incremental analysis in a way of presenting relevant information in a direct comparison mode so as show the net benefit of making a particular decision. It is should be

10 170 CHAPTER NINE Incremental Analysis and Decision-making Costs remembered that incremental analysis is no better than the quality of information available for analysis. Incremental analysis is a tool that focuses on certain basic concepts including the following: Incremental analysis Relevant and irrelevant costs Opportunity costs Sunk costs Depreciation Fixed and variable costs Direct and indirect Common costs Salvage value Trade-in allowance Net benefit It is important that accountants and management have a basic understanding of these concepts. Q. 9.1 Define the following terms: a. Relevant cost b. Irrelevant cost c. Incremental analysis d. Sunk cost e. Incremental cost f. Opportunity cost g. Direct cost h. Indirect cost Q. 9.2 Explain the steps in using incremental analysis. Q. 9.3 Give at least three examples of opportunity cost. Q. 9.4 Give several examples of sunk costs. Q. 9.5 Explain the difference between the majority and minority view of sunk costs. Q. 9.6 List at least eight types of decisions for which incremental analysis an appropriate tool. Q. 9.7 If new equipment is purchased, then the old equipment will be sold for $10,000 and a loss of $2,000 will in incurred. Is the loss a relevant cost? Is the proceeds from the sale of the old machine relevant? Q. 9.8 If a new territory is opened the company will use a warehouse in this territory that it owns. The company now receives annual rental revenue of $50,000. Is the rental value of the warehouse relevant or irrelevant? Why? Q. 9.9 Under what circumstances is it important to know the amount of irrelevant costs? Q Explain how the introduction of income taxes into the analysis can make a historical cost relevant.

11 Management Accounting 171 Exercise 9.1 Matching of Cost Concepts and Costs Required: Match each cost with the appropriate cost. More than one cost concept may be applicable. 1. Inescapable 2. Escapable 3. Incremental 4. Sunk 5. Opportunity 6. Variable 7. Fixed 8. Relevant 9. Irrelevant 10. Semi-variable Cost Concepts Costs A. President s salary B. Factory workers wages C. Installation cost of new machine D. Cost of old machine E. Monthly rental value of warehouse F. Repairs and maintenance Machine A $2,000 Machine B $2,000 G. Utilities Machine A $1,500 Machine B $2,000 Exercise 9.2 Keep or Replace You have been provided the following keep or replace decision information: Old Machine New Machine Cost $ 50,000 $ 100,000 Salvage value $ 10,000 $ 5,000 Trade-in allowance $ 15,000 Remaining useful life 10 years 10 years Labor costs (annual) $ 20,000 $ 5,000 Repairs and maintenance $ 5,000 $ 6,000 Utilities $ 1,000 $ 2,000 Interest rate* - 6% * Assume installment financing and estimate interest by computing average size of loan over life of machine. Required: Determine whether or not the old machine should be replaced.

12 172 CHAPTER NINE Incremental Analysis and Decision-making Costs Exercise 9.3 Own or Lease You have been provided the following information concerning a lease or own decisions. If equipment is owned: Purchase price of equipment $ 50,000 Repairs and maintenance (monthly) $ 100 Utilities (monthly) $ 200 Interest on financing (annual) $ 1,500 Useful life of equipment (years) 10 If equipment is leased: Monthly lease payments $ 600 Repairs and maintenance (Cost is included in lease agreement) Utilities (monthly) $ 150 Required: Determine which is more desirable, own or lease? Exercise 9.4 Sell now or Process Further You have been provided the following information concerning the sell now or process further decisions. Current production method cost data: Selling price $ 20 Units manufactured 100 Production capacity (units) 150 Labor hours required (per unit) 2 Manufacturing costs: Material (per unit) $ 1.00 Factory labor (per unit) $ Fixed manufacturing overhead $ 5.00 Variable manufacturing cost (per hour) $.50 Costs of Additional Processing: Labor hours (per unit) 1.0 Labor rate (per hour) $ 7.50 New selling price $ *If the additional processing is undertaken the variable manufacturing cost rate will remain the same. Required: Use incremental analysis to determine whether processing further should be undertaken.

13 Management Accounting 173 Problem 9.1 Incremental Analysis Problem: Keep or Replace The vice president of finance for the Acme Manufacturing Company authorized the company s management accountant to collect data pertaining to the purchase of new manufacturing equipment. If purchased, the new equipment will replace old equipment. The following information was obtained from various sources by the accountant: Old Equipment New Equipment Book value of old equip. $ 50,000 List price of new equipment $ 150,000 Life of equipment (years) 5 5 Trade-in allowance (old) $ 15,000 Operating expenses (per year) $ 50,000 $ 5,000 Salvage value (end of life) $ 5,000 $ 10,000 If purchased, a 10%,5 year installment loan will be obtained. Interest will be paid annually. Required: 1. What is the incremental cost (net benefit) of the replace decision (purchasing the new equipment?) $ 2. What is the total relevant cost of the keep decision? _ $ 3. What is the total relevant cost of the replace decision? _ $ 4. What amount of cost in this problem may be considered to be sunk cost? _ $ 5. Assume that the company s marginal tax rate is 40%. What is the incremental cost on an after-tax basis? $

