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524 ACC201

L07

L03

C E RG ESc.feb~S194.1lD

March: S/J3,400

L04.1CHECXRG ESa. Ma'(.$7I,oooc. Jene: $16,760

Exen:ise 14-15 PrePRring pro forma income sttdemeJrts with different flSnlmptWru

. 'orman Jelen, the contreller of Wing Corporation, is trying to prepare a sales budget for thecorning year, The income statements for tbe last four quarters foUow.

First Second Third fouJtllQuarter Quarter Quarter Quarter Tatll

Sales revenue S170.0Jl 5200.000 S210.tm 5260.000 S640.000Cost of gooos sold 102.000 120.000 126.tm ~ ~Gross profit 68.tm 110,000 84,D00 104.000 336.000Seling & admin. expense 17,llXl ~ 21,D00 26.000 ~Net Income S 51.,000 560.000 S 63.tm S 18.000 S252.00D

Historically. cost of goods sold is about 60 percent of sales revenue. Selling and administra-tive expenses are about 10 percent of sales revenue.

Sam Wing. the chief executive officer. told Mr. Jelen that he expected sales next year to be10 percent for each respective quarter above last )-ear'$ level, However; Glenda Sullivan, the vicepresident of sales, IOIdMr. Jelen that she believed sales grov.'tb would be only 5 percent,

1Ie~.iRd•.. Prepar-e a pro forma income statement including quarterly budgets for the coming year using

Mr. Wing's estimate.b. P~ a pro forma income statement including quarterly budgets for the coming year using

M$. Sullivan's estimate.e, £splain \>oily two exe..-uti"" officers in the same company could have different estimates of

future growth.

PRlBLEMS

AUapplicable ProbletallFlt IIvailable with McGrawMill'sComIfICt AccDllllfi",.

P 14-1& Prepgring /I sales lNuiget and 5cheda1e of ClUh receipts

~yl't!inla'S lee, txpec!510 begin operatioos onJaooary 1.2012; it willoperate as a specialtysal<s~' that sdh Wet poinI.en O\-etthe In=nK McCarty e:<p<ClS sales in January 2012 tototal S2OO,ooo and 10 i!Icrea5e 10 pe1a!l'It per month in February and Man:h. All sales are on ae-count. p.1cCarty expectS 10eoIIect 70 percent of accounts reccivabIe in the month of sate, 20 percentin the month following the and 10 peroen! in the seeond month foD.owingthe saJe.

Relllin:d

II, Prepare a sales budget for the fltSt quarter of 20 12.b. Determine the amount of sales menue )I1cCatty will repon on the first 2012 quarterly pro

rerma income statement.c. Prepare a easb receipu schedule for the first quarte •. of 2012.d. o.:termine the amount of accounts receh'3ble as of Macdt 31. 2012.

IUI inventory purclrtues budget and scluuhde of Cluh

paoy's marketing director developed the follcwing cost ofand JuI)·.

Bu~geted cost of goods sold

May

S70,000

Jane July

$86.noo58lJ.noo

Spratt bad a begillJling inventory balance ofaccoums payable of SI4,800. The company de .

,600 on April I and a beginning balance ino maintain an ending inventory balance

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Surveyor Accounting. Third Edition

PIonn.ng fry pro'£. ••nd Cast Control

equal to 10 percent of tbe next period's of 800d£ sold. Spratt makes all purchases on ac-count. The company pays 60 percent aecounts pa)'3bk in !be month of purchase and tbe re-maining 40 percern in the month fo ing purcllase.

RequinrdII- Prepare an inventory p ses booStt for April, :\iay. and June.b. Determine the amoun of ending inventory Sprat! will report on the end-of-quarter pro

forma balance sbc. Prepare a scbed of cash payments for inventory for April, May, and June.d. Determine balance in accounts payable Spratt will report on the end-of-quarter pro

forma b sheet.

