["Appendix D Accounting for Partnerships D-15 12\/31\/2010 Elway & Associates earns $127,600 in income for the year, and year-end withdrawals are 1\/1\/2011 Bax, $25,000; Royce, $27,000; Murdock, $15,000; and Elway, $40,000. Elway buys out Bax and Royce for the balances of their capital accounts after a revalua- 2\/28\/2011 tion of the partnership assets. The revaluation gain is $50,000, which is divided in using a 1:1:1:2 ratio (Bax:Royce:Murdock:Elway). Elway pays the others from personal funds. Murdock and Elway will share income on a 1:9 ratio. The partnership earns $10,000 of income since the beginning of the year. Murdock retires and receives partnership cash equal to her capital balance. Elway takes possession of the partnership assets in his own name, and the partnership is dissolved. Part 2 Journalize the events affecting the partnership for the year ended December 31, 2008. Planning the Solution \u2022 Evaluate each transaction\u2019s effects on the capital accounts of the partners. \u2022 Each time a new partner is admitted or a partner withdraws, allocate any bonus based on the income- or-loss-sharing agreement. \u2022 Each time a new partner is admitted or a partner withdraws, allocate subsequent net income or loss in accordance with the new partnership agreement. \u2022 Prepare entries to (1) record Royce\u2019s initial investment; (2) record the allocation of interest, salaries, and remainder; (3) show the cash withdrawals from the partnership; and (4) close the withdrawal ac- counts on December 31, 2008. Solution to Demonstration Problem Part 1 Event Ries Bax Royce Murdock Elway Total 4\/13\/2007 Apago PDF Enhancer Initial Investment . . . . . . . . . $10,000 $10,000 $ 20,000 12\/31\/2007 7,500 7,500 15,000 Income (equal) . . . . . . . . . . (4,000) (7,000) (11,000) Withdrawals . . . . . . . . . . . . $13,500 $10,500 $ 24,000 Ending balance . . . . . . . . . . 1\/1\/2008 $12,000 $ 12,000 New investment . . . . . . . . . 12\/31\/2008 1,350 1,050 1,200 3,600 10% interest . . . . . . . . . . . . 5,000 5,000 10,000 Salaries . . . . . . . . . . . . . . . . 8,800 8,800 8,800 26,400 Remainder (equal) . . . . . . . . (5,000) (12,500) (11,000) (28,500) Withdrawals . . . . . . . . . . . . $18,650 $12,850 $16,000 $ 47,500 Ending balance . . . . . . . . . . 1\/1\/2009 $18,650 $0 Transfer interest . . . . . . . . . (18,650) 12\/31\/2009 $ 25,000 25,000 50,000 Salaries . . . . . . . . . . . . . . . . (5,000) (5,000) (5,000) (15,000) Remainder (equal) . . . . . . . . (2,500) (2,000) Withdrawals . . . . . . . . . . . . 0 $30,350 $34,000 $13,650 (4,500) Ending balance . . . . . . . . . . $ 78,000 1\/1\/2010 (3,000) (3,000) (3,000) $ 60,000 60,000 New investment . . . . . . . . . $27,350 $31,000 $10,650 9,000 0 Bonuses to Elway . . . . . . . . Adjusted balance . . . . . . . . . $ 69,000 $138,000 [continued on next page]","D-16 Appendix D Accounting for Partnerships [continued from previous page] Event Ries Bax Royce Murdock Elway Total 12\/31\/2010 5,470 6,200 2,130 13,800 27,600 20% interest . . . . . . . . . . . . 20,000 20,000 20,000 40,000 100,000 Remainder (1:1:1:2) . . . . . . . (25,000) (27,000) (15,000) (40,000) (107,000) Withdrawals . . . . . . . . . . . . $27,820 $30,200 $17,780 $ 82,800 $158,600 Ending Balance . . . . . . . . . . 1\/1\/2011 10,000 10,000 10,000 20,000 50,000 Gain (1:1:1:2) . . . . . . . . . . . $37,820 $40,200 $27,780 $102,800 $208,600 Adjusted balance . . . . . . . . . (37,820) (40,200) Transfer interests . . . . . . . . $0 $0 $27,780 78,020 0 Adjusted balance . . . . . . . . . $180,820 $208,600 2\/28\/2011 1,000 9,000 10,000 Income (1:9) . . . . . . . . . . . . $28,780 $189,820 $218,600 Adjusted balance . . . . . . . . . (28,780) (189,820) (218,600) Settlements . . . . . . . . . . . . . $0 $0 $0 Final balance . . . . . . . . . . . . Part 2 2008 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 12,000 Jan. 1 Royce, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . Dec. 31 40,000 10,150 To record investment of Royce. 14,850 Dec. 31 Income Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 15,000 12,500 Dec. 31 Apago PDF EnhancerRies, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000 28,500 Bax, Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 5,000 Royce, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500 12,500 To allocate interest, salaries, and remainders. 11,000 11,000 Ries, Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . Bax, Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . Royce, Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . To record cash withdrawals by partners. Ries, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bax, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royce, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ries, Withdrawals . . . . . . . . . . . . . . . . . . . . . . . Bax, Withdrawals. . . . . . . . . . . . . . . . . . . . . . . . Royce, Withdrawals . . . . . . . . . . . . . . . . . . . . . . To close withdrawal accounts. Summary C1 Identify characteristics of partnerships and similar P1 Prepare entries for partnership formation. A partner\u2019s ini- organizations. Partnerships are voluntary associations, in- tial investment is recorded at the market value of the assets volve partnership agreements, have limited life, are not subject to contributed to the partnership. income tax, include mutual agency, and have unlimited liability. Organizations that combine selected characteristics of partnerships P2 Allocate and record income and loss among partners. A and corporations include limited partnerships, limited liability part- partnership agreement should specify how to allocate partner- nerships, S corporations, and limited liability companies. ship income or loss among partners. Allocation can be based on a stated ratio, capital balances, or salary and interest allowances to A1 Compute partner return on equity and use it to evaluate compensate partners for differences in their service and capital partnership performance. Partner return on equity provides contributions. each partner an assessment of his or her return on equity invested in the partnership. P3 Account for the admission and withdrawal of partners. When a new partner buys a partnership interest directly from","Appendix D Accounting for Partnerships D-17 one or more existing partners, the amount of cash paid from one P4 Prepare entries for partnership liquidation. When a partner to another does not affect the partnership total recorded eq- partnership is liquidated, losses and gains from selling uity. When a new partner purchases equity by investing additional partnership assets are allocated to the partners according to their assets in the partnership, the new partner\u2019s investment can yield a income-and-loss-sharing ratio. If a partner\u2019s capital account has a bonus either to existing partners or to the new partner. The entry to deficiency that the partner cannot pay, the other partners share record a withdrawal can involve payment from either (1) the existing the deficit according to their relative income-and-loss-sharing partners\u2019 personal assets or (2) partnership assets. The latter can ratio. yield a bonus to either the withdrawing or remaining partners. Guidance Answers to Decision Ethics Financial Planner The partnership agreement apparently fails would fail to recognize excess of current value over book value. This to mention liabilities or use the term net assets. To give the estate one-third of total assets is not fair to the remaining partners because value increase would be realized if the partnership were liquidated. if the partner had lived and the partners had decided to liquidate, the liabilities would need to be paid out of assets before any liquidation. A fair settlement would seem to be a payment to the estate for the Also, a settlement based on the deceased partner\u2019s recorded equity balance of the deceased partner\u2019s equity based on the current value of net assets. Guidance Answers to Quick Checks 1. (b) 4. 2. Unlimited liability means that the creditors of a partnership re- Net Income . . . . . . . . . . . . . . . Denzel Shantell Total quire each partner to be personally responsible for all partnership Interest allowance (10%) . . . . . . debts. $ 7,000 $ 3,500 $ 40,000 T T 10,500 3. (c) 14,750 14,750 $29,500 Apago PDF EnhancerBalance of income . . . . . . . . 29,500 Balance allocated equally . . . . . . $21,750 $18,250 $0 Balance of income . . . . . . . . . . Income of partners . . . . . . . Key Terms mhhe.com\/wildMA2e Key Terms are available at the book\u2019s Website for learning and testing in an online Flashcard Format. C corporation (p. D-4) Limited partners (p. D-3) Partnership contract (p. D-2) General partner (p. D-3) Limited partnership (p. D-3) Partnership liquidation (p. D-12) General partnership (p. D-3) Mutual agency (p. D-2) S corporation (p. D-4) Limited liability company (LLC) (p. D-4) Partner return on equity (p. D-14) Statement of partners\u2019 equity (p. D-7) Limited liability partnership (p. D-3) Partnership (p. D-2) Unlimited liability (p. D-3) Multiple Choice Quiz Answers on p. D-27 mhhe.com\/wildMA2e Additional Quiz Questions are available at the book\u2019s Website. 1. Stokely and Leder are forming a partnership. Stokely invests a. Building, $250,000; Stokely, Capital, $250,000. a building that has a market value of $250,000; and the part- b. Building, $200,000; Stokely, Capital, $200,000. nership assumes responsibility for a $50,000 note secured c. Building, $200,000; Stokely, Capital, $100,000. by a mortgage on that building. Leder invests $100,000 cash. d. Building, $200,000; Stokely, Capital, $250,000. For the partnership, the amounts recorded for the building e. Building, $250,000; Stokely, Capital, $200,000. and for Stokely\u2019s Capital account are:","D-18 Appendix D Accounting for Partnerships 2. Katherine, Alliah, and Paulina form a partnership. Katherine d. $185,000; $85,000 contributes $150,000, Alliah contributes $150,000, and Paulina e. $85,000; $185,000 contributes $100,000. Their partnership agreement calls for the income or loss division to be based on the ratio of capital in- 4. Hansen and Fleming are partners and share equally in income vested. If the partnership reports income of $90,000 for its first or loss. Hansen\u2019s current capital balance in the partnership is year of operations, what amount of income is credited to $125,000 and Fleming\u2019s is $124,000. Hansen and Fleming Paulina\u2019s capital account? agree to accept Black with a 20% interest. Black invests a. $22,500 $75,000 in the partnership. The bonus granted to Hansen and b. $25,000 Fleming equals: c. $45,000 a. $13,000 each. d. $30,000 b. $5,100 each. e. $90,000 c. $4,000 each. d. $5,285 to Hansen; $4,915 to Fleming. 3. Jamison and Blue form a partnership with capital contributions e. $0; Hansen and Fleming grant a bonus to Black. of $600,000 and $800,000, respectively. Their partnership agreement calls for Jamison to receive $120,000 per year in 5. Mee Su is a partner in Hartford Partners, LLC. Her partner- salary. Also, each partner is to receive an interest allowance ship capital balance at the beginning of the current year was equal to 10% of the partner\u2019s beginning capital contributions, $110,000, and her ending balance was $124,000. Her share of with any remaining income or loss divided equally. If net in- the partnership income is $10,500. What is her partner return come for its initial year is $270,000, then Jamison\u2019s and Blue\u2019s on equity? respective shares are: a. 8.97% a. $135,000; $135,000 b. 1060.00% b. $154,286; $115,714 c. 9.54% c. $120,000; $150,000 d. 1047.00% e. 8.47% Apago PDF Enhancer Discussion Questions 1. If a partnership contract does not state the period of time the 9. George, Burton, and Dillman have been partners for three partnership is to exist, when does the partnership end? years. The partnership is being dissolved. George is leaving the firm, but Burton and Dillman plan to carry on the business. In 2. What does the term mutual a gency mean when applied to a the final settlement, George places a $75,000 salary claim partnership? against the partnership. He contends that he has a claim for a salary of $25,000 for each year because he devoted all of his 3. Can partners limit the right of a partner to commit their part- time for three years to the affairs of the partnership. Is his claim nership to contracts? Would such an agreement be binding valid? Why or why not? (a) on the partners and (b) on outsiders? 10. Kay, Kat, and Kim are partners. In a liquidation, Kay\u2019s share 4. Assume that Amey and Lacey are partners. Lacey dies, and of partnership losses exceeds her capital account balance. her son claims the right to take his mother\u2019s place in the part- Moreover, she is unable to meet the deficit from her personal nership. Does he have this right? Why or why not? assets, and her partners shared the excess losses. Does this re- lieve Kay of liability? 5. Assume that the Barnes and Ardmore partnership agreement provides for a two-third\/one-third sharing of income but says 11. After all partnership assets have been converted to cash and nothing about losses. The first year of partnership operation all liabilities paid, the remaining cash should equal the sum of resulted in a loss, and Barnes argues that the loss should be the balances of the partners\u2019 capital accounts. Why? shared equally because the partnership agreement said nothing about sharing losses. Is Barnes correct? Explain. 12. Assume a partner withdraws from a partnership and receives assets of greater value than the book value of his equity. Should 6. Allocation of partnership income among the partners appears the remaining partners share the resulting reduction in their on what financial statement? equities in the ratio of their relative capital balances or ac- cording to their income-and-loss-sharing ratio? 7. What does the term unlimited liability mean when it is applied to partnership members? 