14 174 CHAPTER NINE Incremental Analysis and Decision-making Costs Problem 9.2 Make or Buy The Acme Manufacturing Company manufactures a product which requires component X. However, a supplier has offered to sell component X at $4.00 per unit. Acme s cost in manufacturing 1,000 units this past year was reported by the management accountant as follows: Material $ 2,000 Insurance $200 Direct labor $ 1,000 Power and lights $500 Indirect labor $ 500 Depreciation (bldg.) $400 Gen. & admin. sal. $ 500 Note: all costs are presented on a per year basis. If the component is purchased, then material, direct labor, and indirect labor costs would be eliminated. Insurance and power and lights would be reduced by $50 and $100 respectively. General and administrative salaries would not change. The building in which component X is now manufactured can be leased for $1,000. Required: 1. What is the incremental cost if component X is purchased? $ 2. What is the total relevant cost of the make decision? $ 3. What is the total relevant cost of the purchase decision? $ 4. What is the amount of the opportunity cost? $ 5. What is the total amount of escapable cost? $ 6. What is the amount of opportunity cost in this analysis? $

Classification of Manufacturing Costs and Expenses

Classification of Manufacturing Costs and Expenses Management Accounting 51 Classification of Manufacturing Costs and Expenses Introduction Management accounting, as previously explained, consists primarily of planning, performance evaluation, and decision

More information

Comprehensive Business Budgeting

Comprehensive Business Budgeting Management Accounting 137 Comprehensive Business Budgeting Goals and Objectives Profit planning, commonly called master budgeting or comprehensive business budgeting, is one of the more important techniques

More information

Incremental Analysis and Cost Volume Profit Analysis: Special Applications

Incremental Analysis and Cost Volume Profit Analysis: Special Applications Management Accounting 175 Incremental Analysis and Cost Volume Profit Analysis: Special Applications Incremental analysis is a flexible decision-making tool that may be used in making many different kinds

More information

Financial Statements for Manufacturing Businesses

Financial Statements for Manufacturing Businesses Management Accounting 31 Financial Statements for Manufacturing Businesses Importance of Financial Statements Accounting plays a critical role in decision-making. Accounting provides the financial framework

More information

Management Accounting and Decision-Making

Management Accounting and Decision-Making Management Accounting 15 Management Accounting and Decision-Making Management accounting writers tend to present management accounting as a loosely connected set of decision making tools. Although the

More information

Management Accounting 303 Segmental Profitability Analysis and Evaluation

Management Accounting 303 Segmental Profitability Analysis and Evaluation Management Accounting 303 Segmental Profitability Analysis and Evaluation Unless a business is a not-for-profit business, all businesses have as a primary goal the earning of profit. In the long run, sustained

More information

House Published on www.jps-dir.com

House Published on www.jps-dir.com I. Cost - Volume - Profit (Break - Even) Analysis A. Definitions 1. Cost - Volume - Profit (CVP) Analysis: is a means of predicting the relationships among revenues, variable costs, and fixed costs at

More information

UNIT2:- Session 1-3 :- Cost analysis for planning and decision making :-

UNIT2:- Session 1-3 :- Cost analysis for planning and decision making :- UNIT2:- Session 1-3 :- Cost analysis for planning and decision making :- * Cost classification and approach :- A- Marginal costing :- - variable and fixed. - Variable cost is charged to the product unit.

More information

Management Accounting Theory of Cost Behavior

Management Accounting Theory of Cost Behavior Management Accounting 63 Management Accounting Theory of Cost Behavior Management accounting contains a number of decision making tools that require the conversion of all operating costs and expenses into

More information

FINANCIAL INTRODUCTION

FINANCIAL INTRODUCTION FINANCIAL INTRODUCTION In earlier sections you calculated your cost of goods sold, overhead expenses and capital cost in order to help you determine the sales price of your product. In your business plan,

More information

Part II Management Accounting Decision-Making Tools

Part II Management Accounting Decision-Making Tools Part II Management Accounting Decision-Making Tools Chapter 7 Chapter 8 Chapter 9 Cost-Volume-Profit Analysis Comprehensive Business Budgeting Incremental Analysis and Decision-making Costs Chapter 10

More information

Course Title: Cost Accounting for Decision Making

Course Title: Cost Accounting for Decision Making Course Title: Cost Accounting for Decision Making Professional Development Programme on Enriching Knowledge of the Business, Accounting and Financial Studies (BAFS) Curriculum 1 Learning

More information

Identifying Relevant Costs

Identifying Relevant Costs Relevant Costs for Decision Making Identifying Relevant Costs A relevant cost is a cost that differs between alternatives. An avoidable cost can be eliminated, in whole or in part, by choosing one alternative

More information

Will the future benefits of this project be large enough to justify the investment given the risk involved?

