AFM101 Chapter Notes - Chapter 8: Perpetual Inventory, Gross Profit, Income Statement

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scarletpanda765

25 Aug 2016

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM101

Professor

Duane Kennedy

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AFM101 Full Course Notes

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Document Summary

Inventory often is one of the largest amounts listed under assets on the statement of financial position, which means that inventory represents a significant amount of the resources available to the business. The inventory may be excessive in amount, which is a needless waste of resources; alternatively it may be too low, which may result in lost sales. Therefore, for internal users inventory control is very important. On the income statement, inventory exerts a direct impact on the amount of income. Therefore, statement users are interested particularly in the amount of this effect and the way in which inventory is measured. Because of its impact on both the statement of financial position and the income statement, inventory is of particular interest to all statement users. Fundamentally, inventory should include those items, and only those items, legally owned by the business.

Related Questions

An organizationâs finances are closely linked to local and global markets. Therefore, regular monitoring of economic factors, such as employment, inflation, supply and demand, and interest rates is sure to provide beneficial information. Therefore, it is important to understand the impact of economic factors upon an organizationâs current and future operations and finances.

Using the module readings, Argosy University online library resources, and the Internet, research two to three articles on the importance of analyzing economic factors for organizations.

Then respond to the following:

Why should companies pay attention to economic factors when managing the organizationâs current and future financial information?

Consider an organization you are familiar with. Identify the economic factor that has had the most impact on the organizationâs earnings in the past 5 years.

How has this factor impacted the organization and how has the organization dealt with the impact in a positive or negative manner?

Please put the following income statement and balance sheet terms in the proper order:

Taxes, interest, gross profit, selling, general and administrative expenses, sales, depreciation, net income, cost of goods sold, and EBITDA.

For the balance sheet, please categorize the following as short-term assets, long-term assets, short-term liabilities, long-term liabilities, or ownerâs equity:

Cash, accounts payable, accruals, property, plant and equipment, inventory, accounts receivables, paid in capital, retained earnings, notes payable, mortgage, and accounts payable.

Please explain in which order the four major financial statements need to be prepared, and why.

Please also explain the three major categories of the statement of cash flows and under which category the following items belong. Also explain whether or not each item would be considered a source or use of cash for the period in question:

Inventory-increased for period
Net income-increased for period
Accounts receivables increase for period
Accounts payable decrease for period
Accruals decrease for period
Depreciation-increases for period
Stock issued
Property purchased
Bonds paid off
Inventories increase for period
Cash decreases
Notes payable increase for period
Bonds redeemed for period

aquamarineeel341

I'll rate posting for sec times just do last parts likecost and balance sheet ( account balance and cost incurred ) that'sit ready question carefully then answer all last partthanks

Charles Maxwell is starting a cheesecake bakery, Able BakerCharlie Company, to produce and sell different flavored cheesecakesto restaurants and the general public. He has just begun his studyof accounting, and is a bit confused about the many types ofreports he has read about and how they will help him run hisbusiness. He asks you to help him clarify what the differencesbetween managerial accounting and financial accounting are. Heâsalso wondering how to set up his inventory, how to classify thecosts of his business, and how to fill in some missinginformation.

	Required:
1.	Choose whether thecharacteristics on the Managerial vs. Financial panel are mostoften associated with managerial accounting or financialaccounting.
2.	Charles has provided some ofthe costs he expects to incur on the Cost Classification panel.Decide on the classifications that could be applied to each ofthese costs using the table provided. The cost object in each caseis the cheesecake.
3.	Charles found some sampleincome statements and balance sheets on the Internet, and askedwhich of them might be most appropriate for a manufacturingbusiness like his. Review income statements A and B on the IncomeStatements panel, and balance sheets C and D on the Balance Sheetspanel. Determine which income statement and balance sheet would bemost appropriate for a manufacturing business like Able BakerCharlie. Then, on the Financial Statements panel, denote whichincome statement and balance sheet would be most appropriate for amanufacturing business.
4.	At the end of February, afterthe second month of operations of Able Baker Charlie Company,Charles shows you the data heâs collected, but he was unable tofigure out some of the amounts. On the Costs and Balances panel,determine the missing amounts. Note: It may behelpful to use T accounts to map the flow of the amounts throughthe manufacturing accounts and solve for the missing dollarvalues.

Managerial vs. Financial

Choose whether the following characteristics are most oftenassociated with managerial accounting or financial accounting.