8. How does a general partnership differ from a limited partnership? Denotes Discussion Questions that involve decision making.","Appendix D Accounting for Partnerships D-19 Most materials in this section are available in McGraw-Hill\u2019s Connect QUICK STUDY Otis and Hunan are partners in operating a store. Without consulting Otis, Hunan enters into a contract QS D-1 to purchase merchandise for the store. Otis contends that he did not authorize the order and refuses to Partnership liability pay for it. The vendor sues the partners for the contract price of the merchandise. (a) Must the partner- C1 ship pay for the merchandise? Why? (b) Does your answer differ if Otis and Hunan are partners in a public accounting firm? Explain. Ramona Stolton and Jerry Bright are partners in a business they started two years ago. The partnership QS D-2 agreement states that Stolton should receive a salary allowance of $30,000 and that Bright should re- Partnership income allocation ceive a $40,000 salary allowance. Any remaining income or loss is to be shared equally. Determine each partner\u2019s share of the current year\u2019s net income of $104,000. P2 Hiram and Tyrone are partners who agree that Hiram will receive a $50,000 salary allowance and that QS D-3 any remaining income or loss will be shared equally. If Tyrone\u2019s capital account is credited for $1,000 Partnership income allocation as her share of the net income in a given period, how much net income did the partnership earn in that period? P2 Vernon organized a limited partnership and is the only general partner. Xavier invested $40,000 in the QS D-4 partnership and was admitted as a limited partner with the understanding that he would receive 10% of Liability in limited partnerships the profits. After two unprofitable years, the partnership ceased doing business. At that point, partner- ship liabilities were $170,000 larger than partnership assets. How much money can the partnership\u2019s P1 creditors obtain from Xavier\u2019s personal assets to satisfy the unpaid partnership debts? Dresden agrees to pay Choi and Amal $20,000 each for a one-third (331\u20443%) interest in the Choi and Amal QS D-5 partnership. Immediately prior to Dresden\u2019s admission, each partner had a $60,000 capital balance. Make Partner admission Apago PDF Enhancerthe journal entry to record Dresden\u2019s purchase of the partners\u2019 interest. through purchase of interest P3 Neal and Vanier are partners, each with $80,000 in their partnership capital accounts. Brantford is ad- QS D-6 mitted to the partnership by investing $80,000 cash. Make the entry to show Brantford\u2019s admission to Admission of a partner P3 the partnership. Paulson and Fleming\u2019s company is organized as a partnership. At the prior year-end, partnership equity QS D-7 totaled $300,000 ($200,000 from Paulson and $100,000 from Fleming). For the current year, partnership Partner return on equity net income is $49,000 ($38,400 allocated to Paulson and $10,600 allocated to Fleming), and year-end total partnership equity is $400,000 ($280,000 from Paulson and $120,000 from Fleming). Compute the A1 total partnership return on equity and the individual partner return on equity ratios. Most materials in this section are available in McGraw-Hill\u2019s Connect EXERCISES Next to the following list of eight characteristics of business organizations, enter a brief description of how Exercise D-1 each characteristic applies to general partnerships. Characteristics of partnerships C1 Characteristic Application to General Partnerships 1. Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Owners\u2019 liability . . . . . . . . . . . . . . . . . . . . . . . . 3. Legal status . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Tax status of income . . . . . . . . . . . . . . . . . . . . . 5. Owners\u2019 authority . . . . . . . . . . . . . . . . . . . . . . . 6. Ease of formation . . . . . . . . . . . . . . . . . . . . . . . 7. Transferability of ownership . . . . . . . . . . . . . . . . 8. Ability to raise large amounts of capital . . . . . . .","D-20 Appendix D Accounting for Partnerships Exercise D-2 For each of the following separate cases, recommend a form of business organization. With each rec- Forms of organization ommendation, explain how business income would be taxed if the owners adopt the form of organiza- tion recommended. Also list several advantages that the owners will enjoy from the form of business C1 organization that you recommend. a. Sharif, Henry, and Saanen are recent college graduates in computer science. They want to start a Website development company. They all have college debts and currently do not own any substan- tial computer equipment needed to get the company started. b. Dr. LeBlanc and Dr. Liu are recent graduates from medical residency programs. Both are family prac- tice physicians and would like to open a clinic in an underserved rural area. Although neither has any funds to bring to the new venture, a banker has expressed interest in making a loan to provide start-up funds for their practice. c. Novato has been out of school for about five years and has become quite knowledgeable about the commercial real estate market. He would like to organize a company that buys and sells real estate. Novato believes he has the expertise to manage the company but needs funds to invest in commer- cial property. Exercise D-3 On March 1, 2009, Eckert and Kelley formed a partnership. Eckert contributed $83,000 cash and Kelley Journalizing partnership contributed land valued at $66,400 and a building valued at $96,400. The partnership also assumed transactions responsibility for Kelley\u2019s $77,800 long-term note payable associated with the land and building. The P2 partners agreed to share income as follows: Eckert is to receive an annual salary allowance of $30,500, both are to receive an annual interest allowance of 11% of their beginning-year capital investment, Check (2) Kelley, $87,860 and any remaining income or loss is to be shared equally. On October 20, 2009, Eckert withdrew $32,000 cash and Kelley withdrew $25,000 cash. After the adjusting and closing entries are made to Exercise D-4 the revenue and expense accounts at December 31, 2009, the Income Summary account had a credit Income allocation in balance of $86,000. a partnership 1. Prepare journal entries to record (a) the partners\u2019 initial capital investments, (b) their cash withdrawals, P2 and (c) the December 31 closing of both the Withdrawals and Income Summary accounts. Check Plan 3, Daria, $92,740 Apago PDF Enhancer2. Determine the balances of the partners\u2019 capital accounts as of December 31, 2009. Daria and Farrah began a partnership by investing $64,000 and $58,000, respectively. During its first year, the partnership earned $175,000. Prepare calculations showing how the $175,000 income should be allocated to the partners under each of the following three separate plans for sharing income and loss: (1) the partners failed to agree on a method to share income; (2) the partners agreed to share income and loss in proportion to their initial investments (round amounts to the nearest dollar); and (3) the partners agreed to share income by granting a $52,000 per year salary allowance to Daria, a $42,000 per year salary allowance to Farrah, 8% interest on their initial capital investments, and the remaining balance shared equally. Exercise D-5 Assume that the partners of Exercise D-4 agreed to share net income and loss by granting annual salary Income allocation in allowances of $52,000 to Daria and $42,000 to Farrah, 8% interest allowances on their investments, and a partnership any remaining balance shared equally. P2 1. Determine the partners\u2019 shares of Daria and Farrah given a first-year net income of $98,800. Check (2) Daria, $(3,160) 2. Determine the partners\u2019 shares of Daria and Farrah given a first-year net loss of $16,800. Exercise D-6 The partners in the Biz Partnership have agreed that partner Estella may sell her $111,000 equity in the Sale of partnership interest P3 partnership to Sean, for which Sean will pay Estella $88,800. Present the partnership\u2019s journal entry to record the sale of Estella\u2019s interest to Sean on September 30. Exercise D-7 The Josetti Partnership has total partners\u2019 equity of $558,000, which is made up of Dopke, Capital, Admission of new partner $392,000, and Hughes, Capital, $166,000. The partners share net income and loss in a ratio of 85% to Dopke and 15% to Hughes. On November 1, Nillsen is admitted to the partnership and given a P3 10% interest in equity and a 10% share in any income and loss. Prepare the journal entry to record the admission of Nillsen under each of the following separate assumptions: Nillsen invests cash of (1) $62,000; (2) $97,000; and (3) $32,000.","Appendix D Accounting for Partnerships D-21 Edison, Delray, and West have been partners while sharing net income and loss in a 5:4:1 ratio. On Exercise D-8 January 31, the date West retires from the partnership, the equities of the partners are Edison, $330,000; Retirement of partner Delray, $231,000; and West, $165,000. Present journal entries to record West\u2019s retirement under each of the following separate assumptions: West is paid for her equity using partnership cash of (1) $165,000; P3 (2) $192,000; and (3) $129,000. The Red, White & Blue partnership was begun with investments by the partners as follows: Red, $153,000; Exercise D-9 White, $183,000; and Blue, $180,000. The operations did not go well, and the partners eventually de- Liquidation of partnership cided to liquidate the partnership, sharing all losses equally. On August 31, after all assets were con- P4 verted to cash and all creditors were paid, only $39,000 in partnership cash remained. Check (1) Red, $(6,000) 1. Compute the capital account balance of each partner after the liquidation of assets and the payment of creditors. 2. Assume that any partner with a deficit agrees to pay cash to the partnership to cover the deficit. Present the journal entries on August 31 to record (a) the cash receipt from the deficient partner(s) and (b) the final disbursement of cash to the partners. 3. Assume that any partner with a deficit is not able to reimburse the partnership. Present journal entries (a) to transfer the deficit of any deficient partners to the other partners and (b) to record the final disbursement of cash to the partners. Brewster, Conway, and Ogden are partners who share income and loss in a 1:5:4 ratio. After lengthy dis- Exercise D-10 agreements among the partners and several unprofitable periods, the partners decided to liquidate the Liquidation of partnership P4 partnership. Immediately before liquidation, the partnership balance sheet shows: total assets, $117,000; total liabilities, $87,750; Brewster, Capital, $1,600; Conway, Capital, $11,600; and Ogden, Capital, Check (b) Ogden, Capital after $16,050. The cash proceeds from selling the assets were sufficient to repay all but $20,500 to the cred- allocation, $(3,850) itors. (a) Calculate the loss from selling the assets. (b) Allocate the loss to the partners. (c) Determine how much of the remaining liability should be paid by each partner. Apago PDF EnhancerAssume that the Brewster, Conway, and Ogden partnership of Exercise D-10 is a limited partnership. Exercise D-11 Liquidation of limited partnership Brewster and Conway are general partners and Ogden is a limited partner. How much of the remaining $20,500 liability should be paid by each partner? (Round amounts to the nearest dollar.) P4 Hunt Sports Enterprises LP is organized as a limited partnership consisting of two individual partners: Exercise D-12 Soccer LP and Football LP. Both partners separately operate a minor league soccer team and a semipro Partner return on equity football team. Compute partner return on equity for each limited partnership (and the total) for the year ended June 30, 2009, using the following selected data on partner capital balances from Hunt Sports A1 Enterprises LP. Soccer LP Football LP Total Balance at 6\/30\/2008 . . . . . . . . $331,000 $1,357,100 $1,688,100 Annual net income . . . . . . . . . 35,405 725,803 761,208 Cash distribution . . . . . . . . . . \u2014 (65,000) (65,000) Balance at 6\/30\/2009 . . . . . . . . $366,405 $2,017,903 $2,384,308 Most materials in this section are available in McGraw-Hill\u2019s Connect PROBLEM SET A Alex Jeffers, Jo Ford, and Rose Verne invested $32,500, $45,500, and $52,000, respectively, in a part- Problem D-1A nership. During its first calendar-year, the firm earned $391,200. Allocating partnership income P2 Required Check (3) Verne, Capital, $136,760 Prepare the entry to close the firm\u2019s Income Summary account as of its December 31 year-end and to allocate the $391,200 net income to the partners under each of the following separate assumptions: The partners (1) have no agreement on the method of sharing income and loss; (2) agreed to share income and loss in the ratio of their beginning capital investments; and (3) agreed to share income and loss by providing annual salary allowances of $40,000 to Jeffers, $35,000 to Ford, and $46,000 to Verne; granting 8% interest on the partners\u2019 beginning capital investments; and sharing the remainder equally.","D-22 Appendix D Accounting for Partnerships Problem D-2A Jasmine Watts and Liz Thomas are forming a partnership to which Watts will devote one-half time and Allocating partnership income Thomas will devote full time. They have discussed the following alternative plans for sharing income and loss; sequential years and loss: (a) in the ratio of their initial capital investments, which they have agreed will be $30,000 for Watts and $45,000 for Thomas; (b) in proportion to the time devoted to the business; (c) a salary al- P2 lowance of $3,000 per month to Thomas and the balance in accordance with the ratio of their initial cap- ital investments; or (d) a salary allowance of $3,000 per month to Thomas, 10% interest on their initial xe cel capital investments, and the balance shared equally. The partners expect the business to perform as fol- lows: Year 1, $18,000 net loss; Year 2, $45,000 net income; and Year 3, $75,000 net income. mhhe.com\/wildMA2e Required Prepare three tables with the following column headings. Income (Loss) Year Sharing Plan Calculations Watts Thomas Check Plan d,Year 1, Thomas\u2019s Complete the tables, one for each of the first three years, by showing how to allocate partnership income share, $9,750 or loss to the partners under each of the four plans being considered. (Round answers to the nearest whole dollar.) Problem D-3A Will Beck, Trevor Beck, and Barb Beck formed the BBB Partnership by making capital contributions Partnership income allocation, of $142,500, $118,750, and $213,750, respectively. They predict annual partnership net income of statement of partners\u2019 equity, $210,000 and are considering the following alternative plans of sharing income and loss: (a) equally; and closing entries (b) in the ratio of their initial capital investments; or (c) salary allowances of $38,000 to Will, $28,000 P2 Apago PDF Enhancerto Trevor, and $43,000 to Barb; interest allowances of 10% on their initial capital investments; and the xe cel balance shared equally. mhhe.com\/wildMA2e Required 1. Prepare a table with the following column headings. Income (Loss) Calculations Will Trevor Barb Total Sharing Plan Check (2) Barb, Ending Capital, Use the table to show how to distribute net income of $210,000 for the calendar year under each of $221,125 the alternative plans being considered. (Round answers to the nearest whole dollar.) 