Will the future benefits of this project be large enough to justify the investment given the risk involved? Chapter 1 The Overall Process Capital Expenditures Whenever we make an expenditure that generates a cash flow benefit for more than one year, this is a capital expenditure. Examples include the purchase

More information

Breakeven Analysis. Breakeven for Services.

Breakeven Analysis. Breakeven for Services. Dollars and Sense Introduction Your dream is to operate a profitable business and make a good living. Before you open, however, you want some indication that your business will be profitable, if not immediately

More information

What is a cost? What is an expense?

What is a cost? What is an expense? What is a cost? What is an expense? A cost is a sacrifice of resources. An expense is a cost incurred in the process of generating revenues. Expenses are recorded at the same time that the associated revenues

More information

Chapter 09 - Using Discounted Cash-Flow Analysis to Make Investment Decisions

Chapter 09 - Using Discounted Cash-Flow Analysis to Make Investment Decisions Solutions to Chapter 9 Using Discounted Cash-Flow Analysis to Make Investment Decisions 1. Net income = ($74 $42 $10) [0.35 ($74 $42 $10)] = $22 $7.7 = $14.3 million Revenues cash expenses taxes paid =

More information

COST CLASSIFICATION AND COST BEHAVIOR INTRODUCTION

COST CLASSIFICATION AND COST BEHAVIOR INTRODUCTION COST CLASSIFICATION AND COST BEHAVIOR INTRODUCTION LESSON# 1 Cost Accounting Cost Accounting is an expanded phase of financial accounting which provides management promptly with the cost of producing and/or

More information

Multiple Choice Questions (45%)

Multiple Choice Questions (45%) Multiple Choice Questions (45%) Choose the Correct Answer 1. The following information was taken from XYZ Company s accounting records for the year ended December 31, 2014: Increase in raw materials inventory

More information

Course 3: Capital Budgeting Analysis

Course 3: Capital Budgeting Analysis Excellence in Financial Management Course 3: Capital Budgeting Analysis Prepared by: Matt H. Evans, CPA, CMA, CFM This course provides a concise overview of capital budgeting analysis. This course is recommended

More information

Accounting 2910, Summer 2002 Practice Exam 4. 1. The cost of materials entering directly into the manufacturing process is classified as:

Accounting 2910, Summer 2002 Practice Exam 4. 1. The cost of materials entering directly into the manufacturing process is classified as: Accounting 2910, Summer 2002 Practice Exam 4 1. The cost of materials entering directly into the manufacturing process is classified as: a. direct labor cost b. factory overhead cost c. burden cost d.

More information

Exercises. Differential Analysis Sell (Alt. 1) or Lease (Alt. 2)

Exercises. Differential Analysis Sell (Alt. 1) or Lease (Alt. 2) Chapter 24 and Product Pricing Study Guide Solutions Fill-in-the-Blank Equations 1. Differential revenue 2. Differential costs 3. Differential income (Loss) 4. Markup per unit 5. Estimated units produced

More information

CHAPTER 7 MAKING CAPITAL INVESTMENT DECISIONS

CHAPTER 7 MAKING CAPITAL INVESTMENT DECISIONS CHAPTER 7 MAKING CAPITAL INVESTMENT DECISIONS Answers to Concepts Review and Critical Thinking Questions 1. In this context, an opportunity cost refers to the value of an asset or other input that will

More information

Chapter 7: Net Present Value and Capital Budgeting

Chapter 7: Net Present Value and Capital Budgeting Chapter 7: Net Present Value and Capital Budgeting 7.1 a. Yes, the reduction in the sales of the company s other products, referred to as erosion, should be treated as an incremental cash flow. These lost

More information

SOLUTIONS TO EXERCISES

SOLUTIONS TO EXERCISES EXERCISE 10-1 (15 20 minutes) SOLUTIONS TO EXERCISES Item Land Land Improvements Building Other Accounts (a) ($275,000) Notes Payable (b) $275,000 (c) $ 8,000 (d) 7,000 (e) 6,000 (f) (1,000) (g) 22,000

More information

AGENDA: MANAGERIAL ACCOUNTING AND COST CONCEPTS

AGENDA: MANAGERIAL ACCOUNTING AND COST CONCEPTS TM 2-1 A. Cost classifications for: AGENDA: MANAGERIAL ACCOUNTING AND COST CONCEPTS 1. Financial statement preparation. 2. Predicting cost behavior. 3. Assigning costs to cost objects. 4. Making decisions

More information

NAR Frequently Asked Questions Health Insurance Reform

NAR Frequently Asked Questions Health Insurance Reform NEW MEDICARE TAX ON UNEARNED NET INVESTMENT INCOME Q-1: Who will be subject to the new taxes imposed in the health legislation? A: A new 3.8% tax will apply to the unearned income of High Income taxpayers.

