Flashcards in Formulas Deck (17):

1

## Account Receivable Turnover

### Accounts receivable turnover is calculated as: (Net Credit) Sales/Average Net Accounts Receivable. Ugi

2

## Inventory Turnover

### Inventory turnover is computed as: Cost of Goods Sold/Average Inventory

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## Accounting Rate of Return (ARR) [Also called Simple Rate of Return]

### ARR = (Average Annual Incremental Revenues − Average Annual Incremental Expenses) / Initial (or Average) Investment

4

## Definition - Internal Rate of Return

###
The Internal Rate of Return (also called the Time Adjusted Rate of Return) method : Evaluates a project by determining the discount rate that equates the present value of the project's future cash inflows with the present value of the project's cash outflows. The rate so determined is the rate of return earned by the project.

A.

Advantages --

1. Recognizes the time value of money (i.e., present value of the future cash flows)

2. Considers entire life and results of the project

3. Meaning of resulting rate is intuitive.

B.

Disadvantages --

1. Difficult to compute

2. Requires estimation of cash flows over the entire life of the project, which could be very long

3. Requires that all future cash flows be of the same direction, either positive or negative

4. Assumes immediate reinvestment of cash flows resulting from new revenues or cost savings at the project's internal rate of return

5. Limited usefulness when comparing projects of different sizes (initial costs), with different length lives, or with different timing of cash flows.

5

## Formula - Internal Rate of Return

###
Annual Cash Inflow (or Savings) × PV Factor = Investment Cost, or

PV Factor = Investment Cost/Annual Cash Inflow (or Savings)

6

## Profitability Index

###
It is computed as: Net Present Value/Project Cost.

The profitability index computes the expected return for each dollar invested.

7

## NPV (Net Present Value)

### NET present value is the difference between present value of cash inflows and cost of the investment.

8

## Definition - NPV (Net Present Value)

###
The Net Present Value approach : Assesses projects by comparing the present value of the expected cash inflows (revenues/savings/residual value/etc.) of the project with the expected cash outflows (initial cash investment/other payments) of the project.

The most common NPV exam question asks you to determine NPV. However, some questions give you the NPV and ask you to calculate cash inflows or cash outflows. You should note that if you have any two of the three factors (NPV, PV of cash inflows, PV of cash outflows), using the eqDuring the month of March Year 1, Nale Co. used $300,000 of direct materials. On March 31, Year 1, Nale's direct materials inventory was $50,000 more than it was on March 1, Year 1.

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##
During the month of March Year 1, Nale Co. used $300,000 of direct materials. On March 31, Year 1, Nale's direct materials inventory was $50,000 more than it was on March 1, Year 1.

Direct material purchases during the month of March Year 1 amounted to

A. $0.

B. $250,000.

C. $300,000.

D. $350,000.

###
D. $350,000.

Purchases is the amount required to provide the materials used ($300,000) and the increase in inventory ($50,000) for total purchases of $350,000.

Beginning material inventory + purchases = ending material inventory + material used

Purchases = ending inventory - beginning inventory + material used

Purchases = inventory increase + materials used

Purchases = $50,000 + $300,000

= $350,000

10

## Breakeven sales

### Breakeven sales = fixed cost/contribution margin ratio

11

## Regression equation

### The regression equation has the format: Y = A + Bx, where Y is the dependent variable, A is point where the regression line intercepts the Y access, B is the slope of the line, and x is the independent variable. The Y intercept occurs when x equals zero.

12

##
On January 1, Year 1, Lake Co. increased its direct labor wage rates. All other budgeted costs and revenues were unchanged.

How did this increase affect Lake's budgeted breakeven point and budgeted margin of safety?

Budgeted breakeven point Budgeted margin of safety

Increase Increase

Increase Decrease

Decrease Decrease

Decrease Increase

###
Increase Decrease

Contribution margin percentage (cmr) = (sales - variable costs)/sales breakeven sales = fixed cost/cmr Budgeted margin of safety = Budgeted sales - breakeven sales. If direct labor wage rates increase, then the total variable cost increases. Contribution margin and cmr are decreased, causing breakeven sales to increase. (The firm is now contributing less per sales unit toward the fixed cost.) With the increase in breakeven sales, the margin of safety declines. (The firm has less breathing room now because actual sales are closer to the breakeven point, which has increased.)

13

## direct costing - Fixed cost and selling cost

###
Sales

- Variable Manufacturing

- Variable Selling and Administrative

= Contribution Margin

- Fixed Manufacturing

- Fixed Selling and Administration

= Operating Income

14

##
Which of the following statements is correct regarding the difference between the absorption costing and variable costing methods?

A. When production equals sales, absorption costing income is greater than variable costing income.

B. When production equals sales, absorption costing income is LESS than variable costing income.

C. When production is greater than sales, absorption costing income is greater than variable costing income.

D. When production is LESS than sales, absorption costing income is greater than variable costing income.

###
C. When production is greater than sales, absorption costing income is greater than variable costing income.

When production is greater than sales, absorption costing income is greater than variable costing income. This is why managers are often tempted to overproduce.

15

##
A single-product company prepares income statements using both absorption and variable costing methods. Manufacturing overhead cost applied per unit produced in Year 2 was the same as in Year 1.

The Year 2 variable costing statement reported a profit, whereas the Year 2 absorption costing statement reported a loss.

The difference in reported income could be explained by the units produced in Year 2 being

A. Less than the units sold in Year 2.

B. Less than the activity level used for allocating overhead to the product.

C. In excess of the activity level used for allocating overhead to the product.

D. In excess of the units sold in Year 2.

###
A. Less than the units sold in Year 2.

Absorption costing includes fixed manufacturing costs as part of product costs; direct costing expenses fixed manufacturing costs as a period expense. Because of this, inventory valuation under absorption costing is more than inventory valuation under direct costing. When a firm sells more than it produces, it must use some of its existing inventory. Since absorption costing has a higher inventory valuation, the cost of goods sold under absorption costing will be higher (and income lower) than under direct costing.

16

##
Lynn Manufacturing Co. prepares income statements using both standard absorption and standard variable costing methods. For Year 2, unit standard costs were unchanged from Year 1. In Year 2, the only beginning and ending inventories were finished goods of 5,000 units.

How would Lynn's ratios using absorption costing compare with those using variable costing?

Current ratio Return on stockholders' equity

Same Same

Same Smaller

Greater Same

Greater Smaller

###
Greater Smaller

Current ratio = current assets/current liabilities. Return on stockholders' equity = net income/average owners' equity. Absorption costing allocates both variable and fixed manufacturing costs to inventory. Variable costing assigns only variable manufacturing cost to inventory and expenses fixed manufacturing overhead as a period cost. Therefore, ending inventory, and thus, current assets, are higher under absorption costing by the amount of fixed overhead allocated to ending inventory. The current ratio under absorption costing is, therefore, higher than under variable costing. Income in the current period is the same under both absorption costing and variable costings because the fixed overhead allocation rate has not changed, and ending inventory quantities have not changed. Therefore, total expenses recognized for the life of the firm for absorption costing are less than for variable costing by the amount of fixed overhead remaining in those 5,000 units at the end of Year 2. Thus, retained earnings are higher for absorption costing, causing the denominator of return on stockholders' equity to be greater, and finally causing the ratio to be smaller for absorption costing.

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