2. Prepare a statement of partners\u2019 equity showing the allocation of income to the partners assuming they agree to use plan (c), that income earned is $87,500, and that Will, Trevor, and Barb withdraw $18,000, $25,000, and $34,000, respectively, at year-end. 3. Prepare the December 31 journal entry to close Income Summary assuming they agree to use plan (c) and that net income is $87,500. Also close the withdrawals accounts. Problem D-4A Part 1. Meir, Zarcus, and Ross are partners and share income and loss in a 1:4:5 ratio. The partner- Partner withdrawal and admission ship\u2019s capital balances are as follows: Meir, $43,000; Zarcus, $179,000; and Ross, $228,000. Zarcus P3 decides to withdraw from the partnership, and the partners agree to not have the assets revalued upon Check (1e) Cr. Ross, Capital, $93,500 Zarcus\u2019s retirement. Prepare journal entries to record Zarcus\u2019s February 1 withdrawal from the part- nership under each of the following separate assumptions: Zarcus (a) sells her interest to Garcia for $160,000 after Meir and Ross approve the entry of Garcia as a partner; (b) gives her interest to a son- in-law, Fields, and thereafter Meir and Ross accept Fields as a partner; (c) is paid $179,000 in part- nership cash for her equity; (d ) is paid $215,000 in partnership cash for her equity; and (e) is paid $20,000 in partnership cash plus equipment recorded on the partnership books at $70,000 less its ac- cumulated depreciation of $23,200.","Appendix D Accounting for Partnerships D-23 Part 2. Assume that Zarcus does not retire from the partnership described in Part 1. Instead, Potter is (2c) Cr. Zarcus, Capital, $13,800 admitted to the partnership on February 1 with a 25% equity. Prepare journal entries to record Potter\u2019s entry into the partnership under each of the following separate assumptions: Potter invests (a) $150,000; (b) $110,000; and (c) $196,000. Kendra, Cogley, and Mei share income and loss in a 3:2:1 ratio. The partners have decided to liquidate Problem D-5A their partnership. On the day of liquidation their balance sheet appears as follows. Liquidation of a partnership KENDRA, COGLEY, AND MEI P4 Balance Sheet May 31 Assets $199,100 Liabilities and Equity $258,000 Cash . . . . . . . . . . . . 548,400 Accounts payable . . . . . . . . . . . . . 97,900 Inventory . . . . . . . . . Kendra, Capital . . . . . . . . . . . . . . . Cogley, Capital . . . . . . . . . . . . . . . 220,275 Total assets . . . . . . . $747,500 Mei, Capital . . . . . . . . . . . . . . . . . 171,325 Total liabilities and equity . . . . . . . $747,500 Required Check (4) Cash distribution: Mei, $104,158 Prepare journal entries for (a) the sale of inventory, (b) the allocation of its gain or loss, (c) the payment of liabilities at book value, and (d) the distribution of cash in each of the following separate cases: Inventory is sold for (1) $625,200; (2) $452,400; (3) $321,000 and any partners with capital deficits pay in the amount of their deficits; and (4) $249,000 and the partners have no assets other than those in- vested in the partnership. (Round to the nearest dollar.) Apago PDF Enhancer PROBLEM SET B Erin Rock, Sal Arthur, and Chloe Binder invested $47,840, $64,400, and $71,760, respectively, in a part- Problem D-1B nership. During its first calendar-year, the firm earned $361,800. Allocating partnership income P2 Required Check (3) Binder, Capital, $127,976 Prepare the entry to close the firm\u2019s Income Summary account as of its December 31 year-end and to allocate the $361,800 net income to the partners under each of the following separate assumptions. (Round answers to whole dollars.) The partners (1) have no agreement on the method of sharing income and loss; (2) agreed to share income and loss in the ratio of their beginning capital investments; and (3) agreed to share income and loss by providing annual salary allowances of $33,000 to Rock, $28,000 to Arthur, and $40,000 to Binder; granting 10% interest on the partners\u2019 beginning capital investments; and sharing the remainder equally. Maria Selk and David Green are forming a partnership to which Selk will devote one-third time and Green Problem D-2B Allocating partnership income will devote full time. They have discussed the following alternative plans for sharing income and loss: and loss; sequential years (a) in the ratio of their initial capital investments, which they have agreed will be $208,000 for Selk and $312,000 for Green; (b) in proportion to the time devoted to the business; (c) a salary allowance of $8,000 P2 per month to Green and the balance in accordance with the ratio of their initial capital investments; or (d) a salary allowance of $8,000 per month to Green, 10% interest on their initial capital investments, and the balance shared equally. The partners expect the business to perform as follows: Year 1, $72,000 net loss; Year 2, $152,000 net income; and Year 3, $376,000 net income. Required Prepare three tables with the following column headings. Income (Loss) Year Sharing Plan Calculations Selk Green","D-24 Appendix D Accounting for Partnerships Check Plan d,Year 1, Green\u2019s share, Complete the tables, one for each of the first three years, by showing how to allocate partnership income $17,200 or loss to the partners under each of the four plans being considered. (Round answers to the nearest whole dollar.) Problem D-3B Sally Cook, Lin Xi, and Sami Bruce formed the CXB Partnership by making capital contributions of Partnership income allocation, $169,750, $121,250, and $194,000, respectively. They predict annual partnership net income of $270,000 statement of partners\u2019 equity, and and are considering the following alternative plans of sharing income and loss: (a) equally; (b) in the ra- closing entries tio of their initial capital investments; or (c) salary allowances of $40,000 to Cook, $29,000 to Xi, and $42,000 to Bruce; interest allowances of 12% on their initial capital investments; and the balance shared P2 equally. Required 1. Prepare a table with the following column headings. Income (Loss) Calculations Cook Xi Bruce Total Sharing Plan Check (2) Bruce, Ending Capital, Use the table to show how to distribute net income of $270,000 for the calendar year under each of $208,380 the alternative plans being considered. (Round answers to the nearest whole dollar.) 2. Prepare a statement of partners\u2019 equity showing the allocation of income to the partners assuming they agree to use plan (c), that income earned is $124,500, and that Cook, Xi, and Bruce withdraw $19,000, $26,000, and $36,000, respectively, at year-end. 3. Prepare the December 31 journal entry to close Income Summary assuming they agree to use plan (c) and that net income is $124,500. Also close the withdrawals accounts. Problem D-4B Apago PDF EnhancerPart 1. Davis, Brown, and Nell are partners and share income and loss in a 5:1:4 ratio. The partnership\u2019s Partner withdrawal and admission capital balances are as follows: Davis, $303,000; Brown, $74,000; and Nell, $223,000. Davis decides to P3 withdraw from the partnership, and the partners agree not to have the assets revalued upon Davis\u2019s re- Check (1e) Cr. Nell, Capital, $81,600 tirement. Prepare journal entries to record Davis\u2019s April 30 withdrawal from the partnership under each of the following separate assumptions: Davis (a) sells her interest to Leer for $125,000 after Brown and Nell approve the entry of Leer as a partner; (b) gives her interest to a daughter-in-law, Gibson, and there- after Brown and Nell accept Gibson as a partner; (c) is paid $303,000 in partnership cash for her equity; (d) is paid $175,000 in partnership cash for her equity; and (e) is paid $100,000 in partnership cash plus manufacturing equipment recorded on the partnership books at $269,000 less its accumulated deprecia- tion of $168,000. Check (2c) Cr. Brown, Capital, $5,040 Part 2. Assume that Davis does not retire from the partnership described in Part 1. Instead, McCann is admitted to the partnership on April 30 with a 20% equity. Prepare journal entries to record the entry of McCann under each of the following separate assumptions: McCann invests (a) $150,000; (b) $98,000; and (c) $213,000. Problem D-5B London, Ramirez, and Toney, who share income and loss in a 3:2:1 ratio, plan to liquidate their part- Liquidation of a partnership nership. At liquidation, their balance sheet appears as follows. P4 LONDON, RAMIREZ, AND TONEY Balance Sheet January 18 Assets $179,500 Liabilities and Equity $241,500 Cash . . . . . . . . . . . . 552,000 Accounts payable . . . . . . . . . . . . . 98,000 Equipment . . . . . . . . London, Capital . . . . . . . . . . . . . . 220,500 Ramirez, Capital . . . . . . . . . . . . . . 171,500 Total assets . . . . . . . $731,500 Toney, Capital . . . . . . . . . . . . . . . . Total liabilities and equity . . . . . . . $731,500","Appendix D Accounting for Partnerships D-25 Required Check (4) Cash distribution: Ramirez, $98,633 Prepare journal entries for (a) the sale of equipment, (b) the allocation of its gain or loss, (c) the pay- ment of liabilities at book value, and (d) the distribution of cash in each of the following separate cases: Equipment is sold for (1) $605,400; (2) $474,000; (3) $301,200 and any partners with capital deficits pay in the amount of their deficits; and (4) $271,200 and the partners have no assets other than those in- vested in the partnership. (Round amounts to the nearest dollar.) BEYOND THE NUMBERS BTN D-1 Take a step back in time and imagine Best Buy in its infancy as a company. The year is REPORTING IN 1966. ACTION Required C1 1. Read the history of Best Buy at BestBuymedia.tekgroup.com. Can you determine from the history whether Best Buy was originally organized as a sole proprietorship, partnership, or corporation? 2. Assume that Best Buy was originally organized as a partnership. Best Buy\u2019s income statement in Appendix A varies in several key ways from what it would look like for a partnership. Identify at least two ways in which a corporate income statement differs from a partnership income statement. 3. Compare the Best Buy balance sheet in Appendix A to what a partnership balance sheet would have shown. Identify and explain any account differences you would anticipate. BTN D-2 Over the years Best Buy and Circuit City have evolved into large corporations. Today it COMPARATIVE is difficult to imagine them as fledgling start-ups. Research each company\u2019s history online. ANALYSIS Required Apago PDF Enhancer C1 1. Which company is older? 2. Which company started as a partnership? 3. In what years did each company first achieve $1,000,000 in sales? 4. In what years did each company have its first public offering of stock? BTN D-3 Doctors Maben, Orlando, and Clark have been in a group practice for several years. Maben ETHICS and Orlando are family practice physicians, and Clark is a general surgeon. Clark receives many refer- CHALLENGE rals for surgery from his family practice partners. Upon the partnership\u2019s original formation, the three doctors agreed to a two-part formula to share income. Every month each doctor receives a salary al- P2 lowance of $3,000. Additional income is divided according to a percent of patient charges the doctors generate for the month. In the current month, Maben generated 10% of the billings, Orlando 30%, and Clark 60%. The group\u2019s income for this month is $50,000. Clark has expressed dissatisfaction with the income-sharing formula and asks that income be split entirely on patient charge percents. Required 1. Compute the income allocation for the current month using the original agreement. 2. Compute the income allocation for the current month using Clark\u2019s proposed agreement. 3. Identify the ethical components of this partnership decision for the doctors. BTN D-4 Assume that you are studying for an upcoming accounting exam with a good friend. Your COMMUNICATING friend says that she has a solid understanding of general partnerships but is less sure that she understands IN PRACTICE organizations that combine certain characteristics of partnerships with other forms of business organiza- tion. You offer to make some study notes for your friend to help her learn about limited partnerships, C1 limited liability partnerships, S Corporations, and limited liability companies. Prepare a one-page set of well-organized, complete study notes on these four forms of business organization.","D-26 Appendix D Accounting for Partnerships TAKING IT TO BTN D-5 Access the March 6, 2007, filing of the December 31, 2006, 10-K of America First Tax THE NET Exempt Investors LP. This company deals with tax-exempt mortgage revenue bonds that, among other things, finance student housing properties. P1 P2 1. Locate its December 31, 2006, balance sheet and list the account titles reported in the equity section of the balance sheet. 2. Locate its statement of partners\u2019 capital and comprehensive income (loss). How many units of lim- ited partnership (known as \u201cbeneficial unit certificate holders\u201d) are outstanding at December 31, 2006? 