More information

Exercise 17-1 (15 minutes)

Exercise 17-1 (15 minutes) Exercise 17-1 (15 minutes) 1. 2002 2001 Sales... 100.0% 100.0 % Less cost of goods sold... 63.2 60.0 Gross margin... 36.8 40.0 Selling expenses... 18.0 17.5 Administrative expenses... 13.6 14.6 Total expenses...

More information

3. If you received any interest from a "Seller Financed" mortgage, provide: Name and Address of Payer Social Security Number Amount

3. If you received any interest from a Seller Financed mortgage, provide: Name and Address of Payer Social Security Number Amount Print this form out, take some time to fill it out, and bring it with you when you come to the office. This will save you time and money, and help us help you more effectively. Tax Return Questionnaire

More information

Chapter 7 Fundamentals of Capital Budgeting

Chapter 7 Fundamentals of Capital Budgeting Chapter 7 Fundamentals of Capital Budgeting Copyright 2011 Pearson Prentice Hall. All rights reserved. Chapter Outline 7.1 Forecasting Earnings 7.2 Determining Free Cash Flow and NPV 7.3 Choosing Among

More information

Chapter 011 Project Analysis and Evaluation

Chapter 011 Project Analysis and Evaluation Multiple Choice Questions 1. Forecasting risk is defined as the: a. possibility that some proposed projects will be rejected. b. process of estimating future cash flows relative to a project. C. possibility

More information

11.3 BREAK-EVEN ANALYSIS. Fixed and Variable Costs

11.3 BREAK-EVEN ANALYSIS. Fixed and Variable Costs 385 356 PART FOUR Capital Budgeting a large number of NPV estimates that we summarize by calculating the average value and some measure of how spread out the different possibilities are. For example, it

More information

AGENDA: JOB-ORDER COSTING

AGENDA: JOB-ORDER COSTING TM 3-1 AGENDA: JOB-ORDER COSTING A. The documents in a job-order costing system. 1. Materials requisition form. 2. Direct labor time ticket. 3. Job cost sheet. B. Applying overhead using a predetermined

More information

Net Present Value and Capital Budgeting. What to Discount

Net Present Value and Capital Budgeting. What to Discount Net Present Value and Capital Budgeting (Text reference: Chapter 7) Topics what to discount the CCA system total project cash flow vs. tax shield approach detailed CCA calculations and examples project

More information

Part 7. Capital Budgeting

Part 7. Capital Budgeting Part 7. Capital Budgeting What is Capital Budgeting? Nancy Garcia and Digital Solutions Digital Solutions, a software development house, is considering a number of new projects, including a joint venture

More information

Cash Flow Forecasting & Break-Even Analysis

Cash Flow Forecasting & Break-Even Analysis Cash Flow Forecasting & Break-Even Analysis 1. Cash Flow Cash Flow Projections What is cash flow? Cash flow is an estimate of the timing of when the cash associated with sales will be received and when

More information

Commercial Real Estate Investment: Opportunities for Income Generation in Today s Environment

Commercial Real Estate Investment: Opportunities for Income Generation in Today s Environment Commercial Real Estate Investment: Opportunities for Income Generation in Today s Environment Prepared by Keith H. Reep, CCIM Real Estate Investment Consultant In this white paper 1 Advantages of investing

More information

Difference: Net Operating Income Increase or (Decrease) Total If Racing Bikes Are Dropped

Difference: Net Operating Income Increase or (Decrease) Total If Racing Bikes Are Dropped Exercise 13-2 1. No, production and sale of the racing bikes should not be discontinued. If the racing bikes were discontinued, then the operating income for the company as a whole would decrease by $11,000

More information

The Nature of Accounting Systems

The Nature of Accounting Systems Basic Accounting & Budgeting February 4, 2009 The Nature of Accounting Systems Accounting is the process of recording, classifying, summarizing, reporting and interpreting information about the economic

More information

Cost Accounting For Decision Making

Cost Accounting For Decision Making Cost Accounting For Decision Making Joyce L. Wang 24 June 2014 2014/6/24 1 How to make decision? Variable cost Incremental cost Opportunity cost Fixed cost Avoidable cost Sunk cost... 2014/6/24 2 Relevance

More information

6.1 UNIT COST CALCULATIONS AND THE BREAK EVEN. Working Out Costs - The Terminology. How To Work Out Your Break Even Point

6.1 UNIT COST CALCULATIONS AND THE BREAK EVEN. Working Out Costs - The Terminology. How To Work Out Your Break Even Point 6.1 COSTS AND COSTING 6 UNIT COST CALCULATIONS AND THE BREAK EVEN..... Working Out Costs - The Terminology How To Work Out Your Break Even Point Costing And Break Even Exercise Costing The Job Exercises

More information

Understanding Financial Statements. For Your Business

Understanding Financial Statements. For Your Business Understanding Financial Statements For Your Business Disclaimer The information provided is for informational purposes only, does not constitute legal advice or create an attorney-client relationship,

