Acct 2220 Zeigler - Exam #2 Comments Our second Accounting 2220 Examination will be held Thursday night, March If you want to learn more check out infants emotional needs study guide
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2nd, using the 7:30- 9:30pm common exam time, in BA 1007. The format will be the same as our first exam. Approximately fifty (50) M/C questions are planned. Additional Zeigler office hours this day will be from 5:30–7:00pm in BA 321. See our class website for all regular office hours. 2220 Exam Requirements: - Bring a calculator (TI or equivalent is acceptable, but do not rely on TI present value computations), a #2 pencil, good eraser and your Student ID. Your ID must be provided if requested. - Hats shall be removed or turned-around. Students must protect their work during the examination. - This is a closed book/note examination, but Chp 10 P.V. Table Factors (Handout #1) will be provided. - No phones or equivalent may be used. Material coverage includes Chapter 6, 7 and 10 text reading, Group Quiz #2 & #3, Attendance Quiz #2 & #3, homework, case-study assigns and in-class discussion. Some items to consider are discussed below (all material is includible): Chapter 6 - Relevant Information for Special Decisions: -This chapter focused on information “relevance” to support the decision-making process. In our context, relevant revenues and costs are: 1) expected future revenues and costs that will, 2) "differ" among the available choices (i.e. alternatives). These differential (also called incremental, if increasing) costs are "avoidable" if one future alternative is chosen over another. If the cost (or revenue) remains the same regardless of the alternatives available, the cost (revenue) should be excluded as it is irrelevant to the decision at hand. -Further, if a cost has already taken place, there is little we can do to change that fact. As such, this may be a good (or bad) learning experience for management, but it is sunk and irrelevant. Depreciation is the result of a past decision and is a classic example of a sunk cost. Only the fair market value (FMV) of the asset would be relevant (not the depreciation itself). -The relationship of Cost Avoidance and Cost Hierarchy will be addressed (see pg 208, E6-2A, E6-4A and GQ#2). Which of the four levels typically associate with variable costs? Fixed costs? Can the same fixed or variable cost be relevant, and then irrelevant, depending on the decision at hand? Yes, relevance is a “context-sensitive” concept (pg 207). Thoughtful analysis is required for each specific decision at hand. -Watch out for allocated (typically, product-sustaining or facility-sustaining) fixed costs. These types of costs may be required for GAAP income statement reporting and segment allocation purposes, but will often remain the same for the company regardless when making decisions. Of course, in the long-run, all costs are variable and can be changed. -What is the difference between a "sunk" and an "opportunity" cost? Which represents a "sacrifice" (i.e. a foregone benefit) and can be relevant? Can an opportunity cost be "cumulative"? No (see pg 206). -Review all homework and associated templates offered to help your analysis for this chapter. We discussed three (3) specific decision-models in Chapter 6: 1) Special Order decisions focus primarily on variable (i.e. unit-level) costs, but can include all costs that "differ among the alternatives". Typically, these incremental (again, primarily unit-level) costs are incurred to produce one more unit to fulfill an order unless we have a capacity problem. Make sure you understand the concept of available "capacity" and how it relates to the relevant range. If we have a capacity problem (i.e. can't make more product or provide more services unless capacity is increased), then we would not (quantitatively) want to accept a price lower that we are now charging. Again, on a quantitative basis, why would we give up normal sales at normal prices to accept a special order at reduced prices when operating near or at capacity? We may choose to accept the offer and increase capacity, but new cost-related questions would arise. For example, qualitatively, we still may choose to accept such an order, and not sell to existing customers, to accomplish other goals. See problems E6-2A, E6-7A, E6-8A and the GQ#2 solution.2) Outsourcing (i.e. Make vs. Buy) decisions focus on avoidable (relevant) costs. If the cost is not avoidable (incurred regardless if we make or buy), it is irrelevant. If additional revenue sources exist, we may choose to compare the lost contribution margin against (vs.) the avoidable fixed costs in determining the opportunity cost of rejecting the additional revenue (i.e. when choosing to make rather than buy). Further, can we determine an "indifference point" (i.e. equating cost structures equal to one another) between the alternatives at hand? Yes. See E6-2A, E6-13A, GQ#2 and class notes. 3) Segment Elimination decisions focus on lost CM vs. avoidable FC (this is a short-cut approach). I recommend a full approach when reviewing this analysis by using our income statement template that addresses the "before and after" situation for the company as a whole (to clearly prove the analysis). Not only does this template guide you through the analysis, but it would be a useful tool to explain your work to a third party (i.e. your boss). See P6-28A, Canvas HW and GQ#2 postings. X) Asset Replacement: There will be no coverage of this topic on the examination. Chapter 7 - Planning for Profit & Cost Control (i.e. Budgeting): 1) The Master Budget (The "Profit Plan") focuses on the Income Statement. It all starts with a sales forecast and ends with planned profitability. We also need to address the balance sheet resources required to support the profit plan for the period in question. In essence, we are planning (budgeting) the income statement and addressing each component of the income statement in detail. Next, we address how to pay for this profit plan by confirming the balance sheet resources required. Assuming all goes according to plan (it won't!), the ending financial statements represent our "Pro Forma" (projected) position at the end of the budget period. Even though we do not expect precision, we do have a plan (i.e. a roadmap) that can be communicated to all within the organization. Based on this plan, we can use it for purposes of future decision-making *and* for performance evaluation metrics (i.e. bonuses, financial incentives, etc.). Review E7-1A and P7-16A dealing with goal congruence behavioral issues and the setting of budgetary goals. This entire conceptual area is often called "Responsibility Accounting" (holding managers accountable) and will be addressed further in the upcoming Capsim simulation. 