3. What is the partnership\u2019s largest asset and its amount at December 31, 2006? TEAMWORK IN BTN D-6 This activity requires teamwork to reinforce understanding of accounting for partnerships. ACTION Required P2 1. Assume that Baker, Warner, and Rice form the BWR Partnership by making capital contributions of $200,000, $300,000, and $500,000, respectively. BWR predicts annual partnership net income of $600,000. The partners are considering various plans for sharing income and loss. Assign a different team member to compute how the projected $600,000 income would be shared under each of the following separate plans: a. Shared equally. b. In the ratio of the partners\u2019 initial capital investments. c. Salary allowances of $50,000 to Baker, $60,000 to Warner, and $70,000 to Rice, with the re- maining balance shared equally. Apago PDF Enhancerd. Interest allowances of 10% on the partners\u2019 initial capital investments, with the remaining bal- ance shared equally. 2. In sequence, each member is to present his or her income-sharing calculations with the team. 3. As a team, identify and discuss at least one other possible way that income could be shared. ENTREPRENEURIAL BTN D-7 Assume that you own and operate a small business and that you have decided to expand DECISION with the help of general partners. C1 Required 1. What details should you and your future partners specify in the general partnership agreements? 2. What advantages should you and your future partners be aware of with respect to organizing as gen- eral partnerships? 3. What disadvantages should you and your future partners be aware of with respect to organizing as general partnerships? GLOBAL DECISION BTN D-8 Access DSG international\u2019s Website (www.DSGiplc.com) and research the company\u2019s history. C1 1. When was the company founded, and what was its original form of ownership? 2. Why did the company change its name from Dixons to DSG international? 3. What are some of the companies that are part of DSG international?","Appendix D Accounting for Partnerships D-27 ANSWERS TO MULTIPLE CHOICE QUIZ 1. e; Capital \u03ed $250,000 \u03ea $50,000 4. b; Total partnership equity \u03ed $125,000 \u03e9 $124,000 \u03e9 $75,000 \u03ed $324,000 2. a; $90,000 \u03eb 3$100,000\u05801$150,000 \u03e9 $150,000 Equity of Black \u03ed $324,000 \u03eb 20% \u03ed $64,800 Bonus to old partners \u03ed $75,000 \u03ea $64,800 \u03ed $10,200, split equally \u03e9 $100,0002 4 \u03ed $22,500 5. a; $10,500\u0580 3 1$110,000 \u03e9 $124,0002\u058024 \u03ed 8.97% 3. d; Jamison Blue Total Net income . . . . . . . . . . . . . . . . $120,000 $80,000 $ 270,000 Salary allowance . . . . . . . . . . . . . 60,000 (120,000) Interest allowance. . . . . . . . . . . . 5,000 (140,000) Balance of income. . . . . . . . . . . . 5,000 $85,000 10,000 Balance divided equally . . . . . . . . $185,000 (10,000) Totals. . . . . . . . . . . . . . . . . . . . . $0 Apago PDF Enhancer","Glossary Absorption costing A costing method that includes all manufacturing costs\u2014 amount of resources used depends on the number of batches run rather than direct materials, direct labor, and both variable and fixed manufacturing on the number of units in the batch. (p. 137) overhead\u2014in unit product costs. Absorption costing is also referred to as the Break-even point Output level at which sales equals fixed plus variable costs; full cost method; also called full costing. (p. 206) where income equals zero. (p. 175) Account Record within an accounting system in which increases and de- Break-even time (BET) Time-based measurement used to evaluate the ac- creases are entered and stored in a specific asset, liability, equity, revenue, or ceptability of an investment; equals the time expected to pass before the expense. (p. C-3) present value of the net cash flows from an investment equals its initial cost. Account balance Difference between total debits and total credits (includ- (p. 402) ing the beginning balance) for an account. (p. C-3) Budget Formal statement of future plans, usually expressed in monetary Accounting rate of return Rate used to evaluate the acceptability of an in- terms. (p. 238) vestment; equals the after-tax periodic income from a project divided by the av- Budget report Report comparing actual results to planned objectives; some- erage investment in the asset; also called rate of return on aver age investment. times used as a progress report. (p. 278) (p. 395) Budgetary control Management use of budgets to monitor and control com- Activity An event that causes the consumption of overhead resources in an pany operations. (p. 278) entity. (p. 135) Budgeted balance sheet Accounting report that presents predicted amounts Activity-based budgeting (ABB) Budget system based on expected activi- of the company\u2019s assets, liabilities, and equity balances as of the end of the ties. (p. 251) budget period. (p. 250) Activity-based costing (ABC) A two-stage costing method in which overhead Budgeted income statement Accounting report that presents predicted amounts Apago PDF Enhancercosts are assigned to products on the basis of the activities required. (p. 135) of the company\u2019s revenues and expenses for the budget period. (p. 250) Activity-based management A management approach that focuses on man- Budgeting Process of planning future business actions and expressing them aging activities as a way of eliminating waste and reducing delays and defects. as formal plans. (p. 238) (p. 135) Business segment Part of a company that can be separately identified by the Activity cost driver An allocation base in an activity-based costing system; products or services that it provides or by the geographic markets that it a measure of what caused the costs in an activity cost pool. (p. 139) serves; also called segment. (p. 499) Activity cost pool A grouping of costs that are accumulated and relate to a single activity measure in the activity-based costing system. (p. 135) Capital budgeting Process of analyzing alternative investments and decid- Activity driver (See activity cost driver.) (p. 139) ing which assets to acquire or sell. (p. 392) Activity overhead (pool) rate A predetermined overhead rate in activity- Capital expenditures budget Plan that lists dollar amounts to be both received based costing; each activity cost pool has its own activity rate that is used to from disposal of plant assets and spent to purchase plant assets. (p. 247) apply overhead to products and services. (p. 135) Cash budget Plan that shows expected cash inflows and outflows during the Annual report Summary of a company\u2019s financial results for the year with budget period, including receipts from loans needed to maintain a minimum its current financial condition and future plans; directed to external users of cash balance and repayments of such loans. (p. 248) financial information. (p. A-1) Cash flow on total assets Ratio of operating cash flows to average total as- sets; not sensitive to income recognition and measurement; partly reflects Avoidable expense Expense (or cost) that is relevant for decision making; earnings quality. (p. 442) expense that is not incurred if a department, product, or service is elimi- nated. (p. 371) Chart of accounts List of accounts used by a company; includes an identi- fication number for each account. (p. C-6) Balance column account Account with debit and credit columns for record- Clock card Source document used to record the number of hours an employee ing entries and another column for showing the balance of the account after works and to determine the total labor cost for each pay period. (p. 54) each entry. (p. C-10) Common stock Corporation\u2019s basic ownership share; also generically called Balanced scorecard A set of performance evaluation measures on four per- capital stock. (p. C-5) spectives of a company\u2019s strategy: financial, customer, internal process, and learning. (pp. 323, 332) Common-size financial statement Statement that expresses each amount as a percent of a base amount. In the balance sheet, total assets is usually the Batch level activities Activities that are performed each time a batch of goods base and is expressed as 100%. In the income statement, net sales is usually is handled or processed, regardless of how many units are in a batch; the the base. (p. 483) G-1","G-2 Glossary Comparative financial statement Statement with data for two or more suc- Cost variance Difference between the actual incurred cost and the standard cessive periods placed in side-by-side columns, often with changes shown in cost. (p. 284) dollar amounts and percents. (p. 478) Cost-volume-profit (CVP) analysis Planning method that includes predict- Composite unit Generic unit consisting of a specific number of units of each ing the volume of activity, the costs incurred, sales earned, and profits product; unit comprised in proportion to the expected sales mix of its products. received. (p. 168) (p. 182) Cost-volume-profit (CVP) chart Graphic representation of cost-volume- Compound journal entry Journal entry that affects at least three accounts. profit relations. (p. 176) (p. C-13) Credit Recorded on the right side; an entry that decreases asset and expense Continuous budgeting Practice of preparing budgets for a selected number of accounts, and increases liability, revenue, and most equity accounts; abbre- future periods and revising those budgets as each period is completed. (p. 240) viated Cr. (p. C-7) Continuous improvement Concept requiring every manager and employee Creditors Individuals or organizations entitled to receive payments. (p. C-4) continually to look to improve operations. (p. 8) Curvilinear cost Cost that changes with volume but not at a constant rate. Contribution format An income statement format that is geared to cost be- (p. 170) havior in that costs are separated into variable and fixed categories rather than being separated according to the functions of production, sales, and admin- Customer orientation Company position that its managers and employees istration. (p. 216) be in tune with the changing wants and needs of consumers. (p. 7) Contribution margin income statement Income statement that separates CVP chart Graphic representation of cost-volume-profit relations. (p. 170) variable and fixed costs; highlights the contribution margin, which is sales less variable expenses. (p. 209) Cycle efficiency (CE) A measure of production efficiency, which is defined as value-added (process) time divided by total cycle time. (p. 2) Contribution margin per unit Amount that the sale of one unit contributes toward recovering fixed costs and earning profit; defined as sales price per Cycle time (CT) A measure of the time to produce a product or service, unit minus variable expense per unit. (p. 174) which is the sum of process time, inspection time, move time, and wait time; also called throughput time. (p. 21) Contribution margin ratio Product\u2019s contribution margin divided by its sale Debit Recorded on the left side; an entry that increases asset and expense ac- price. (p. 174) counts, and decreases liability, revenue, and most equity accounts; abbreviated Contribution margin report A managerial statement listing sales less vari- Dr. (p. C-7) Apago PDF Enhancerable expenses, which are the components of contribution margin. (p. 209) Debt ratio Ratio of total liabilities to total assets; used to reflect risk asso- Control Process of monitoring planning decisions and evaluating the orga- ciated with a company\u2019s debts. (p. C-21) nization\u2019s activities and employees. (p. 5) Debtors Individuals or organizations that owe money. (pp. 49, C-3) Controllable costs Costs that a manager has the power to control or at least Degree of operating leverage (DOL) Ratio of contribution margin di- strongly influence. (pp. 11, 216, 334) vided by pretax income; used to assess the effect on income of changes in sales. (p. 184) Controllable variance Combination of both overhead spending vari- ances (variable and fixed) and the variable overhead efficiency variance. Departmental accounting system Accounting system that provides infor- (p. 291) mation useful in evaluating the profitability or cost effectiveness of a de- partment. (p. 322) Conversion costs Expenditures incurred in converting raw materials to fin- ished goods; includes direct labor costs and overhead costs. (p. 16) Departmental contribution to overhead Amount by which a department\u2019s revenues exceed its direct expenses. (p. 329) Cost accounting system Accounting system for manufacturing activities based on the perpetual inventory system. (p. 48) Direct costs Costs incurred for the benefit of one specific cost object. (p. 10) Cost-based transfer pricing A method of assigning prices on transfers Direct expenses Expenses traced to a specific department (object) that are between divisions within a company based on the cost of the item being incurred for the sole benefit of that department. (p. 324) transferred. (p. 340) Direct labor Efforts of employees who physically convert materials to fin- Cost center Department that incurs costs but generates no revenues; com- ished product. (p. 16) mon example is the accounting or legal department. (p. 323) Direct labor costs Wages and salaries for direct labor that are separately and Cost driver Variable that causes an activity\u2019s cost to go up or down; a causal readily traced through the production process to finished goods. (p. 16) factor. (p. 139) Direct material Raw material that physically becomes part of the product Cost object Product, process, department, or customer to which costs are and is clearly identified with specific products or batches of product. assigned. (pp. 11 & 131) (p. 16) Cost of capital The minimum desired rate of return on an investment. (p. 397) Direct material costs Expenditures for direct material that are separately and readily traced through the production process to finished goods. (p. 16) Cost of goods manufactured Total manufacturing costs (direct materials, di- rect labor, and factory overhead) for the period plus beginning goods in Direct method Presentation of net cash from operating activities for the state- process less ending goods in process; also called net cost of goods manufac- ment of cash flows that lists major operating cash receipts less major oper- tured and cost of goods completed. (p. 99) ating cash payments. (p. 430)","Glossary G-3 Discount rate Expected rate of return on investments; also called cost of cap- Fixed budget performance report Report that compares actual revenues and ital, hurdle rate, or required rate of return. (p. B-2) costs with fixed budgeted amounts and