More information

10.SHORT-TERM DECISIONS & CAPITAL INVESTMENT APPRAISAL

10.SHORT-TERM DECISIONS & CAPITAL INVESTMENT APPRAISAL INDUSTRIAL UNIVERSITY OF HO CHI MINH CITY AUDITING ACCOUNTING FACULTY 10.SHORT-TERM DECISIONS & CAPITAL INVESTMENT APPRAISAL 4 Topic List INDUSTRIAL UNIVERSITY OF HO CHI MINH CITY AUDITING ACCOUNTING FACULTY

More information

Exam 1 Chapters 1-3 Key

Exam 1 Chapters 1-3 Key Exam 1 Chapters 1-3 Key 1. Which of the following should NOT be included as part of manufacturing overhead at a company that makes office furniture? A. Sheet steel in a file cabinet made by the company.

More information

Reg. 1.5833-1 (Effective for tax years beginning on and after January 1, 1998) Allocation and apportionment of Vermont net income by corporations

Reg. 1.5833-1 (Effective for tax years beginning on and after January 1, 1998) Allocation and apportionment of Vermont net income by corporations Reg. 1.5833 ALLOCATION AND APPORTIONMENT OF INCOME Reg. 1.5833-1 (Effective for tax years beginning on and after January 1, 1998) Allocation and apportionment of Vermont net income by corporations (a)

More information

Capital budgeting & cash flow analysis

Capital budgeting & cash flow analysis Capital budgeting & cash flow analysis A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction 2. Cash flows from investments 3. Investment cash flows 4. Operating cash flows 5. Putting

More information

COST & BREAKEVEN ANALYSIS

COST & BREAKEVEN ANALYSIS COST & BREAKEVEN ANALYSIS http://www.tutorialspoint.com/managerial_economics/cost_and_breakeven_analysis.htm Copyright tutorialspoint.com In managerial economics another area which is of great importance

More information

SHORT-TERM DECISION MAKING DIFFERENTIAL (INCREMENTAL) ANALYSIS

SHORT-TERM DECISION MAKING DIFFERENTIAL (INCREMENTAL) ANALYSIS 1 SHORT-TERM DECISION MAKING DIFFERENTIAL (INCREMENTAL) ANALYSIS I. In short-run decison making, differential costs and revenues are generally the economic figures which should be compared when trying

More information

CHAPTER 7: NPV AND CAPITAL BUDGETING

CHAPTER 7: NPV AND CAPITAL BUDGETING CHAPTER 7: NPV AND CAPITAL BUDGETING I. Introduction Assigned problems are 3, 7, 34, 36, and 41. Read Appendix A. The key to analyzing a new project is to think incrementally. We calculate the incremental

More information

Tax Return Questionnaire - 2013 Tax Year

Tax Return Questionnaire - 2013 Tax Year Print this form out, take some time to fill it out, and bring it with you when you come to the office. This will save you time and money, and help us help you more effectively. Tax Return Questionnaire

More information

Agriculture & Business Management Notes...

Agriculture & Business Management Notes... Agriculture & Business Management Notes... Farm Machinery & Equipment -- Buy, Lease or Custom Hire Quick Notes... Selecting the best method to acquire machinery services presents a complex economic problem.

More information

Chapter 5 Revenue & Cost Analysis

Chapter 5 Revenue & Cost Analysis Chapter 5 Revenue & Cost Analysis 1. General Cost data are subject to great misunderstanding than are value data. The main reason: although the various categories of costs have precise meaning to the accountant,

More information

Chapter 9. Plant Assets. Determining the Cost of Plant Assets

Chapter 9. Plant Assets. Determining the Cost of Plant Assets Chapter 9 Plant Assets Plant Assets are also called fixed assets; property, plant and equipment; plant and equipment; long-term assets; operational assets; and long-lived assets. They are characterized

More information

Financial Analysis, Modeling, and Forecasting Techniques. Course #5710B/QAS5710B Course Material

Financial Analysis, Modeling, and Forecasting Techniques. Course #5710B/QAS5710B Course Material Financial Analysis, Modeling, and Forecasting Techniques Course #5710B/QAS5710B Course Material TECHNIQUES OF FINANCIAL ANALYSIS, MODELING, AND FORECASTING Delta Publishing Company Copyright 2011 by DELTA

More information

29.1 COST SHEET : MEANING AND ITS IMPORTANCE

29.1 COST SHEET : MEANING AND ITS IMPORTANCE 29 COST SHEET You are running a factory which manufactures electronic toys. You incur expenses on raw material, labour and other expenses which can be directly attibuted to cost and which cannot be directly

More information

EVALUATING CAPITAL INVESTMENTS IN AGRIBUSINESS

EVALUATING CAPITAL INVESTMENTS IN AGRIBUSINESS EVALUATING CAPITAL INVESTMENTS IN AGRIBUSINESS Technological advancements impact the agribusiness industry in a very irregular fashion. Given the difficulties associated with predicting the arrival and/or

