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Contrast the advantages and disadvantages of the direct andindirect methods of preparing the statement of cash flows

Are both methods acceptable? Which method is preferred by theFASB? Which method is more popular? Why? Which method do you preferand why?

I am looking for original answer- not something that has beenposted before. I will give good rating only to originalcontent.

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Irving Heathcote
Irving HeathcoteLv2
28 Sep 2019

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A.) The textbook seems to favor two techniques for two differentreasons Net present value seems to be the most widely usedtechnique because of its ability to predict the expected dollaramount of wealth that a project should produce. The other widelyused technique is the internal rate of return. Both of thesetechniques can be used to make accept or reject decisions andsometimes IRR is used because of its focus on percentage rates ofreturn as it pertains to the cost of capital of the firm. This wayan analyst can identify any problems with the IRR before theirbosses can implement the project. I am fairly new to this but cansee why a combination of these two techniques could be very usefulto decision makers especially IRR which can show if investmentreturns can exceed a company’s requirements. Personally my interestis in small business and I enjoyed learning about the paybackperiod. Baby steps.

What are your thoughts regarding this feedback? Pleaseexplain!!!!

B.)The textbook favors the net present valueinvestment valuation technique. The reasoning is that it goes intodeeper detail about the financial standing of a company, than othervaluation methods. It subtracts the value of the initial investmentfrom the firm's cash flows at a rate comparable to the firm's costof capital, as a percentage. It demonstrates more than just thefact that a company can pay back their debts, but whether a companyis profitable or not. An investment firm would be most interestedin an investment that has a greater cash flow than that of theinitial investment. It may seem obvious that someone would want toinvest in a company that makes money, but our textbook has alsoshown us that investments do not always make money at the samepace. For example an investment could break even the first year,but then have accelerated growth year 2 and 3, or vice versa. Thisis a reason why, to me, NPV is a good way to value an investment.It leaves room for this information if you calculate the yearsseparately (unlike you would an annuity).

What are your thoughts regarding this feedback? Pleaseexplain!!!!

Please help answer for Required #1-4 at bottom: Please show methodsand formulas in explanation. I am totally lost on thissubject.

Kelvin Aerospace, Inc., manufactures parts such as rudder hingesfor the aerospace industry. The company uses a job-order costingsystem with a predetermined plantwide overhead rate based on directlabor-hours. On December 16, 2008, the company's controller made apreliminary estimate of the predetermined overhead rate for theyear 2009. The new rate was based on the estimated totalmanufacturing overhead cost of $3,402,000 and the estimated 63,000total direct labor-hours for 2009:

Predetermined overhead rate= $3,402,000 /63,000 hours = $54 perdirect labor-hour


This new predetermined overhead rate was communicated to topmanagers in a meeting on December 19. The rate did not cause anycomment because it was within a few pennies of the overhead ratethat had been used during 2008. One of the subjects discussed atthe meeting was a proposal by the production manager to purchase anautomated milling machine built by Sunghi Industries. The presidentof Kelvin Aerospace, Harry Arcany, agreed to meet with the salesrepresentative from Sunghi Industries to discuss theproposal.

On the day following the meeting, Mr. Arcany met with JasmineChang, Sunghi Industries' sales representative. The followingdiscussion took place:

Arcany: Wally, our production manager, asked me to meet with youbecause he is interested in installing an automated millingmachine. Frankly, I'm skeptical. You're going to have to show methis isn't just another expensive toy for Wally's people to playwith.

Chang: This is a great machine with direct bottom-line benefits.The automated milling machine has three major advantages. First, itis much faster than the manual methods you are using. It canprocess about twice as many parts per hour as your present millingmachines. Second, it is much more flexible. There are some up-frontprogramming costs, but once those have been incurred, almost nosetup is required to run a standard operation. You just punch inthe code for the standard operation, load the machine's hopper withraw material, and the machine does the rest.

Arcany: What about cost? Having twice the capacity in the millingmachine area won't do us much good. That center is idle much of thetime anyway.

Chang: I was getting there. The third advantage of the automatedmilling machine is lower cost. Wally and I looked over your presentoperations, and we estimated that the automated equipment wouldeliminate the need for about 6,000 direct labor-hours a year. Whatis your direct labor cost per hour?

Arcany: The wage rate in the milling area averages about $32 perhour. Fringe benefits raise that figure to about $41 perhour.

Chang: Don't forget your overhead.

Arcany: Next year the overhead rate will be $54 per hour.

Chang: So including fringe benefits and overhead, the cost perdirect labor-hour is about $95.

Arcany: That's right.

Chang: Since you can save 6,000 direct labor-hours per year, thecost savings would amount to about $570,000 a year. And our60-month lease plan would require payments of only $348,000 peryear.

Arcany: That sounds like a no-brainer. When can you install theequipment?