identifies the differences as favorable Dividends Corporation\u2019s distributions of assets to its owners. (p. C-5) or unfavorable variances. (p. 279) Double-entry accounting Accounting system in which each transaction affects at least two accounts and has at least one debit and one credit. (p. C-7) Fixed cost Cost that does not change with changes in the volume of activity. (p. 10) Efficiency Company\u2019s productivity in using its assets; usually measured rel- ative to how much revenue a certain level of assets generates. (p. 477) Fixed overhead cost deferred in inventory The portion of the fixed manu- Efficiency variance Difference between the actual quantity of an input and facturing overhead cost of a period that goes into inventory under the ab- the standard quantity of that input. (p. 291) sorption costing method as a result of production exceeding sales. (p. 213) Equity ratio Portion of total assets provided by equity, computed as total equity divided by total assets. (p. 491) Fixed overhead cost recognized from inventory The portion of the fixed Equivalent units of production (EUP) Number of units that would be com- manufacturing overhead cost of a prior period that becomes an expense of pleted if all effort during a period had been applied to units that were started the current period under the absorption costing method as a result of sales and finished. (p. 93) exceeding production. (p. 213) Estimated line of cost behavior Line drawn on a graph to visually fit the relation between cost and sales. (p. 172) Flexible budget Budget prepared (using actual volume) once a period is com- plete that helps managers evaluate past performance; uses fixed and variable costs in determining total costs. (p. 280) Flexible budget performance report Report that compares actual revenues and costs with their variable budgeted amounts based on actual sales volume (or other level of activity) and identifies the differences as variances. (p. 282) Ethics Codes of conduct by which actions are judged as right or wrong, fair Form 10-K (or 10-KSB) Annual report form filed with SEC by businesses or unfair, honest or dishonest. (p. 9) (small businesses) with publicly-traded securities. (p. A-1) Extraordinary gains or losses Gains or losses reported separately from continu- General accounting system Accounting system for manufacturing activities ing operations because they are both unusual and infrequent. (p. 499) based on the periodic inventory system. (p. 48) General and administrative expense budget Plan that shows predicted op- Facility level activities Activities that relate to overall production and can- erating expenses not included in the selling expenses budget. (p. 246) not be traced to specific products; costs associated with these activities per- Apago PDF Enhancertain to a plant\u2019s general manufacturing process. (p. 137) General journal All-purpose journal for recording the debits and credits of Factory overhead Factory activities supporting the production process that transactions and events. (p. C-8) are not direct material or direct labor; also called overhead and manufactur- General ledger (See ledger.) (p. C-3) ing overhead. (p. 16) General partner Partner who assumes unlimited liability for the debts of the Factory overhead costs Expenditures for factory overhead that cannot be partnership; responsible for partnership management. (p. D-3) separately or readily traced to finished goods; also called overhead costs . General partnership Partnership in which all partners have mutual agency (p. 16) and unlimited liability for partnership debts. (p. D-3) Favorable variance Difference in actual revenues or expenses from the bud- General-purpose financial statements Statements published periodically for geted amount that contributes to a higher income. (p. 279) use by a variety of interested parties; includes the income statement, balance sheet, statement of stockholders\u2019 equity (or statement of retained earnings), Financing activities Transactions with owners and creditors that include ob- statement of cash flows, and notes to these statements. (p. 477) taining cash from issuing long-term debt, repaying amounts borrowed, and Goods in process inventory Account in which costs are accumulated for obtaining cash from or distributing cash to owners. (p. 426) products that are in the process of being produced but are not yet complete; also called work in process inventory. (pp. 14 & 50) Financial reporting Process of communicating information relevant to in- vestors, creditors, and others in making investment, credit, and business High-low method Procedure that yields an estimated line of cost behavior decisions. (p. 477) by graphically connecting costs associated with the highest and lowest sales volume. (p. 172) Financial statement analysis Application of analytical tools to general- Horizontal analysis Comparison of a company\u2019s financial condition and per- purpose financial statements and related data for making business decisions. formance across time. (p. 478) (p. 476) Hurdle rate Minimum acceptable rate of return (set by management) for an investment. (p. 332) Finished goods inventory Account that controls the finished goods files, which acts as a subsidiary ledger (of the Inventory account) in which the costs Incremental cost Additional cost incurred only if a company pursues a spe- of finished goods that are ready for sale are recorded. (pp. 14 & 50) cific course of action. (p. 366) Indirect costs Costs incurred for the benefit of more than one cost ob- First-in, first-out (FIFO) Method to assign cost to inventory that as- ject. (p. 10) sumes items are sold in the order acquired; earliest items purchased are the first sold. (p. 105) Fixed budget Planning budget based on a single predicted amount of vol- ume; unsuitable for evaluations if the actual volume differs from predicted volume. (p. 279)","G-4 Glossary Indirect expenses Expenses incurred for the joint benefit of more than one Least-squares regression Statistical method for deriving an estimated line department (or cost object). (p. 324) of cost behavior that is more precise than the high-low method and the scat- ter diagram. (p. 173) Indirect labor Efforts of production employees who do not work specifically on converting direct materials into finished products and who are not clearly Ledger Record containing all accounts (with amounts) for a business; also identified with specific units or batches of product. (p. 16) called general ledger. (p. C-3) Indirect labor costs Labor costs that cannot be physically traced to produc- Limited liability company Organization form that combines select features tion of a product or service; included as part of overhead. (p. 16) of a corporation and a limited partnership; provides limited liability to its members (owners), is free of business tax, and allows members to actively Indirect material Material used to support the production process but not participate in management. (p. D-4) clearly identified with products or batches of product. (p. 13) Limited liability partnership Partnership in which a partner is not person- Indirect method Presentation that reports net income and then adjusts it by ally liable for malpractice or negligence unless that partner is responsible for adding and subtracting items to yield net cash from operating activities on providing the service that resulted in the claim. (p. D-3) the statement of cash flows. (p. 430) Limited partners Partners who have no personal liability for partnership Infrequent gain or loss Gain or loss not expected to recur given the operat- debts beyond the amounts they invested in the partnership. (p. D-3) ing environment of the business. (p. 499) Limited partnership Partnership that has two classes of partners, limited Institute of management accountants (IMA) A professional association of partners and general partners. (p. D-3) management accountants. (p. 9) Liquidation Process of going out of business; involves selling assets, pay- Internal controls or Internal control system All policies and procedures ing liabilities, and distributing remainder to owners. (p. D-11) used to protect assets, ensure reliable accounting, promote efficient opera- tions, and urge adherence to company policies. (p. 9) Liquidity Availability of resources to meet short-term cash requirements. (p. 477) Internal rate of return (IRR) Rate used to evaluate the acceptability of an Management by exception Management process to focus on significant investment; equals the rate that yields a net present value of zero for an in- variances and give less attention to areas where performance is close to the vestment. (p. 399) standard. (p. 294) Investing activities Transactions that involve purchasing and selling of long- Managerial accounting Area of accounting mainly aimed at serving the term assets, includes making and collecting notes receivable and investments decision-making needs of internal users; also called management account- in other than cash equivalents. (p. 426) ing. (p. 4) Investment center Center of which a manager is responsible for revenues, Apago PDF Enhancercosts, and asset investments. (p. 323) Manufacturing budget Plan that shows the predicted costs for direct mate- rials, direct labor, and overhead to be incurred in manufacturing units in the Investment center residual income The net income an investment center production budget. (p. 257) earns above a target return on average invested assets. (p. 331) Manufacturing statement Report that summarizes the types and amounts of Investment center return on total assets Center net income divided by av- costs incurred in a company\u2019s production process for a period; also called erage total assets for the center. (p. 331) cost of goods manufacturing statement . (p. 18) Investment turnover The efficiency with which a company generates sales Margin of safety Excess of expected sales over the level of break-even from its available assets; computed as sales divided by average invested assets. sales. (p. 180) (p. 336) Marginal costing (See variable costing.) (p. 206) Job Production of a customized product or service. (p. 48) Market-based transfers price A method of assigning prices on transfers be- Job cost sheet Separate record maintained for each job. (p. 50) tween divisions within a company based on the market price of the item being Job lot Production of more than one unit of a customized product or service. transferred. (p. 340) (p. 49) Job order cost accounting system Cost accounting system to determine the Market prospects Expectations (both good and bad) about a company\u2019s fu- cost of producing each job or job lot. (pp. 50 & 89) ture performance as assessed by users and other interested parties. (p. 477) Job order production Production of special-order products; also called cus- tomized production. (p. 48) Markup The difference between selling price and cost; often expressed as a Joint cost Cost incurred to produce or purchase two or more products at the percentage of cost. (p. 372) same time. (p. 341) Journal Record in which transactions are entered before they are posted to Master budget Comprehensive business plan that includes specific plans for ledger accounts; also called book of original entry . (p. C-8) expected sales, product units to be produced, merchandise (or materials) to Journalizing Process of recording transactions in a journal. (p. C-8) be purchased, expenses to be incurred, plant assets to be purchased, and Just-in-time (JIT) manufacturing Process of acquiring or producing in- amounts of cash to be borrowed or loans to be repaid, as well as a budgeted ventory only when needed. (p. 8) income statement and balance sheet. (p. 242) Lean business model Practice of eliminating waste while meeting customer Materials consumption report Document that summarizes the materials a de- needs and yielding positive company returns. (p. 8) partment uses during a reporting period; replaces materials requisitions. (p. 90) Materials ledger card Perpetual record updated each time units are pur- chased or issued for production use. (p. 51) Materials requisition Source document production managers use to request materials for production; used to assign materials costs to specific jobs or overhead. (p. 52)","Glossary G-5 Merchandise purchases budget Plan that shows the units or costs of mer- Planning Process of setting goals and preparing to achieve them. (p. 4) chandise to be purchased by a merchandising company during the budget Posting Process of transferring journal entry information to the ledger; com- period. (p. 245) puterized systems automate this process. (p. C-8) Mixed cost Cost that behaves like a combination of fixed and variable Posting reference (PR) column A column in journals in which individual costs. (p. 169) ledger account numbers are entered when entries are posted to those ledger Mutual agency Legal relationship among partners whereby each partner is accounts. (p. C-10) an agent of the partnership and is able to bind the partnership to contracts Predetermined overhead rate Rate established prior to the beginning of a within the scope of the partnership\u2019s business. (p. D-3) period that relates estimated overhead to another variable, such as estimated Negotiated transfer price A method of determining prices on transfers be- direct labor, and is used to assign overhead cost to production. (p. 56) tween divisions within a company based on negotiations between division managers. (p. 341) Price variance Difference between actual and budgeted revenue or cost caused by the difference between the actual price per unit and the budgeted Net present value (NPV) Dollar estimate of an asset\u2019s value that is used to price per unit. (p. 282) evaluate the acceptability of an investment; computed by discounting future cash flows from the investment at a satisfactory rate and then subtracting the Prime costs Expenditures directly identified with the production of finished initial cost of the investment. (p. 397) goods; include direct materials costs and direct labor costs. (p. 16) Non-value-added time The portion of cycle time that is not directed at pro- Process cost accounting system System of assigning direct materials, di- ducing a product or service; equals the sum of inspection time, move time, rect labor, and overhead to specific processes; total costs associated with