More information

CHAPTER 7. Fundamentals of Capital Budgeting. Chapter Synopsis

CHAPTER 7. Fundamentals of Capital Budgeting. Chapter Synopsis CHAPTER 7 Fundamentals of Capital Budgeting Chapter Synopsis 7.1 Forecasting Earnings A firm s capital budget lists all of the projects that a firm plans to undertake during the next period. The selection

More information

Information About Financial Statements for Intrastate Household Goods Movers

Information About Financial Statements for Intrastate Household Goods Movers Instructions for Page 4 of Application (FINANCIAL STATEMENTS) Part of determining whether an applicant is fit to become a household goods mover involves provision of information about financial capability.

More information

Chapter 7 Fundamentals of Capital Budgeting

Chapter 7 Fundamentals of Capital Budgeting Chapter 7 Fundamentals of Capital Budgeting 7-1. Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats.

More information

Capital Investment Analysis and Project Assessment

Capital Investment Analysis and Project Assessment PURDUE EXTENSION EC-731 Capital Investment Analysis and Project Assessment Michael Boehlje and Cole Ehmke Department of Agricultural Economics Capital investment decisions that involve the purchase of

More information

6.3 PROFIT AND LOSS AND BALANCE SHEETS. Simple Financial Calculations. Analysing Performance - The Balance Sheet. Analysing Performance

6.3 PROFIT AND LOSS AND BALANCE SHEETS. Simple Financial Calculations. Analysing Performance - The Balance Sheet. Analysing Performance 63 COSTS AND COSTING 6 PROFIT AND LOSS AND BALANCE SHEETS Simple Financial Calculations Analysing Performance - The Balance Sheet Analysing Performance Analysing Financial Performance Profit And Loss Forecast

More information

Incremental Analysis. Managerial Accounting Fifth Edition Weygandt Kimmel Kieso. Page 7-2

Incremental Analysis. Managerial Accounting Fifth Edition Weygandt Kimmel Kieso. Page 7-2 7-1 Incremental Analysis Managerial Accounting Fifth Edition Weygandt Kimmel Kieso 7-2 study objectives 1. Identify the steps in management s decision-making process. 2. Describe the concept of incremental

More information

Audit Program for Fixed Assets

Audit Program for Fixed Assets Form AP 35 Index Audit Program for Fixed Assets Legal Company Name Client: Balance Sheet Date: Instructions: The auditor should refer to the audit planning documentation to gain an understanding of the

More information

Chapter 5 Accounting for Merchandising Operations

Chapter 5 Accounting for Merchandising Operations Chapter 5 Accounting for Merchandising Operations Purchase Transactions Purchaser records goods at cost. When goods are returned, purchaser reduces Inventory. On September 5, De La Hoya Company buys merchandise

More information

Quantitative Marketing Analysis

Quantitative Marketing Analysis Quantitative Marketing Analysis CLASS 2 09.16.13 Revenue (sales) Income Statement Sections 5 Expenses Cost of goods sold (FC and VC) Operating expenses (generally FC) Profit 1 EXHIBIT 2.4: PRO FORMA INCOME

More information

Export Business Plan Guide

Export Business Plan Guide Export Business Plan Guide Table of Contents Introduction... 4 SECTION 01: CURRENT SITUATION ANALYSIS... 5 Company Overview... 5 Availability of Resources... 6 SWOT Analysis... 9 SECTION 02: MARKET ANALYSIS...

More information

Fundamentals of Capital Budgeting

Fundamentals of Capital Budgeting 8 Fundamentals of Capital Budgeting LEARNING OBJECTIVES Identify the types of cash flows needed in the capital budgeting process Forecast incremental earnings in a pro forma earnings statement for a project

More information

EXERCISES. Ex. 24 1 (FIN MAN); Ex. 9 1 (MAN) Ex. 24 2 (FIN MAN); Ex. 9 2 (MAN) *$276,000 5%

EXERCISES. Ex. 24 1 (FIN MAN); Ex. 9 1 (MAN) Ex. 24 2 (FIN MAN); Ex. 9 2 (MAN) *$276,000 5% Ex. 24 1 (FIN MAN); Ex. 9 1 (MAN) EXERCISES 2 Lease Machine (Alt. 1) or Sell Machine (Alt. 2) 3 January 3, 2012 4 Lease Equipment Sell Equipment 5 Revenues $285,000 $276,000 $ 9,000 6 Costs 25,500 13,800*

More information

1. Managerial accounting is primarily concerned with the organization as a whole rather than with segments of the organization.