2) When addressing a Purchases budget, keep in mind that management may want to have some "safety stock" on hand at the end of the month to go forward on the first day of the next month. As such, we will have beginning and ending inventories to consider when determining production and associated material purchases needed for said production. In essence, what are our "needs", less what do we "have" on-hand already, to support the projected sales demand level? This budget is generally the most difficult. Refer to the Bee Gee Budget case and Canvas/Excel budgeting homework assignment postings for further review. Note that exam questions will relate to individual budget preparation rather than one comprehensive budget analysis. Be sure to understand how individual budgets fit within the overall budgeting framework and how each relates to one another as part of the Master Budget. 3) A second main budgetary component, the Cash Budget (Cash in vs. Cash out), continues to focus on the Balance Sheet. We are trying to answer questions about paying for (i.e. financing) the profit plan made and the focus is on cash flow. Will we have enough cash, and if not, how should we go about addressing this problem before we run out of cash? Establishing "credit-lines" (short-term financing) is a typical approach to solve short-term cash flow needs (i.e. until we sell inventory and/or collect A/R). 4) Based upon the profit plan, what are the expected cash inflows and outflows that will result? After preparing a cash receipts and disbursements budget, the Cash Budget is prepared. If the cash balance is negative, we should address credit-line needs. If a cash surplus appears to be the case, we can address ways to invest the extra cash for maximum returns to shareholders. Cash, in and of itself, is a fairly poor investment vehicle (i.e. CD's, etc.), but we must have enough cash to provide liquidity for the organization (i.e. the ability to pay our bills as they become due). This low/no rate-of-return injection of cash flow to handle payables, receivables and other current operations is called "Working Capital" (i.e. Current Assets - Current Liabilities). We will work with this issue again in the simulation. 5) In addition to calculating cash balances, be prepared to determine ending A/R and A/P balances for cash receipts and disbursements budgets respectively (See AQ#2). Chapter 10 - Planning for Capital Investments & the Time Value of Money: -Note: Present Value tables (Handout #1) will be provided, but the three "Key Formulas" will not. -Why is a "dollar today preferred over a dollar tomorrow"? Answer: If we do not have a dollar today, we cannot invest it. Therefore, we need to "strip-away" (discount) our required rate of return from all future cash flow(s) expected to be received to find its "present" value today. This allows an apples-to-apples comparison of the investment (cash outflows) involved. -What is the "Cost of Capital" (COC) for a company all about? Generally, a firm would certainly want to earn a rate of return in excess of its cost of obtaining funds. Further, we use the terms "COC", "Minimum desired rate of return", "Discount Rate", "Hurdle Rate" and "Cut-off Rate" interchangeably in this chapter (see pg 303). -What is behind a Table "1" or Table "2" factor? What are the concepts here? Why use one table over the other? Table 2 is a "convenience" table used to minimize calculations where cash flows are equal. Table 2 is built upon Table 1 factors. When in doubt, use Table 1 for your calculations relating to each *individual* cash flow. -Two Time Value of Money (TVM) approaches are addressed. What is the difference between Net Present Value (NPV) and Internal Rate of Return (IRR)? What different questions are being addressed here with these two approaches? -Review the "Key Formulas" handout used to answer questions about PV, IRR and required cash flows per period. Review the class website IRR calculator and posted homework to confirm your understanding. -Be prepared to analyze conceptual issues and perform calculations using the four capital budgeting techniques discussed in the chapter. Which two methods consider the use of Time Value of Money (TVM) concepts? Which two do not? We address all four methods with assign P10-22A. -For all TVM questions presented, you should draw timelines to confirm your understanding of the cash flows involved. -TVM is all about cash flows (i.e. not accrual accounting). Both pre and post-tax scenarios will be presented. If taxes are considered, why is an income statement prepared prior to completing the analysis? What is the sole purpose of preparing this (Handout #4) income stmt? How can depreciation, a non-cash expense, affect cash flows? See E10-8A, P10-22A and AQ#3. -How can the choice of depreciation methods create differing cash flows? See P10-22A. -How is Formula 3 involved when determining required minimum periodic benefits? See E10-8A & AQ #3 solution. -What are the two *non-TVM* approaches to Capital Budgeting? Review the chapter examples (pg 316- 318), P10-22A, GQ#3 and AQ#3. Two to three questions are planned here. -What is a "Postaudit" and how can this apply to performance evaluations? What comparisons are actually taking place here? Review E10-11A & P10-18A. Last, our Capsim "Getting Started" (pre-work) assignments are posted. These required assigns are electronically due at the start of lab on Monday, March 13th. A few hours of pre-work effort now represents an investment that will pay off later. Feel free to stop by during office hours with questions prior to our exam Thursday night.