and wait time. (p. 21) each process are then divided by the number of units passing through that process to determine the cost per equivalent unit. (p. 89) Not controllable costs Costs that a manager does not have the power to con- trol or strongly influence. (p. 11) Process cost summary Report of costs charged to a department, its equiva- lent units of production achieved, and the costs assigned to its output. (p. 98) Process operations Processing of products in a continuous (sequential) flow Operating activities Activities that involve the production or purchase of of steps; also called process operations or process production. (p. 86) merchandise and the sale of goods or services to customers, including ex- Product costs Costs that are capitalized as inventory because they produce penditures related to administering the business. (p. 425) benefits expected to have future value; include direct materials, direct labor, Operating leverage Extent, or relative size, of fixed costs in the total cost and overhead. (p. 11) structure. (p. 184) Production budget Plan that shows the units to be produced each period. Apago PDF EnhancerOpportunity cost Potential benefit lost by choosing a specific action from (p. 257) two or more alternatives. (p. 11) Product level activities Activities that relate to specific products that must Out-of-pocket cost Cost incurred or avoided as a result of management\u2019s de- be carried out regardless of how many units are produced and sold or batches cisions. (p. 11) run. (p. 137) Overapplied overhead Amount by which the overhead applied to produc- Profit center Business unit that incurs costs and generates revenues. (p. 323) tion in a period using the predetermined overhead rate exceeds the actual Profit margin Ratio of a company\u2019s net income to its net sales; the percent of income in each dollar of revenue; also called net profit margin. (p. 336) overhead incurred in a period. (p. 60) Overhead cost variance Difference between the total overhead cost applied Profitability Company\u2019s ability to generate an adequate return on invested capital. (p. 477) to products and the total overhead cost actually incurred. (p. 290) Profitability index A measure of the relation between the expected benefits of Partner return on equity Partner net income divided by average partner eq- a project and its investment, computed as the present value of expected future uity for the period. (p. D-14) cash flows from the investment divided by the cost of the investment; a higher value indicates a more desirable investment, and a value below 1 indicates an Partnership Unincorporated association of two or more persons to pursue a unacceptable project. (p. 399) business for profit as co-owners. (p. D-2) Partnership contract Agreement among partners that sets terms under which Quantity variance Difference between actual and budgeted revenue or cost the affairs of the partnership are conducted; also called articles of partner- caused by the difference between the actual number of units and the bud- ship. (p. D-2) geted number of units. (p. 282) Partnership liquidation Dissolution of a partnership by (1) selling noncash Ratio analysis Determination of key relations between financial statement assets and allocating any gain or loss according to partners\u2019 income-and-loss items as reflected in numerical measures. (p. 478) ratio, (2) paying liabilities, and (3) distributing any remaining cash accord- Raw materials inventory Goods a company acquires to use in making prod- ing to partners\u2019 capital balances. (p. D-12) ucts. (p. 13) Relevant benefits Additional or incremental revenue generated by selecting Payback period (PBP) Time-based measurement used to evaluate the ac- a particular course of action over another. (p. 365) ceptability of an investment; equals the time expected to pass before an in- Relevant range of operations Company\u2019s normal operating range; excludes vestment\u2019s net cash flows equal its initial cost. (p. 393) extremely high and low volumes not likely to occur. (p. 177) Period costs Expenditures identified more with a time period than with finished products costs; includes selling and general administrative expenses. (p. 11)","G-6 Glossary Responsibility accounting budget Report of expected costs and expenses Total quality management (TQM) Concept calling for all managers and under a manager\u2019s control. (p. 334) employees at all stages of operations to strive toward higher standards and reduce number of defects. (p. 8) Responsibility accounting performance report Responsibility report that com- pares actual costs and expenses for a department with budgeted amounts. (p. 334) Transfer price A price on a transfer of goods or services across divisions within a company. (p. 339) Responsibility accounting system System that provides information that management can use to evaluate the performance of a department\u2019s man- Trial balance List of accounts and their balances at a point in time; total ager. (p. 322) debit balances equal total credit balances. (p. C-17) Rolling budget New set of budgets a firm adds for the next period (with re- visions) to replace the ones that have lapsed. (p. 240) Unavoidable expense Expense (or cost) that is not relevant for business de- cisions; an expense that would continue even if a department, product, or S corporation Corporation that meets special tax qualifications so as to be service is eliminated. (p. 371) treated like a partnership for income tax purposes. (p. D-4) Uncontrollable costs Costs that a manager does not have the power to de- termine or strongly influence. (pp. 216 & 334) Safety stock Quantity of inventory or materials over the minimum needed to satisfy budgeted demand. (p. 245) Underapplied overhead Amount by which overhead incurred in a period ex- ceeds the overhead applied to that period\u2019s production using the predeter- Sales budget Plan showing the units of goods to be sold or services to be mined overhead rate. (p. 59) provided; the starting point in the budgeting process for most departments. (p. 244) Unearned revenue Liability created when customers pay in advance for products Sales mix Ratio of sales volumes for the various products sold by a com- or services; earned when the products or services are later delivered. (p. C-4) pany. (p. 181) Unfavorable variance Difference in revenues or costs, when the actual amount Scatter diagram Graph used to display data about past cost behavior and is compared to the budgeted amount, that contributes to a lower income. (p. 279) sales as points on a diagram. (p. 171) Unit level activities Activities that arise as a result of the total vloume of Selling expense budget Plan that lists the types and amounts of selling ex- goods and services that are produced, and that are performed each time a unit is produced. (p. 137) penses expected in the budget period. (p. 246) Solvency Company\u2019s long-run financial viability and its ability to cover long- Unlimited liability Legal relationship among general partners that makes term obligations. (p. 477) each of them responsible for partnership debts if the other partners are un- able to pay their shares. (p. D-3) Source documents Source of information for accounting entries that can be Apago PDF Enhancerin either paper or electronic form; also called business papers. (p. C-2) Unusual gain or loss Gain or loss that is abnormal or unrelated to the com- Spending variance Difference between the actual price of an item and its pany\u2019s ordinary activities and environment. (p. 499) standard price. (p. 291) Value-added time The portion of cycle time that is directed at producing a product or service; equals process time. (p. 21) Standard costs Costs that should be incurred under normal conditions to pro- duce a product or component or to perform a service. (p. 283) Value chain Sequential activities that add value to an entity\u2019s products or ser- Statement of cash flows A financial statement that lists cash inflows (re- vices; includes design, production, marketing, distribution, and service. (p. 18) ceipts) and cash outflows (payments) during a period; arranged by operating, Variable cost Cost that changes in proportion to changes in the activity out- investing, and financing. (p. 424) put volume. (p. 10) Statement of partners\u2019 equity Financial statement that shows total capital Variance analysis Process of examining differences between actual and bud- balances at the beginning of the period, any additional investment by partners, geted revenues or costs and describing them in terms of price and quantity the income or loss of the period, the partners\u2019 withdrawals, and the partners\u2019 differences. (p. 282) ending capital balances; also called statement of partner s\u2019 capital. (p. D-7) Vertical analysis Evaluation of each financial statement item or group of Step-wise cost Cost that remains fixed over limited ranges of volumes but items in terms of a specific base amount. (p. 478) changes by a lump sum when volume changes occur outside these limited ranges. (p. 170) Volume variance Difference between two dollar amounts of fixed overhead cost; one amount is the total budgeted overhead cost, and the other is the Sunk cost Cost already incurred and cannot be avoided or changed. (p. 11) overhead cost allocated to products using the predetermined fixed overhead rate. (p. 291) T-account Tool used to show sthe effects of transactions and events on indi- vidual accounts. (p. C-7) Weighted average contribution margin For multi-product firms, the sum Target cost Maximum allowable cost for a product or service; defined as ex- of each product\u2019s unit contribution margin multiplied by that product\u2019s sales pected selling price less the desired profit. (p. 49) mix percentage. (p. 182) Time ticket Source document used to report the time an employee spent Weighted average method Method to assign inventory cost to sales; the cost working on a job or on overhead activities and then to determine the amount of available-for-sale units is divided by the number of units available to de- of direct labor to charge to the job or the amount of indirect labor to charge termine per unit cost prior to each sale that is then multiplied by the units to overhead. (p. 54) sold to yield the cost of that sale. (p. 96) Total cost method Procedure to establish selling price, where price is set Working capital Current assets minus current liabilities at a point in time. equal to the product\u2019s total cost plus a desired profit on that product. (p. 372) (p. 487)","Photo Credits Chapter 1 Chapter 8 Page 3 Courtesy of Kernel Seasons Page 277 Courtesy of Martin Guitar Co. Page 7 AP Images\/KEYSTONE\/Alessandro Della Bella Page 280 Ken Samuelsen\/PhotoDisc\/Getty Images Page 13 \u00a9 Jeff Greenberg\/The Image Works Page 284 AP Images\/David Vincent Page 14 \u00a9 Darrell Ingham\/Getty Images Page 286 \u00a9 Kristjan Maack\/Getty Images\/Nordic Photos Page 20 GABRIEL BOUYS\/AFP\/Getty Images Page 287 \u00a9 ColorBlind Images\/Corbis Page 289 \u00a9 Patrik Giardino\/Photolibrary Chapter 2 Page 290 \u00a9 Nick Daly\/Getty Images\/Digital Vision Page 47 Courtesy of Specialty Surfaces International, Inc. d\/b\/a Sprinturf Page 295 \u00a9 Photodisc\/Alamy Page 48 Peter Newcomb\/Bloomberg News\/Landov Page 55 \u00a9 Photodisc\/Alamy Chapter 9 Page 60 image100\/Punchstock Page 321 Courtesy of RockBottomGolf.com Page 326 \u00a9 Christian Hoehn\/Getty Images\/Stone Chapter 3 Page 85 Courtesy of Hood River Juice Company Chapter 10 Page 85 \u00a9 Grant V. Faint\/Getty Images\/Iconica Page 363 Courtesy of Danielle Greenberg\/ Page 86 \u00a9 INGO WAGNER\/dpa\/Landov Prairie Sticks Bat Company Page 90 \u00a9 Tom Tracy Photography\/Alamy Page 365 \u00a9 JOHN SOMMERS\/Reuters\/Corbis Page 96 \u00a9 Lester Lefkowitz \/Getty Images\/Stone Page 371 \u00a9 Dimas Ardian\/Getty Images Page 101 \u00a9 Frederic Pitchal\/Sygma\/Corbis Page 372 \u00a9 Louie Psihoyos\/CORBIS Chapter 4 PDF Chapter 11 Page 129 Courtesy of Oregon Ice Cream EnhancerPage 391 Courtesy of 1-800-GOT-JUNK? ApagoPage 132 \u00a9 Philippe Eranian\/Corbis Page 394 AP Images\/Katsumi Kasahara Page 400 \u00a9 Philip Lee Harvey\/Getty Images\/Taxi Page 135 \u00a9 Stock4B\/Jupiterimages Page 137 AP Images\/Maurilio Cheli Chapter 12 Page 139 AP Images\/Christof Stache Page 423 Courtesy of Jungle Jim\u2019s International Market Page 142 \u00a9 Jan Greune\/Getty Images\/LOOK Page 424 AP Images\/Brian Kersey Page 430 \u00a9 Corbis Super RF\/Alamy Chapter 5 Page 167 Courtesy of Moe\u2019s Southwest Grill Chapter 13 Page 169 \u00a9 Royalty Free\/Corbis Page 475 \u00a9 Dirck Halstead\/Liaison\/Getty Images Page 174 \u00a9 Rob Tringali\/Sportschrome\/Getty Images Page 489 AP Images\/Ben Margot Page 181 \u00a9 Jonathan Fickies\/Getty Images Page 494 AP Images\/Chuck Burton Page 182 \u00a9 Nick Onken\/Getty Images\/UpperCut Images Chapter 6 Web Appendix C Page 205 Warwick Saint\/Courtesy of Bonobos Page C-2 Courtesy of Spanx Page 207 \u00a9 TOSHIFUMI KITAMURA\/AFP\/Getty Images Page C-5 Courtesy of Spanx Page 210 \u00a9 Steve Mason\/Getty Images Page C-6 \u00a9 Jonathan Daniel\/Getty Images Page 215 \u00a9 David Young-Wolff\/PhotoEdit Page C-7 Copyright 2007 NBAE.Photo by Joe Murphy\/ NBAE via Getty Images Chapter 7 Page 237 AP Images\/David Zalubowski Web Appendix D Page 244 \u00a9 Royalty Free\/Corbis Page D-3 \u00a9 David R. Frazier Photolibrary, Inc.