Shortly after this meeting, Mr. Arcany informed the company'scontroller of the decision to lease the new equipment, which wouldbe installed over the Christmas vacation period. The controllerrealized that this decision would require a recomputation of thepredetermined overhead rate for the year 2009 because the decisionwould affect both the manufacturing overhead and the directlabor-hours for the year. After talking with both the productionmanager and the sales representative from Sunghi Industries, thecontroller discovered that in addition to the annual lease cost of$348,000, the new machine would also require a skilledtechnician/programmer who would have to be hired at a cost of$50,000 per year to maintain and program the equipment. Both ofthese costs would be included in factory overhead. There would beno other changes in total manufacturing overhead cost, which isalmost entirely fixed. The controller assumed that the new machinewould result in a reduction of 6,000 direct labor-hours for theyear from the levels that had initially been planned.
p. 140

When the revised predetermined overhead rate for the year 2009 wascirculated among the company's top managers, there was considerabledismay.

Required:

1. Recompute the predetermined rate assuming that the new machinewill be installed. Explain why the new predetermined overhead rateis higher (or lower) than the rate that was originally estimatedfor the year 2009.

2. What effect (if any) would this new rate have on the cost ofjobs that do not use the new automated milling machine?

3.Why would managers be concerned about the new overheadrate?

4.After seeing the new predetermined overhead rate, the productionmanager admitted that he probably wouldn't be able to eliminate allof the 6,000 direct labor-hours. He had been hoping to accomplishthe reduction by not replacing workers who retire or quit, but thathad not been possible. As a result, the real labor savings would beonly about 2,000 hours—one worker. Given this additionalinformation, evaluate the original decision to acquire theautomated milling machine from Sunghi Industries.

Robatelli's Pizzeria Case StudyIntroduction On the morning of October 31st, Elaine Black, Chief Information Officer at Robatelli's Pizzeria, was waiting for both Jim Saxton, database administrator, and Peter Greyton, operations manager, to come to her office for a meeting. While waiting, Elaine was thinking about the surge of telephone and Internet orders expected to be received through the company's customer order center within the next 12 hours. Halloween had always been the most popular day of the year for people in the greater Pittsburgh area to order pizza from Robatelli's. There were 53 restaurant locations to serve these customers, but only one location to receive all of the orders and forward them to the right restaurant. Elaine's thoughts were interrupted as Jim and Peter entered her office. The following conversation took place: ELAINE Well, guys, it's here again, our biggest day of the year. Not only is Halloween a busy day, but we have the upcoming day after Thanksgiving, the week before Christmas, and Super Bowl Sunday. Can our current computer system's infrastructure and people keep pace with the orders we expect? JIM I think our systems are all running at peak performance. We shouldn't have any computer concerns for today or those other busy days. PETER Everyone in the customer order center is focused on making sure that our customers get their pizzas as ordered. We have plenty of people scheduled to work tonight, so we're good to go. ELAINE Terrific. But every time we face one of these peak sales days, I start wondering about the long-term capacity and effectiveness of our computer systems. Jim, we need to think long term about our computer system. I was just reading an article that I'd like you to take a look at. It's about Anheuser-Busch Companies and their use of data mining. JIM I do agree with you, Elaine; we should always be thinking about how newer IT systems can help us. Could you e-mail me the link to the article? ELAINE Sure, and I would like you to think about how we might use the same approach in our business. Peter, your order center people are doing a great job, but again there's something I'd like us to think about in the long run. As you know, we now have to manually enter all customer order center sales and store sales into our general ledger (GL). I think we could improve a lot of things if those sales are automatically fed into our GL software. Why don't you think about any advantages you see for an automatic interface, and we'll look at the costs compared to those advantages. How's that sound? PETER I'll do that. I'll give it some thought and work on a report about an automatic interface between our GL software and the point of sale systems in our restaurants as well as the phone and Internet sales. How soon do you want to meet again to look at these issues? ELAINE Let's say, in two weeks at the same time. As Jim and Peter left her office, Elaine continued to think about the features of the company's accounting information systems and whether or not data extracted from these systems could facilitate the multiple needs of the company. The focus had always been on providing accurate financial accounting information from the various locations; however, the company's aggressive growth strategies meant increased emphasis on the system's ability to analyze detailed customer information that could be translated into increased sales opportunities. Elaine knew the challenges they faced could very well affect the company's ability to maintain its competitive advantage. She realized that her department must continually improve the company's information systems to help it achieve growth strategies. Operating state-of-the-art systems was imperative to position the company to execute those growth plans. However, she was concerned about the possibility that restrictions of the current information systems could actually prevent the company from doing what it wanted to do. Allowing restrictive systems to prevent them from achieving business strategies was a risk that Elaine would not tolerate!

Review the Robatelli's Pizzeria Case Study.

Develop an internal controls system in Robatelli's Pizzeria sales and cash business areas.

Prepare a 12- to 16-slide presentation describing the typical activities and outlining an effective system of internal controls for the Sales, Sales Returns, and Cash Collections business areas. Include any associated risks in these areas.

Describe specific internal controls that include authorization of transactions, segregation of duties, adequate records and documentation, security of assets, and independent checks and reconciliation for each business area.

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