1. Managerial accounting is primarily concerned with the organization as a whole rather than with segments of the organization. Page 1 of 69 True False True False True False True False True False True False True False True False True False True False True False True False True False True False True False True False True False 1

More information

There are two basic types of cost accounting systems:

There are two basic types of cost accounting systems: CHAPTER 2 JOB ORDER COSTING Managerial Accounting, Fourth Edition 2-1 Cost Accounting Systems There are two basic types of cost accounting systems: 2-2 LO 1: Explain the characteristics and purposes of

More information

UNDERSTANDING WHERE YOU STAND. A Simple Guide to Your Company s Financial Statements

UNDERSTANDING WHERE YOU STAND. A Simple Guide to Your Company s Financial Statements UNDERSTANDING WHERE YOU STAND A Simple Guide to Your Company s Financial Statements Contents INTRODUCTION One statement cannot diagnose your company s financial health. Put several statements together

More information

Learning Objectives: Quick answer key: Question # Multiple Choice True/False. 14.1 Describe the important of accounting and financial information.

Learning Objectives: Quick answer key: Question # Multiple Choice True/False. 14.1 Describe the important of accounting and financial information. 0 Learning Objectives: 14.1 Describe the important of accounting and financial information. 14.2 Differentiate between managerial and financial accounting. 14.3 Identify the six steps of the accounting

More information

Accruals and prepayments

Accruals and prepayments 5 Accruals and prepayments this chapter covers... In the last chapter we have looked at the preparation of financial statements or final accounts using the extended trial balance, or spreadsheet, approach.

More information

Chapter 6. 1. Your firm is considering two investment projects with the following patterns of expected future net aftertax cash flows:

Chapter 6. 1. Your firm is considering two investment projects with the following patterns of expected future net aftertax cash flows: Chapter 6 1. Your firm is considering two investment projects with the following patterns of expected future net aftertax cash flows: Year Project A Project B 1 $1 million $5 million 2 2 million 4 million

More information

CHAPTER 10. Acquisition and Disposition of Property, Plant, and Equipment 1, 2, 3, 5, 6, 11, 12, 21 11, 15, 16 8, 9, 10, 11, 12

CHAPTER 10. Acquisition and Disposition of Property, Plant, and Equipment 1, 2, 3, 5, 6, 11, 12, 21 11, 15, 16 8, 9, 10, 11, 12 CHAPTER 10 Acquisition and Disposition of Property, Plant, and Equipment ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Valuation

More information

CASH FLOW STATEMENT (AND FINANCIAL STATEMENT)

CASH FLOW STATEMENT (AND FINANCIAL STATEMENT) CASH FLOW STATEMENT (AND FINANCIAL STATEMENT) - At the most fundamental level, firms do two different things: (i) They generate cash (ii) They spend it. Cash is generated by selling a product, an asset

More information

Page 1 FBLA: ACCOUNTING II

Page 1 FBLA: ACCOUNTING II Competency: Financial Statements 1. Describe the different types of financial statements; explain their purpose and compare the difference. 2. Prepare a trial balance, a worksheet (8 and 10 columns), and

More information

Lease-Versus-Buy. By Steven R. Price, CCIM

Lease-Versus-Buy. By Steven R. Price, CCIM Lease-Versus-Buy Cost Analysis By Steven R. Price, CCIM Steven R. Price, CCIM, Benson Price Commercial, Colorado Springs, Colorado, has a national tenant representation and consulting practice. He was

More information

Chapter 8: Using DCF Analysis to Make Investment Decisions

Chapter 8: Using DCF Analysis to Make Investment Decisions FIN 301 Class Notes Chapter 8: Using DCF Analysis to Make Investment Decisions Capital Budgeting: is the process of planning for capital expenditures (long term investment). Planning process involves 1-

More information

ARCHDICOESE OF SEATTLE

ARCHDICOESE OF SEATTLE ARCHDICOESE OF SEATTLE SECTION E CAPITAL ASSETS AND EXPENDITURES INDEX I. CAPITAL ASSETS 1E II. RENOVATION VS. ORDINARY REPAIRS 1E - 2E III. RECORDING UNRECORDED CAPITAL ASSETS 2E IV. RECORDING DONATED

More information

Copyright 2015 Pearson Canada Inc. 1

Copyright 2015 Pearson Canada Inc. 1 1 Building Blocks of Managerial Accounting CHAPTER 2 2 Distinguish among service, merchandising, and manufacturing companies OBJECTIVE 1 3 Service Companies Provide an intangible service only Largest sector

More information

Lesson 5: Inventory. 5.1 Introduction. 5.2 Manufacturer or Retailer?

Lesson 5: Inventory. 5.1 Introduction. 5.2 Manufacturer or Retailer? Lesson 5: Inventory 5.1 Introduction Whether it is a brick and mortar or digital store, for many businesses, inventory management is a key cog of their operations. Managing inventory is an important key

More information

Finance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6. Part One. Multiple Choice Questions.