\/Alamy Page 247 Courtesy \u00a9 BP p.l.c. Page D-5 \u00a9 Erik Freeland\/Corbis Page 248 Jeff Vinnick\/Getty Images Page D-8 \u00a9 Bill Bachmann\/Alamy Page 249 Jim McIsaac\/Getty Images Page D-11 \u00a9 James Doberman\/Getty Images\/Iconica Page 250 Teo Lannie\/Getty Images\/PhotoAlto Agency RF Collections CR-1","Index Note: Page numbers followed by n indicate material in footnotes. ABB (activity-based budgeting), 251\u2013252, identification of activities and cost pools, Annuity, B-5 258, 259 136\u2013138 future value of ordinary annuity, B-6\u2013B-7, ABC. See Activity-based costing Abercrombie & Fitch, 371 summary of, 141 B-10, B-11 ABM (activity-based management), 142, 323 Absorption costing, 175, 206\u2013207 tracing overhead costs to cost pools, 131, present value of bonuses linked to income, 213, 214, 217, 221 138\u2013139 annuity of 1, 400 converting variable costing reports to, 213, assessment of, 142\u2013143, 147 ordinary annuity, B-2, B-5, B-7, B-10, B-11 220, 221 demonstration of, 218\u2013220 assigning overhead costs, 130\u2013136 Annuity factor, 398n, B-11 implications for performance reporting. See activity-based rates and costing method, AOCI (accumulated other comprehensive Performance reporting income reporting under, 213\u2013214, 221 135\u2013136 income), 501 income statement effects of, 208, 209, 210, 211, departmental overhead rate method, Apple Computer, 20 214, 220 variable costing compared, 207, 208, 133\u2013135 financial statements of, A-29\u2013A-33 213\u2013217, 221 plantwide overhead rate method, 130\u2013132 consolidated balance sheets, A-30 cost control, 216 cost of goods sold, 209\u2013212 cost drivers in, 343 consolidated statements of cash flows, A-33 price setting, 215\u2013216 production planning, 208, 213\u2013215 cost flows under, 135, 136, 147 consolidated statements of operations, A-31 reporting issues, 217 treatment of fixed overhead costs. See Fixed customer profitability analysis, 143\u2013144 consolidated statements of shareholders\u2019 overhead costs defined, 135 equity, A-32 treatment of income. See Income unit costs, 207, 208, 220, 221 demonstration problem, 144\u2013147 Asset(s) Accelerated depreciation methods, 393, 399 Account analysis, 433, 449 for entrepreneurs, 129 analysis of transactions, 438 Accounting information in cost estimation, 173, 176, 187 ethical issues, 343 current. See Current assets for financial statement analysis, 477 in overhead cost allocation, 132 Activity-based management (ABM), 142, 323 investing activities and, 426, 438 product cost information, 130 purpose of, 6 Activity cost drivers, 139 legal prohibition against use of, 499 users of, 496 external users, 6, 424, 476 Activity cost pool, 135, 144 loss on sale of, 452 internal users, 5, 6, 424, 476 Accounting periods, B-2 Activity level, 289\u2013290 noncurrent, 437\u2013438 Accounting principles, 500\u2013501 Accounting rate of return, 393, 395\u2013396, Apago PDF EnhancerActivity overhead (pool) rate, 135 preparing statement of cash flows, 438, 452 401\u2013402, 406 Asset turnover rate, 488 Accounting software, 429 Activity rate Accounts payable, 433, 434 Accounts receivable, 432\u2013433 computation of, 139\u2013140 Association of Certified Fraud Examiners (ACFE), 9 Accounts receivable turnover ratio, 489, 495, 498 Accrual basis accounting, 431 \u201cActs of God,\u201d 499 Assumptions Accumulated other comprehensive income (AOCI), 501 Additional business decision, 365\u2013367 in analysis reports, 496 ACFE (Association of Certified Fraud Examiners), 9 Acid-test ratio, 488\u2013489, 495, 498 customer relationships and, 375 in CVP analysis, 171, 177\u2013178, 187 Activity(ies), 135, 136\u2013138, 147, 251 Activity-based budgeting (ABB), 251\u2013252, demonstration of, 373, 374 Auditors, 6, 476 258, 259 Activity-based costing (ABC), 128\u2013147, 343 qualitative factors in, 372 Auditor\u2019s report, A-1 application of, 136\u2013141 assigning overhead costs to cost objects, Adidas, 13 Automobile industry, 284 140\u2013141 Adjusting entries Average book value, 395 determining activity rate, 139\u2013140 for factory overhead, 55 Average collection period, 490 Administrative expenses, 142, 366 Average values Advertising expenses, 325, 327, 328, A-12 comparison of, 479 After-tax income, 179\u2013180, 185 Avoidable costs, 364 Airline industry, 216 Avoidable expenses, 371 Allocation base in allocating indirect expenses, 327\u2013328 Balanced scorecard, 9, 323, 323, 332\u2013333 in departmental overhead rate method, 133 Balance sheet(s) in establishing standard costs, 289 budgeted balance sheet, 250, 250n, 251, 256 for factory overhead, 55 common-size, 483, 484, 498 Allocation rate formula, 56 comparative. See Comparative balance sheets Allowances consolidated in standard setting, 284 examples of, A-4, A-20, A-25, A-30 All Tune and Lube, 290 cost flows to, 20 American Eagle, 371 manufacturer\u2019s balance sheet American Express, 425 different from merchandiser, 23, 26 Amortization method, 501 finished goods inventory, 14 Analysis overview, 496 goods in process inventory, 14 Analysis period, 479 raw materials inventory, 13\u201314 Analyst services, 476 use in preparation of budgets, 243 Anheuser Busch, 339 Balance sheet accounts, 429\u2013430 Annual average investment, 395 Baldrige Award (MBQNA), 8 Annual report, A-1 Banking activities, 491 Annual Statement Studies (Robert Morris Bank of America, 425 Associates), 487 Bankruptcy, 424, 425 IND","Index IND-1 Bar-coding, 143 goals in, 239 Business activities, 425\u2013426, 453 Business consultants, 480 Base amount, 483 influences on, 242 Business description, A-8 Business environment of managerial Base period, 479, 481 information technology budgets, 392 accounting, 7\u20139 Batch level activities, 137 manufacturing budgets, 244, 257\u2013258, 259 implications of, 8\u20139 lean business model, 7\u20138, 26 Batch level costs, 139 master budgets. See Master budgets lean practices, 8 Business segments, 499 Bear market, 492 for merchandise purchases, 243, 245\u2013246, 254 discontinued segments, 499, 500 note regarding, A-18 Behavior monthly, 240, 241 reportable classification of costs by, 10, 12, 21\u201322 nature of, 4\u20135 graphical analysis of, 485 segment elimination decision, 371 Benchmarking, 290 operating budgets. See Operating budgets Canion, Rod, 170 Benchmarking budgets, 238\u2013239 production budgets, 243, 244, 245, 247, 259 Capacity to pay fixed interest charges, 491 Capital: working capital, 487 Benchmarks, 478 responsibility accounting budgets, 334 Capital budgeting, 247, 392\u2013402, 406 Best Buy, 336, 501 rolling budgets, 238, 240, 241 comparison of methods, 401\u2013402 demonstration of methods, 403\u2013405 analysis of financial statements, 476, 478 sales budget, 239, 243, 244, 254 ethical issues, 398, 406 not using time value of money, 392\u2013396 common-size graphics, 485\u2013486 selling expense budget, 243, 246, 254 accounting rate of return, 393, 395\u2013396 comparative format, 478\u2013481 written budgets, 239 break-even time and, 402\u2013403 payback period, 393\u2013395 ratio analysis, 487\u2013495 See also Budgeting; Capital budgeting techniques for entrepreneurs, 391 using time value of money, 396\u2013402 trend analysis, 481\u2013483 Budget administration, 240\u2013242, 258 internal rate of return, 396, 399\u2013401, B-11 net present value, 393, 396, 397\u2013399, 406 vertical analysis, 483\u2013485 budget committee, 240 Capital expenditures budget, 242, 243, 247, 248, 259 financial statements of, A-2\u2013A-18 reporting, 240, 241 Capital structure of company, 491 Cash, 425 consolidated balance sheets, A-4 timing, 240\u2013241 cash flows. See Cash flow(s) distributed to or received from owners, 426 consolidated statements of cash flows, A-7 Budgetary control, 278\u2013279 e-cash, 430 Cash, Johnny, 277 consolidated statements of changes in Budgetary process (flexible budgets), 278\u2013280 Cash account analyzing, 428\u2013429 shareholders\u2019 equity, A-6 budgetary control and reporting, 278\u2013279 relation to noncash accounts, 429, 430 Cash and cash equivalents, A-8 consolidated statements of earnings, A-5 budget reports for evaluation, 280 Cash balances proving, 428, 433, 441 selected financial data, A-3 fixed budget performance report, 279 Cash budget, 243, 244, 246, 247, 248\u2013249, 255 Cash coverage of debt ratio, 442, 495n selected notes to, A-8\u2013A-18 Budget calendar, 242 Cash coverage of growth ratio, 442, 495n Cash disbursements Management\u2019s Discussion and Analysis Budget committee, 240 budgeting for, 248\u2013249 debited directly to expense account, 451n (MD&A), 477 Budgeted balance sheet, 250n, 250, 251, 256 operating cash payments, 428, 432, 448, BestBuy.com, 477 Budgeted costs. See Standard cost(s) 449\u2013452, 451n Cash dividends, 249, 426 Best case scenario, 280 Budgeted income statement, 250, 256 Cash equivalents BET (break-even time), 402\u2013403 Budgeted performance, 238, 239 cash flows. See Cash flow(s) defined, 425 Blue chips, 477 Budgeting, 236\u2013259 note regarding, A-8 Cash flow(s) Board of directors, 242, 476 activity-based, 251\u2013252, 258, 259 bankruptcy and, 424, 425 classification of, 425\u2013426 Boeing, 48\u201349 budget administration, 240\u2013242, 258 delaying or accelerating, 426 domestic v. international, 440 Bonaminio, Jim, 423 Apago PDFbudget committee,E240nhancer even, 393\u2013394, 400, B-11 Bonobos, 205 reporting, 240, 241 from financing activities, 439\u2013441, 453\u2013454 Bonobos.com, 205 timing, 240\u2013241 analysis of changes in, 446 equity analysis, 440 Bonuses. See Manager bonuses capital budgeting. See Capital budgeting noncurrent liabilities, 439 proving cash balances, 428, 433, 441 Book value of asset, 395\u2013396 continuous budgeting, 238, 240\u2013241 sources and uses of cash, 441\u2013442 three-stage analysis of, 439 Bottom-line figure, 428 defined, 238 Bottom-up processes, 240 demonstration problem, 252\u2013256 BP, 240 ethical issues, 239, 259 Break-even analysis, 217\u2013218 for manufacturers, 259 use in CVP analysis, 174\u2013178 manufacturing budgets, 244, 257\u2013258 break-even point computations, 175 operating budgets, 242 contribution margin, 174 production budgets, 244, 245, 247 cost-volume-profit chart, 176, 185 master budgets, 240\u2013251 making assumptions in, 171, 177\u2013178, 187 capital expenditures budget, 247, 248 multiproduct break-even point, 181\u2013183, 187 components of, 240\u2013243 Break-even chart (graph), 176 financial budgets. See Financial budgets Break-even point, 175, 185, 187 operating budgets, 244\u2013247 fixed costs and, 181 for merchandisers, 242, 244, 245\u2013246 multiproduct, 181\u2013183, 187 as process. See Budget process revised Budget process changes in estimates and, 171, 175, 178 benchmarking budgets, 238\u2013239 as result of sensitivity analysis, 181 communication of, 239 selling price and, 177, 178 human behavior and, 239 Break-even sales dollars, 175 as management tool, 239 Break-even time (BET), 402\u2013403, 406 strategic budgeting, 238 Break-even volume (in units), 218, 221 Budget reports (flexible budgets), 278, 280\u2013283 Briggs & Stratton, 14 flexible budget performance report, 282, Brokers, 477 283, 302 Budget(s), 238 preparation of, 279, 280\u2013282 benchmarking budgets, 238\u2013239 purpose of, 280 capital expenditures budget, 242, 243, 247, as tool for evaluation, 280 248, 259 Budget(s) Sales budget, 244 cash budget, 243, 244, 246, 247, 248\u2013249, 255 Building blocks of financial statement fixed budget, 279, 301 analysis, 477 general and administrative expense budget, 243, Building expenses, 324\u2013325 246\u2013247, 255 Bull market, 492","IND-2 Index Cash flow(s)\u2014Cont. Competitive markets, 130 Cost allocation free cash flows, 442, 495n from investing activities, 453\u2013454 Competitor benchmarks, 478 by ABC method, 142 analysis of changes in, 446 noncurrent asset analysis, 437\u2013438 Component costs, 101 classification of costs by traceability, 10, 133 other asset transactions, 438 sources and uses of cash, 441\u2013442 Composite unit, 182 department managers\u2019 salaries, 91 three-stage analysis of, 437\u2013438 measurement of, 425 Compounding periods, B-2 joint costs, 341\u2013342 misclassification of, 426 net, 393, 394, 397, 402 Comprehensive income, 501, A-16 for performance evaluation, 337\u2013339 not affected by stock dividends\/stock splits, 440 from operating activities. See Operating cash flows Condemnation of property, 499 process cost allocation, 92, 108, 109 under plantwide overhead rate method, 131 predicting inflows and outflows, 392 Consistency concept, 500 transfer pricing, 339\u2013341 sources and uses of cash, 441\u2013442 uneven, 393, 394, 398, 400 Consolidated financial statements variable costs allocated to products, 207 Cash flow analysis, 393, 441\u2013442 examples of Cost-based transfer pricing, 340 Cash flow on total assets ratio, 442, 453, 495n Cash inflows, 425, 428\u2013429 balance sheets, A-4, A-20, A-25, A-30 Cost behavior, 187 Cash outflows, 425, 428\u2013429 Cash receipts, 429, 432, 448, 449 income statements, A-5, A-21, A-26, A-31 identification of, 168\u2013171 Cause\u2013effect relation, 324, 343 CE (cycle efficiency), 21, 26 statements of cash flows, A-7, A-23, curvilinear costs, 170, 177 Certified Financial Manager (CFM), 9 Certified management accountant (CMA), 6, 9 A-28, A-33 fixed costs, 168\u2013169 CFM (Certified Financial Manager), 9 Change in accounting principle, 500\u2013501 statements of shareholders\u2019 equity, A-6, A-22, mixed costs, 169\u2013170 Changes in accounting estimates, 501 Chevrolet Corvette, 284 A-27, A-32 step-wise costs, 170 Circuit City Contingencies, A-18 variable costs, 169, 182, 207 analysis of financial statements, 476, 478 graphical analysis, 482, 486 Continuing operations, 499 measurement of past behavior, 171\u2013174, 187 ratio analysis, 487\u2013495 Continuous budgeting, 238, 240\u2013241 comparison of methods, 173 financial statements of, A-19\u2013A-23 consolidated balance sheets, A-20 Continuous improvement, 8, 240 high-low method, 171, 172\u2013173 consolidated statements of cash flows, A-23 consolidated statements of operations, A-21 Contracts, 7, 441, 454 least-squares regression, 171, 173, 186 consolidated statements of stockholders\u2019 equity and comprehensive income, A-22 Contribution format, 216, 217 scatter diagrams, 171\u2013172, 173 Clapton, Eric, 277 Contribution margin, 175, 187, 209 Cost centers, 323, 325 Clock cards, 53, 54 CMA (Certified Management Accountant), 6, 9 in sales mix selection decision, 370 Cost classification, 10\u201312, 26 CMA exams, 49 Cobb, Brian, 129 in transfer pricing, 340 by behavior, 10, 12, 21\u201322 Coca-Cola Company, 86, 478 Commissions, 169, 246, 249, 366 weighted-average, 182\u2013183 by controllability, 11, 12 Commitments, A-18 Common-size analysis. See Vertical analysis Contribution margin format, 281 ethical issues, 92, 110 Common-size financial statements, 483 Contribution margin income statement, 175, 209 by function, 11\u201312 balance sheets, 483, 484, 498 in vertical analysis, 480, 481, 483\u2013485 Contribution margin per unit, 174, 180, 185, 218 identification of, 12, 13 balance sheets, 483, 484 Contribution margin ratio, 174, 175, 180, 185 materiality principal and, 14 income statements, 484\u2013485 Common-size graphics, 485\u2013486 