	Managerial Accounting	Financial Accounting
Primarily used for internal decision making
Generally Accepted Accounting Principles (GAAP) must beused
Prepared statements usually pertain to the company as a wholerather than individual departments or products
Information provided will often be subjective, such asestimated future results
Often prepared on an as-needed basis rather than at fixedintervals
Use principles of the Sustainability Accounting Standards Board(SASB) to provide sustainability information to external financialstatement users
Consideration of sustainability practices to contribute to thecompanyâs long-term success
Using eco-efficiency measures to reduce expenses

Cost Classification

Charles has provided some of the costs he expects to incur asfollows. Decide on the classifications that could be applied toeach of these costs using the table provided. The cost object ineach case is the cheesecake.

Cost	Product	Period	Direct	Direct	Factory	Selling	Administrative	Direct	Indirect	Prime	Conversion
Cost	Cost	Cost	Materials	Labor	Overhead	Expense	Expense	Cost	Cost	Cost	Cost
Eggs used to make cheesecakes
Bakerâs wages
Delivery driver wages
Depreciation of office computers
Power to run the cheesecake ovens
Presidentâs salary
Sales commissions
Factory supervisor salary

Financial Statements

Charles found some sample income statements and balance sheetson the Internet, and asked which of them might be most appropriatefor a manufacturing business like his. Review income statements Aand B on the Income Statements panel, and balance sheets C and D onthe Balance Sheets panel. Determine which income statement andbalance sheet would be most appropriate for a manufacturingbusiness like Able Baker Charlie Company.

Which income statement is most appropriate for a manufacturingbusiness?

Income statement A

Income statement B

Which balance sheet is most appropriate for a manufacturingbusiness?

Balance sheet C

Balance sheet D

Income Statements

Income Statement A (scroll down for Income StatementB):

Sample Company A

Income Statement

For the Year Ended December 31, 20Y8

1	Sales		$42,000.00
2	Beginning finished goods inventory	$5,250.00
3	Plus cost of goods manufactured	6,400.00
4	Cost of finished goods available for sale	$11,650.00
5	Less ending finished goods inventory	400.00
6	Cost of goods sold		11,250.00
7	Gross profit		$30,750.00
8	Operating expenses:
9	Selling expenses	$6,400.00
10	Administrative expenses	5,250.00
11	Total operating expenses		11,650.00
12	Net income		$19,100.00

Income Statement B:

Sample Company B

Income Statement

For the Year Ended December 31, 20Y8

1	Sales		$42,000.00
2	Beginning merchandise inventory	$5,250.00
3	Plus net purchases	6,400.00
4	Merchandise available for sale	$11,650.00
5	Less ending merchandise inventory	400.00
6	Cost of merchandise sold		11,250.00
7	Gross profit		$30,750.00
8	Operating expenses:
9	Selling expenses	$6,400.00
10	Administrative expenses	5,250.00
11	Total operating expenses		11,650.00
12	Net income		$19,100.00

Balance Sheets

Balance Sheet C (scroll down for Balance SheetD):

Sample Company C

Balance Sheet

December 31, 20Y8

1	Assets
2	Cash		$20,800.00
3	Accounts receivable (net)		10,000.00
4	Merchandise inventory		6,000.00
5	Supplies		2,100.00
6	Land		17,000.00
7	Total assets		$55,900.00
8	Liabilities
9	Accounts payable		$17,800.00
10	Stockholdersâ Equity
11	Common stock	$19,000.00
12	Retained earnings	19,100.00
13	Total stockholdersâ equity		38,100.00
14	Total liabilities and stockholdersâ equity		$55,900.00

Balance Sheet D:

Sample Company D

Balance Sheet

December 31, 20Y8

1	Assets
2	Cash		$20,800.00
3	Accounts receivable (net)		10,000.00
4	Inventories:
5	Finished goods	$2,000.00
6	Work in process	1,500.00
7	Materials	2,500.00	6,000.00
8	Supplies		2,100.00
9	Land		17,000.00
10	Total assets		$55,900.00
11	Liabilities
12	Accounts payable		$17,800.00
13	Stockholdersâ Equity
14	Common stock	$19,000.00
15	Retained earnings	19,100.00
16	Total stockholdersâ equity		38,100.00
17	Total liabilities and stockholdersâ equity		$55,900.00

Costs and Balances

At the end of February, after the second month of operationsof Able Baker Charlie Company, Charles shows you the data heâscollected, but he was unable to figure out some of the amounts.Review the following data and fill in the missing amounts on thechart for Able Baker Charlie Company. Note: It maybe helpful to use T accounts to map the flow of the amounts throughthe manufacturing accounts and solve for the missing dollar values.It may also be helpful to review the steps for determining the costof materials used, total manufacturing cost incurred, and cost ofgoods manufactured.