Problem 14-18 PreparifIJ: pro fomtll incom« statements with diffirenllUsumptWm

Top executive office.r5of Zortoli Company, a merehandieicg firm, are preparing the nett year'sbudget. The controller has provided e~ne with the current )'ear's projected income statemenL

La7

CHECK FICUa.I2.75%

Current Ye.r

SSIK re'lenueCaS1 of goods sold

GlllSs profcSelling & admil. expensKNet income

$2,000.0001,400.llOO

6OO,!Dl26ll,!Dl

~

Cost of goods sold is usually 70 percent of sales revenue, and selling and administrative a-penses are usuaUy 10 percent of sales plus a fixed cost of S6O,000.The president has announcedthat tbe company's goal is to increase net income by IS percent,

Requinr411The following items are independent of each other,

II- What percentage i1lC1'e<Win saI<$'I"Ouldenable tbe company to reach its goal? Support youranswer "ith a pro forma incoCIe Sl&tamttl.

b. The ma.ut may become stagnant next year, and the company does not expect an inaease insales revenue, The productioo III3DaF be\it.'tS that an impro>'Cdproduction procedure cancut cost of goods sold by 2 peretnL \\-'hat else can !be compall} do to reach its goal? Pteparea pro forma inCOID<stateoem illustrating >'OW proposal

Co The company decides to eiaIate its ad\~ campaign to boost consumer ~which will increase selling and adtniJmtrative e.tpeme5 to 5340.000. Wllh the iDcn:aleci ad-vertising, the company expects sa1cs rn'Cl1llt to increase by IS peroml. Assuoe that cost orgoods sold remains a constant proporllOfJ of Can the COIDJWI)' reach its goal?

Prob1m14-19 Preparilrg4u:JaedMkof J1IIFmatsf(Juel1i.KtDIIi~ La 5, 8~r~ltHs

Prestia is 'a rew.il company specializing in men's haIi Its ~ CirectDr prepartd the list or a- a. Sept: S2II.510peered operating expenses that follows. All items are p;tid .-be:n the e:xpeose$_ incurred aaplsales eommissionsand utilities. which are paid in the Cl th after they are incurred. July is thefust month of operations, so there are no beginning account balances.

Salary&xpenseSales commissions i4 percent 01sales)Suppfles expenseUtiitiesDepreciation on store e~ujpmentRentMiscell8f1eousTotal S&A expenses before Interest

Jlly

518.0001.700

36Il1.1003.0006,SOO

~~

525

523

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526 ACC201

LOSC ECK GFeb. cash 'L'fplus bernrefinancing actJvine~S1.o10

L03. 4. 5

JCE RG

c. IstarR purctases forpeaches: $141,1202nd OTR purchases tororar.ges: 5312.840

LO3. 4. 5. 6. 7

Requireda, Prepare a schedule of cas nts for selling and administrative expenses.b, Oett.rmine tbe amou futilities payable as of September 30.e. Determine tbe a t of saJes commissions payable as of September 30.

Problem 14-20 Preparing tI ctlSh budget

Kinman Medical Clinic bas budgeted the following cash flows.

January February March

CaSh receipts $100.000 S106.llOO Sl26,OO11Cash pavmelllS

For inventory purchases !IO,ooo 72.llOO 85,001IFor S&A expenses 31.000 32.000 27,001I

Kinnlon ~edical had a eash balance of SS,OOO on January I. The company desires to main-lain a cash cushion of SS,OOO. Funds an assumed to be borrowed, in increments of 81,000, andrepaid on the last day of each month; the interest rate is 1 percent per month. Kinnion pays itsvendor on the liI5t day of the month also, The company had a montWy S40,OOObeginning bal-ance in lts line of eredit liability account from this years quarterly results.

Req_iRdPrepare a cash budget. (Round all computations to the nearest whole dollar.)

Proble 14-21 Pre 'g budgds ••,ith tmdtipJe products

Fresh Fruits Corporation '" lesales peaches and oranges. Lasbaoda King is working with thecompany', a:ountant to are next year's budget, Ms. King estimates that sales will in-crease S percent (or peaches an I0 percent for oranges. The current year's saJes revenue datafollow,

Rm QUlrWr Third Oaarter Fourth QarWr Tata'

Peaehf!S mn,lXl(l 8300,000 SL40JlOO SUOl,lIOOOranges 4OO,lXl(l 570.000 JIIl,ooO UOl.oooTotal S62D.ooo 5870.000 S62D,0Il0 52.10),000

Based on the company's past experience.revenue, Company policy is to keep 20 percentas th~ CUtrell! period:' ending inventory. (11int:determine the beginning inventory for the first

st of goods sold is usually 60 percent of salesthe next period's estimated cost of goods sold

the cost of goods sold for the first quarter to.)