Finance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6. Part One. Multiple Choice Questions. Finance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6 Part One. Multiple Choice Questions. 1. Similar to the example given in class, assume that a corporation has $500 of cash revenue and $300

More information

How to Forecast Your Revenue and Sales A Step by Step Guide to Revenue and Sales Forecasting in a Small Business

How to Forecast Your Revenue and Sales A Step by Step Guide to Revenue and Sales Forecasting in a Small Business How to Forecast Your Revenue and Sales A Step by Step Guide to Revenue and Sales Forecasting in a Small Business By BizMove Management Training Institute Other free books by BizMove that may interest you:

More information

3. Exclude Security Deposits from your rental income if you plan on returning the deposits at the end of lease.

3. Exclude Security Deposits from your rental income if you plan on returning the deposits at the end of lease. #1 RENTAL INCOME TAX TIPS The lower your rental income for the year, the less that you will owe in taxes. By minimizing your rental income, you can reduce your taxable liability. This does not mean you

More information

RAPID REVIEW Chapter Content

RAPID REVIEW Chapter Content RAPID REVIEW BASIC ACCOUNTING EQUATION (Chapter 2) INVENTORY (Chapters 5 and 6) Basic Equation Assets Owner s Equity Expanded Owner s Owner s Assets Equation = Liabilities Capital Drawing Revenues Debit

More information

Five Steps to Improving Your Profitability

Five Steps to Improving Your Profitability Five Steps to Improving Your Profitability Topic: Business Opportunities Author : Rosebrook, P. Date/Pages Sep 2003 pp. 30-33 Two of the most valuable commodities in business are time and money. They usually

More information

Developing Financial Statements

Developing Financial Statements New York StartUP! Business Plan Competition Developing Financial Statements Presented by Paisley Demby, CEO PBN Consulting, LLC www.pbnconsulting.com 1 Invitation to Tweet #2015NYStartUp PaisleyDemby Contents

More information

SHEET 1: CASH FLOW PROJECTED

SHEET 1: CASH FLOW PROJECTED Blended Value Business Plan Cash Flow Forecast User Guide OVERVIEW The Cash Flow Forecast is the listing of the sources and expenditures of cash plus the timing of when the cash is moving in and out of

More information

Statement of Cash Flow

Statement of Cash Flow Management Accounting 337 Statement of Cash Flow Cash is obviously an important asset to all, both individually and in business. A shortage or lack of cash may mean an inability to purchase needed inventory

More information

CASH FLOW STATEMENT. On the statement, cash flows are segregated based on source:

CASH FLOW STATEMENT. On the statement, cash flows are segregated based on source: CASH FLOW STATEMENT On the statement, cash flows are segregated based on source: Operating activities: involve the cash effects of transactions that enter into the determination of net income. Investing

More information

CHAPTER 11 DECISION MAKING AND RELEVANT INFORMATION

CHAPTER 11 DECISION MAKING AND RELEVANT INFORMATION CHAPTER 11 DECISION MAKING AND RELEVANT INFORMATION 11-28 Equipment upgrade versus replacement. 1. Based on the analysis in the table below, TechGuide will be better off by $337,500 over three years if

More information

CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA

CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Basic 1. To calculate the payback period, we need to find the time that the project has recovered its initial investment. After two years, the

More information

Financial Statements Tutorial

Financial Statements Tutorial Financial Statement Review: Financial Statements Tutorial There are four major financial statements used to communicate information to external users (creditors, investors, suppliers, etc.) - 1. Balance

More information

SMART TOUCH LEARNING Balance Sheet May 31, 2013 $ 4,800. $ 48,700 Accounts receivable 2,600. 900 Inventory 30,500. 100 Supplies.

SMART TOUCH LEARNING Balance Sheet May 31, 2013 $ 4,800. $ 48,700 Accounts receivable 2,600. 900 Inventory 30,500. 100 Supplies. 3 The Adjusting Process Are these balances correctly showing everything the company OWNS? SMART TOUCH LEARNING ance Sheet May 31, 2013 Are these balances correctly showing everything the company OWES?

More information

Non-Financial Assets Tax and Other Special Rules

Non-Financial Assets Tax and Other Special Rules Wealth Strategy Report Non-Financial Assets Tax and Other Special Rules OVERVIEW Because unique attributes distinguish them from other asset classes, nonfinancial assets may offer you valuable financial

More information

CHAPTER 10. EVALUATING PROPOSED CAPITAL EXPENDITURES Table of Contents

CHAPTER 10. EVALUATING PROPOSED CAPITAL EXPENDITURES Table of Contents CHAPTER 10 EVALUATING PROPOSED CAPITAL EXPENDITURES Table of Contents Section Description Page 1000 INTRODUCTION... 10-1 1001 ANALYZING THE CURRENT SITUATION... 10-2.2 Using a Diagnostic Approach... 10-3.4

More information

Introduction. How much does it cost? 2

Introduction. How much does it cost? 2 Basic Principles of Full ost Accounting For the Business, Labor, and Agriculture Interim ommittee Prepared by Gordon Higgins, Research Analyst Legislative Services Division Introduction Governments, responding

More information