Data forFebruary
Decrease in materialsinventory	$3,300
Materials inventory on Feb. 28	50% of materials inventory on Jan.31
Direct materials purchased	$12,600
Direct materials used	3 times the direct laborincurred
Total manufacturing costs incurredin period	$29,400
Total manufacturing costs incurredin period	70% of Cost of GoodsManufactured
Total manufacturing costs incurredin period	$7,000 less than Cost of GoodsSold

Account	Account Balances		Costs Incurred
Account	Jan.31	Feb.28	Costs Incurred
Materials Inventory			DirectMaterials Used
Work inProcess Inventory	$27,000		DirectLabor Incurred
FinishedGoods Inventory		$16,000	FactoryOverhead Incurred
			Cost ofGoods Sold

grayprairie-dog947

This term you have learned to understand a companyâs financial story using the language of accounting. The recording and reporting of information is essential to decision makers and other users of financial information; numbers on the various financial statements are used to help further understand the financial condition of the business. This process is known as financial ratio analysis and allows us to analyze the companyâs financial position in relation to other organizations in the industry. In this final assignment, you will apply the concepts you have learned throughout the term to perform financial statement analysis and to offer some recommendations.

Assume that you are a health care consultant hired by the Dependable DME Company. DME is Durable Medical Equipment and includes all equipment that benefits patients who have certain medical conditions. The owner of the company, David Smith, is interested in applying for a loan to expand his business; he desires to open a second location in another city. He is preparing to apply to a local bank for a loan.

The bank will base its decision on the following averages for the DME industry:

Ratio	Industry Average
Current ratio	1.50
Quick ratio	0.80
Receivables turnover ratio	18.0
Inventory turnover ratio	20.0
Debt to assets ratio	0.56
Profit margin	10.25%

The balance sheet data for Dependable DME Company follows:

	December 31, 2017	December 31, 2016
Cash	$75,000	$60,000
Accounts receivable	40,000	20,000
Inventory	30,000	20,000
Prepaid insurance	5,000	5,000
Total current assets	140,000	105,000
Property and equipment	600,000	550,000
Accumulated depreciation	140,000	110,000
Total property and equipment	460,000	440,000
Total assets	$600,000	$545,000
Accounts payable	$60,000	$60,000
Other current liabilities	40,000	45,000
Total current liabilities	100,000	105,000
Bonds payable	150,000	150,000
Total liabilities	250,000	255,000
Common stock	250,000	250,000
Retained earnings	100,000	40,000
Total stockholdersâ equity	350,000	290,000
Total liabilities and stockholdersâ equity	$600,000	$545,000

The income statement data for Dependable DME Company follows:

Sales	$600,000
Cost of goods sold	350,000
Gross profit	$250,000
Operating expenses	100,000
Operating income	$150,000
Interest expense	25,000
Income before taxes	$125,000
Income tax expense	65,000
Net income	$60,000

Required:

Calculate the following six (6) ratios: Current Ratio, Quick Ratio, Receivables Turnover Ratio, Inventory Turnover Ratio, Profit Margin Ratio and Debt to Assets Ratio. Be sure to show the actual calculation as well as your final answer.

You are only required to calculate the ratios for 2017; however, for two of the ratios (Receivables Turnover Ratio and Inventory Turnover Ratio), you will need data from 2016 for the formula. When calculating the Quick Ratio, please note that Short-Term Investments are $0 in this scenario. (24 points; 4 points for each ratio calculation)

Below each ratio, comment on the interpretation of the ratio. In other words, what does the result tell you, specifically? (8 points)

Based upon the industry averages upon which the bank relies, should they approve the loan to Mr. Smith? Why or why not? (7 points)

In one-half page, comment on what financial aspect of Dependable DME Company looks good and where can Mr. Smith make some improvements. Specifically identify at least two recommendations to Mr. Smith that can be made to improve the financial position of his business. (8 points)

AFM101 Chapter Notes - Chapter 8: Perpetual Inventory, Gross Profit, Income Statement

AFM101 Full Course Notes

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