Requireda, Prepare the companys sales budget for the aca )'e3r

b. If the SC'Jlingand administrative expenses arepan)"s Wdgeted annual inco= statement.

c. Ms. King estimates next year's ending inventory will be Soranges, Prepare tne company's in>-entol)' purchases budtedy figures by produce

for peacbes and S56)lOO fOfthe=year sbooo\-ingquar-

Problem 14-22 PreJHUing tI master budget fOl' tI rettW co'MpfUlJV"'lrIJ lID ~gtlCf'OlUlt bttlttncf<3

Paid Company is 3 rerail company that specializes in selling outdoorcompany is consjdeting opening a new store on October L 2012. The company

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s..vey or Acco.;nting. Third Edition

LOS.7curreat ROJ of 20 petcenL The COClpany target

ROI is l~ percent. The Wade Division opportunity to ~t 55.000,000 at 18percent but isreluctant to do so because its ROI . an to 19.2 percent, The present im=1 base for 1Mdivision is 57,500,000.

IIlOU>'3le the Wade Division to make the investment by using the

PROBLEMS

.• connectAll appljcable Problem. are available with McGraw-Hill'sConnect ACCDunting.

Problem 15-18 Determining SI1.1es and ~'{U'iIlblecost volume variances

Todhunter Publications established the following standard price and costs [or a hardcover pic-rure book that the company produces.

SllIndard prtce and variable costs:Sales prtc:eMaterialsLaborOverheadGeneral, seUing. and admilllstrative

Planr.ed ed eons:Maou'aclUrir.gGeneral. seUing. and administrntive

L04

CHECX AGU ESa.NI = 581.000b. I at2ll.1lIll units: $12.lXXl

S36.oo9.004.506.307.2D

$135.00054.000

Todbunter planned to make and sell 30,000 copies of the book.

RequiJeda. Prepare the pro forma income statement that would appear in the master budget.b. Prepare flexible budget income Stalemttlts, assuming volumes of 29.000 and 31,000 units.c. Determine the sales and variable cost volume variances, assuming volume is actually 31,000

units.d. Indicate whether the variances are favorable (F) or unfavorable (ll).c. Comment on how Todhunter could uu the ,ariance:s to evaluate performance,

Problem 15-19 Determining and interpreting flexibte budJ,<etvariances

Use the standard price and coSt data supplied in Problem J5-18. Assume that Todhunter actuallyproduced and sold 31.000 boon The actual sales price and costs incurred foDow.

Act\l1Il price and variable COilS:S.ales priceMaterialsLaborOverheadGeneral, seUing, and administr.ltlve

Actual fixed eo~ManutaClUlingGensral, sellin~. and administrative

LOS

S35.oo91.04.406.357.00

CHEC FIGUREAexible bodgetvartance of NI:S2D,450 U

5120.00060.000

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ACC201

558 a,.,~""" 15

Requireda. Determine the flexible budget variances.

b. Indicate whether each variance is favorable (F) or unfavorable (L".e. Identify the management position responsible for each variance, Explain what could run'.

caused the variance.

L05

XPro 11m 15-20 FluibJe bwlgetp/annUrg

Luke Chou, the president of Digitecb Computer Services, needs your help. He wonders aboutthe potential clfe;:ts on the firm's net income if he changes the service rate that the firm chargesits customers. The following basic data pertain to fiscal year 2012.CHfCKAG ES

a. NI ~ SlSO.IJIJOc. NI ~ Sl62,5IlD

Standard (ate and vanable casts:Sef\Oice rate psr hourlaborOverhadGenefal. 5elfing, and administrative

Expected fixed costs;FaciJ'lV repairGeneral. seiling, and administrative

$80.0040.00UO4.30

$5Z5,1JIJO.00150,000.00

Req.ired•. Prepare the pro forma income statement that would appear in the master budget if the firm

expects to provide 30,000 hours of services in 2012.b, A marketing consultant SU88CS1S to Mr. Chou that the service rate may affect the number of

service hours that the firm can achieve. According to the consultant's analysis, if Digitechcharges customers 575 per hour, the firm can achieve 38,000 hours of services, Prepare a !lex-ibk budget using the consultant's assumption.

e. The same consultant also suggests that if the firm raises its rate to SB5 per hour, the number ofservice hours will decline to 25,000. Prepare a flexible budget using (be new assumption,

d. Evaluate the three po ible outcomes ),OU determined in Requirements a, b, and C" and rec-ommend a pricing strategy.

LOS,7 Differ-em types of ruporuibiiity cesters

is a large municipal bank with several branch offices, The bank's com-all data processing for bank operations. In addition, the bank sells the

ise in systems dev-elopment and excess machine time to severalthem as a service bureau..

computer department as a cost center, The manager of thecost budget annually for senior bank officials to approve.

actual and budgeted expenses. Revenues from the depart-as other income by the bank and are not reflected on

The COSI.S of servicing these clients are included in

Liberty >lationalputer departmentcomputer deportment '5small busines! firms, servi

The bank currentlycomputer department preparMonthly operating reports commenl's service bureau activitio=oarethe computer department's operatingthe computer department reports, ~.."..

The manager of the computer departmentcomputer department to a profit or investment

iklluireda. Describe the characteristics that differentiate a cost

center from each other.

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Survey of Ac.cowlting. Third Edition 591

LOaLilly Painting Company is ronsidering ••.beth:r to$4,000. The machine is expected to sz>-elabor, intive life of the machine is 15 years aceording

Required

a. Determine the uBadjusltd rate ofb. What is the predominant ,

vestment opportunities'!

a!le'lli spr;!) paint machine that costs. ! net inlXllnt by S600 per year, The effec-

manW3CtU1"eI"',estir:late.

based on the average cost of the investmenr.ing of \l5ing the unadjusted rate of return to evaluate in-

Exercin 16-15 Co IiRg tlu pqbtzck period tIIId ll1JIlJijJutedraIL of ..man forimeslmeflf opportunity

urebase a van thai CO~15560,000; it bas an expected U<dUJlife of three years andFay uses SO'aig/It-liaedepm:iation. Expected ~ is SJO.IXXlper!""".

L07, a

Fa)' Rentalsno salvage

Requi

termiee the payback period.Determine the unadjusted rate of return based on the il'trage cost of tl:e im-estr:!enL

PROBLEMS

All applicable ProblellJs ani available with MeGnIW-HilrsConllflCt ACCDllnling.frob 16-16 UJing present Wlbu!tuluUqus to ntlbuzte tJr~ __

opportunities

Fast Delivery is a small company thaI transports business packages bet-= . 'n.' Yorlc andChicago, Ir operates a fleet of small vans that 1DO\-"eSpackages to and froc a c:mtraI depot withineach 01 y and uses a common carrier to delli-er the packages ret..U>\ the depou in the noo cities.Fast receatly acquired approximatdy £6 million or cash capital from its ~ and its prcs;iOenLDon Keenon, is trying to identify the most profitabk way to imesI these funds.

Clarence Roy, the company's operations manager. believes that the money shouJd be used toexpand the fleetof city vans at a COSt of 5720,000. He argues that more vans "'<llIId mabk thecompany to expand its services into new markets, thereby ~asinl! the reveoue base. ~orespecifically, be expects cash inflows to increase by S280,OOO pet year. The additional ans areexpected 10 have ad average useful life of four)-ears and a combined saI\oagevalue of SIOO.OOO.Operating the vans will require additional y,,,rJcing capital of $40,000. whicb •••.iIl be I'CCO\,-emj "I

the end of the fourth year.In contrasr, Patricia Lipa, the company's chief accountant, believes that !be funds should be

used to purchase large trucks to deliver the packages between the depots in the t•••" cities. Theconversion process would produce continuing improvement in operating savings with reductionsin cash outflows as the following,

comect

L03, 5, S

it. 01 tI'.e var.s irnIesonent:St 1II.B11.C2

b. m:Iex01the trucksuwestnett 1.12&

Yea.' Y_2

S32G,cm

Vea••

$16l1.000 $400,000 S440.1lOO

The large trucks are expected to cost $800.000 and to have a four-year useful life and a580,000 salvage value. In addition to the purchase price of the trucks, up-front training costs areexpected to amount 10 S 16,000. Fast Deln-ery's management bas established a 16 percent desiredrate of return.

Requi,.~

a. Determine the net present value of the two investment altemarives,b. Calculate the present value index for each alternative.e, Indicate which invcstment alternative )011 would recommend. Explain your choice.

5BS

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592 ACC201

590 et...p:.eI'16

LO •• 7. 8

CHECKAG ESa. Payback period of the yogUll

im;estmeot l.n vearsUnadjusted rate ofreturn olllle cappuccinoinvestment 52.B6%

L03. 4. 8

CHECK AGURESa. NPV of A: S4,2ll8.!14b. Rate 01return ot B: 12%

L03. 6. 7

C ECX Aa. NPV of 11: 551.309.36b. Payback period of 12: less

than 2 years

Problem 16-17 U~ing tire payback period aNllUUJdjustedmt~ of return to ffllhuueu.It~r1Ulli.~inrestltJUlt oPPOr1JUfitus

Louis Gallo owns a small retail ice cream parlor. He is considering expanding the business andhas identified two attractive alternatives. One involves purchasing a machine that would enableMr. Gallo to offer frozen yogurt to customers. The machine would cost 58,100 and has an ex-pected useful life of three years with no salvage value, Additional annual cash revenues and cashoperating expenses associated with selling yogurt are expected to be 55,940 and 5900, respectively.

Alternatively, Mr. Gallo could purchase for S10,080 the equipment necessary to serve cap-puccino. That equipment has an expected useful life of four years and no salvage , .• lue, Addi-tional annual cash revenues and cash operating expenses associated with selling cappuccino areexpected to be 58,280 and S2,430, respectively.

Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent.

Required3. Determine the payback period and unadjusted rate of return (use average investment) for

each alternative,b. Indicate which investment akernarive you would recommend. Explain your choice.

Probl8m 16-18 Uiling net pr"ileRt p<Jh« and Urterntd rate of return to ".,abud"westmeRt opportunities

Veronica Tanner, the president of Tanner Enterprises, is considering two investment opportuni-ties. Because of limited resources, she will be able to invest in ooly one of them. Project A is topurchase a machine that ••••~IIenable factory automation; the macbine is expected to have a usefullife of four years and no salvage value. Project B supports a tralning program that will improvethe skills of employees operating the current equipment. Initial cash expenditures for Project Aare SIOO,OOOand for Project B are £40.000. The annual expected cash inflows are S31,487 forProject A and S 13,169 for Project B. Both investments are expected to provide cash !low benefitsfor the next four years. Tanner Enterprise's COStof capital is 8 percent.

Req.il1lda. Compute the cet present value of each project. Which project should be adopted based on

the net present value approach?b. Compute the approximate intemal rate of return of eacb project. Which one should be ad-

opted based on the internal rate of return approach?c. Compare the net present value approach with the internal rate of return approach. Which

method is better in the gi. en circumstances? 'Vhy?

Pro lem U~iJJgnet preleRt plllue and paybaclc period to epaJlIIlte investmeRtopportwritiu

B~ Graham S250,OOOduring the 25 years that be worked for a major corporation. 'ow bebas retired at the age SOand bas begun to draw a comfortable pension check every mouth. Hewants to ensure the f1 . security of his retirement by investing his savings wisely and is cur-rently considering tWO in t opportunities. Both investments requite an initial payment ofSI87,SOO_TbefoUowingtabk ts the estimated cash inflows for the two ahemaoves,

Opportunity ilOpportunity i2

Vear2 Vear3 Veat4

S78.75017.500

S101.25015,000

Mr. Gmbam decides to use his past average recount rate; it is S percent.

Reqaireda, Compute the net present value of each opportunity. Vt'bich uld Mr. Graham adopt based

on the net present value approach?