Contribution margin reports, 209, 221 by relevance, 11, 12 Common stock, 440 Company performance, 482\u2013483 Control, 5, 238\u2013239, 294 by traceability, 10, 11, 12, 26 Compaq Computer, 170 Comparative balance sheets Controllability Cost control, 216, 294, 341 in horizontal analysis, 479\u2013481, 497 as information source for preparing statement of classification of costs by, 11, 12 Cost estimates, 181 cash flows, 430, 432 Apago PDF EnhancerControllable costs, 11, 216, 334n, 334, 343Cost flows analysis of equity, 440 demonstration problem, 443\u2013445 Controllable variances, 291, 293, 295 under activity-based costing, 135, 136, 147 investing activities, 437\u2013438 notes payable transactions, 439 \u201cConvenience\u201d financial statements, 484 to balance sheet, 20 Comparative financial statements, 478\u2013481 balance sheets, 479\u2013481, 497 Conversion costs, 16, 101 departmental overhead rate method, 133, 147 computation of dollar and percent changes, Convertible debentures, A-14 in job order costing 479, 479n income statements, 481, 497\u2013498 Cost(s) labor costs, 51, 53\u201354 of advertising, A-12 materials costs, 51\u201353 allocation of. See Cost allocation overhead costs, 51, 54\u201356 analysis of. See Cost-volume-profit (CVP) summary of, 56\u201358 analysis labor costs, 51, 54\u201356, 62, 64 assigning and reconciling direct labor, 88, 91, 110 by FIFO method, 106, 107\u2013108, 109 indirect labor, 88, 91 by weighted average method, 96\u201399 in job order costing, 51, 53\u201354 avoidable costs, 364 materials costs, 51\u201353, 62, 64 batch level costs, 139 direct materials, 88, 90, 110 behavior of. See Cost behavior indirect materials, 88, 90 budgeted costs. See Standard cost(s) overhead costs, 88, 91\u201392, 110 classifications of. See Cost classification activity-based rates and costing method, 135, computing income from, 179 136, 147 controllable, 11, 216, 334, 334n, 343 cost flows and documents, 51, 54\u201356, 62, 64 curvilinear costs, 170, 177 departmental overhead rate method, 133, 147 expenses contrasted, 334n plantwide overhead rate method, 131 fixed. See Fixed cost(s) plantwide overhead rate method, 131, 147 joint costs, 341\u2013342, 343 for process operations, 88, 100 managerial cost concepts, 10\u201313 reporting, 17\u201318, 26 of material materials activity, 17 standards for, 283 production activity, 17\u201318 mixed costs, 169\u2013170 sales activity, 18 opportunity cost. See Opportunity costs Cost object(s), 10, 26, 131 predicted activities as, 135, 138 in job order costing, 49 assigning overhead costs to, 140\u2013141 for service companies, 12\u201313 direct cost traced to, 89 step-wise costs, 170 Cost of capital, 397 uncontrollable, 11, 216, 334 Cost of goods manufactured, 15, 23, 24, 99 of using activity-based costing, 143 Cost of goods sold variable costs, 169, 182, 207 budgeted, 254 Cost accounting system, 48, 64 constant relation with sales, 246","Index IND-3 job order costing, 63 prepaid expenses, 433, 434 indirect expenses, 324\u2013325, 343 advertising expenses, 325, 327, 328 note regarding, A-12 in preparing statement of cash flows, 432\u2013435 demonstration problem, 337, 338 depreciation expense, 325 shown in manufacturing statement, 19, 26 composition of, 488 rent and related expenses, 325, 327\u2013328 service department expenses, 325 summary entries for, 100 Current liabilities utilities expense, 325, 327, 328 transfers to, 88, 99\u2013100, 110 adjustments for changes in, 432\u2013435 investment center performance, 331\u2013333 Departmental expense allocation spreadsheet, under variable v. absorption costing, 209\u2013212 accounts payable, 433, 434 326n, 326\u2013329, 338 Cost per equivalent unit of production, 93 income taxes payable, 433, 434\u2013435 Departmental income statements, 326\u2013330, 343 changes to, 98 interest payable, 433, 434\u2013435 allocation of direct and indirect expenses, 326 demonstration of, 339 computing, 96, 105, 107 Current ratio, 480, 487\u2013488, 495, 498, 502 departmental expense allocation sheet, 326n, demonstration of, 103 Curvilinear costs, 170, 177 326\u2013329, 338 Departmentalization, 322, 343 Cost per unit of output, 169 Customer(s) Departmental overhead rate method Cost-plus basis, 49 assessing profitability of, 143\u2013144 for overhead cost assignment, 130, 133\u2013135, 147 advantages and disadvantages of, 134\u2013135 Cost-plus contract, 7 balanced scorecard and, 9, 332, 333 application of, 133\u2013134 cost flows under, 133, 147 Cost-plus methods of price setting, 372 operating cash receipts from, 429, 449 demonstration of, 146\u2013147 summary of, 141 Cost pools use of financial statement analysis, 476 Departmental spreadsheet analysis, 323 activity cost pool, 135, 144 Customer-interaction software, 94 Department managers, 91, 98, 108 Depletion method, 501 activity overhead (pool) rate, 135 Customer loyalty programs, A-11 Depreciation identification of, 136\u2013138 Customer orientation, 7\u20138 accelerated methods, 393, 399 adjustments for, 435 tracing overhead costs to, 131, 138\u2013139 flexibility and standardization, 101, 102 change in method, 501 as direct cost, 89 Costs accounted for, 97, 104, 108 lean business model and, 101 effects on NPV analysis, 393, 399 as factory overhead item, 91 Costs to account for, 97, 104, 108 Customer profitability analysis, 143\u2013144 as fixed cost, 169 as product cost for manufacturers, 16 Cost variances (CV), 284n, 284\u2013288 Customer relationships, 366, 375 straight-line method, 395\u2013396, 399 Depreciation expense, 247, 325, 452 computation of, 285\u2013286 Customer satisfaction, 323 Depreciation tax shield, 399 Differential costs of managerial decisions, 366 demonstration of, 300\u2013301 Customer service, 94 Direct costing. See Variable costing Direct costs, 10, 11, 89, 334 labor cost variances, 302 Customized production. See Job order cost Direct expenses, 324, 343 Direct labor, 16 demonstration of, 300 accounting computing cost per equivalent unit for, 96 in cost of goods manufactured, 24 investigating causes of, 288, 302 Custom products, 131 flow of, 88, 91, 110 Direct labor budget, 258 rate and efficiency variance, 287\u2013288 CV. See Cost variances Direct labor costs, 16, 18, 19, 132 Direct labor hours (DLH), 58, 65, 132, 133 materials cost variances, 286\u2013287, 300, 302 CVP analysis. See Cost-volume-profit (CVP) Direct labor rate variance, 295 Direct materials, 13, 14, 16 overhead cost variances. See Overhead cost analysis computing cost per equivalent unit for, 96 computing EUP for, 96 variance(s) CVP chart. See Cost-volume-profit (CVP) chart in cost of goods manufactured, 24 flow of, 88, 90, 110 variance analysis, 285 Cycle efficiency (CE), 21, 26 incremental costs and, 366 shown in manufacturing statement, 18 Cost-volume-profit (CVP) analysis, 166\u2013187, 217 Cycle time (CT), 20\u201321, 26, 92, 323 Direct materials budget, 257\u2013258 Direct materials costs, 16 applications of, 178\u2013183 Direct method of reporting operating cash flows, Apago PDF Enhancerincome computed from sales and costs, 179 430, 453 Days\u2019 cash expense coverage ratio, 495n demonstration of, 444, 445 financing activities, 439\u2013441 margin of safety, 180 Days\u2019 sales in inventory ratio, 490, 495 format of operating activities section, 453 indirect method compared, 429, 430\u2013431, 433 multiproduct break-even point, 181\u2013183, 187 Days\u2019 sales in receivables ratio, 489\u2013490, investing activities, 437\u2013438 operating cash payments, 432, 449\u2013452 sales computed for target income, 179\u2013180 495, 498 for interest and income taxes, 428, 451\u2013452 sensitivity analysis, 181 Days\u2019 sales uncollected ratio, 489\u2013490, for merchandise, 449\u2013450 for wages and operating expenses, 432, break-even analysis used in, 174\u2013178 495, 498 450\u2013451, 451n break-even point computations, 175 Debentures, A-14 contribution margin, 174 Debt cost-volume-profit chart, 176, 185 fair value of, A-15 making assumptions in, 171, 177\u2013178, 187 gain on retirement of, 433, 436, 452 defined, 168 issuing and repaying, 426 degree of operating leverage, 184 notes regarding, A-14, A-15 demonstration problem, 184\u2013185 Debt ratio, 491, 495, 499 identifying cost behavior, 168\u2013171 Debt-to-equity ratio, 491, 495, 499 curvilinear costs, 170 Decentralized companies, 339\u2013341 fixed costs, 168\u2013169 Decision making. See Managerial decisions mixed costs, 169\u2013170 Decision rule for applying NPV, 397 step-wise costs, 170 Declaration of cash dividend, 440 variable costs, 169 Defect rates, 323 measuring past cost behavior, 171\u2013174 Degree of operating leverage (DOL), 184, 187 comparison of methods, 173 Demand-pull system, 8 high-low method, 171, 172\u2013173 Department(s) (subunits), 322 least-squares regression, 171, 173, 186 Departmental accounting scatter diagrams. See Scatter diagrams departmental evaluation, 322\u2013323 Cost-volume-profit (CVP) chart, 176, 185 expense allocation. See Departmental expense CPA exams, 49 allocation Creditors, 242, 476 motivation for departmentalization, 322, 343 Credit risk ratio, 495n reporting and analysis, 323 Crocs, 237 Departmental accounting system, 322, 343 Crocs.com, 237 Departmental contribution reports, 329n, 330, 343 CT (cycle time), 20\u201321, 26, 92, 323 Departmental contribution to overhead, 329n, Cumulative discount factor, 398n, B-11 329\u2013330, 340 Cumulative total of net cash flows, 394 Departmental evaluation, 322\u2013323 Current assets Departmental expense allocation, 324\u2013331 adjustments for changes in, 432\u2013435 contribution to overhead, 329n, 329\u2013330, 340 accounts receivable, 432\u2013433 direct and indirect expenses, 326 merchandise inventory, 433\u2013434 direct expenses, 324, 343","IND-4 Index Direct method of reporting operating cash flows FIFO method of process costing Favorable variances, 279, 282, 284n \u2014Cont. computing cost per unit, 105, 107 FDIC (Federal Deposit Insurance Corporation), 491 operating cash receipts, 432, 449 from customers, 429, 449 computing EUP, 106\u2013107, 108 Federal Deposit Insurance Corporation (FDIC), 491 other receipts, 449 goods in process, 93 Federated Department Stores, 424 summary of adjustments, 452 Disclosures, 427 shown in process cost summary, 108, 109 FedEx, 332 Discontinued segments, 499, 500 Discount, B-2 weighted average method Feedback from control function, 5 Discount factors in applying NPV, 397 Discounting, 392 computing cost per unit, 96 FIFO method of process costing, 105\u2013109, 110 Discount rate, 400, 401, 406, B-2 Dividend(s) computing EUP, 95\u201396 assigning and reconciling costs, 106, 107\u2013108, 109 in cash, 249, 426 Estimated line of cost behavior, 172 computing cost per equivalent unit, 96, stock dividends, 427, 440 stock splits, 440 Estimates, 187 105, 107 Dividend yield ratio, 494, 495 Division managers, 341 changes in, 171, 175, 178 computing equivalent units of production, 106 DLH (direct labor hours), 58, 65, 132, 133 DOL (degree of operating leverage), in job order costing, 55\u201356 beginning goods in process, 106\u2013107 184, 187 yielded by CVP analysis, 177 ending goods in process, 106, 107, 108 Dollar changes Ethics, 9 units started and completed, 106, 107 computation of, 479 Dollar sales activity-based costing, 343 determining physical flow of units, 105\u2013106 computation of, 179\u2013180 added costs in process operations, 102, 110\u2013111 Financial Accounting Standards Board (FASB) Dukes, Kenny, B-2 Dun & Bradstreet, 476, 478, 487 assignment of overhead costs, 135, 147 on reporting operating activities, 426 Dunn, Andy, 205 in budgeting, 239, 259 Financial budgets, 247\u2013251 Earnings per share (EPS), 500, A-15 Earnings quality, 442, 453, 495n capital budgeting, 398, 406 budgeted balance sheet, 250, 250n, 251, 256 E-cash, 430 Economic value added (EVA), 332 in job order costing, 56, 64 budgeted income statement, 250 Economies of scale, 484 EDGAR (Electronic Data Gathering, Analysis and manager bonuses, 215, 217, 221 cash budget, 243, 244, 246, 247, 248\u2013249 Retrieval) database, A-1 in managerial accounting, 7, 9, 26 components of, 242 Efficiency, 322, 343, 477, 487 Efficiency variance(s), 287\u2013288, 291 \u201cmanaging\u201d the numbers, 180, 187 preparation of, 243 Electronic Data Gathering, Analysis and Retrieval misclassification of cash flows, 426 Financial calculators, 398, B-5 (EDGAR) database, A-1 Employee(s) process costing, 92, 110 Financial condition of company, 482\u2013483 active involvement in budgeting, 239, 240 spending budgeted amounts, 294, 302 Financial dimension of balanced scorecard, 9 employer investment in training, 60 fraud committed by, 9, 54 EUP. See Equivalent units of production Financial history and highlights, A-1, A-3 morale of, 325 use of financial statement analysis, 476 EVA (economic value added), 332 Financial information for decision making, 364 Entrepreneurship activity-based costing, 129 Even cash flows, 393 Financial leverage, 491 budgeting process, 237 capital budgeting techniques, 391 computing IRR with, 400, B-11 Financial reporting, 206, 477 costing systems, 205 cost management, 85, 321 computing payback period with, 393\u2013394 Financial results, 332, 333 CVP analysis, 167 financial statement analysis, 475 Evidential matter, 496 Financial statement(s) job order cost accounting, 47 managerial accounting, 3, 277 EVP (executive vice president), 335 in annual report, A-1 managerial decisions, 363 statement of cash flows, 423 Excel\u00ae (Microsoft), 398, 405\u2013406 budgeted, 259 Environmental Protection Agency (EPA), 280 EPA (Environmental Protection Agency), 280 Apago PDF EnhancerExcess capacity, 340 balance sheet, 250, 250n, 251, 256 EPS (earnings per share), 500, A-15 Equity, 426, 493 Excess cash, 248 income statement, 250, 256 Equity analysis, 440 Equity ratio, 491, 495 Executive summary, 496 statement of retained earnings, 256 Equity securities note regarding, A-13 Executive vice president (EVP), 335 comparative, 478\u2013481 Equivalent units of production (EUP), 88, Expected performance, 238, 239 balance sheets, 479\u2013481, 497 93\u201394, 110 demonstration of, 103 Expense accounts, 451n computation of dollar and percent changes, differences for materials, labor, and overhead, Expenses 479, 479n 93\u201394 costs contrasted, 334n income statements, 481 Expropriation of property, 499 consolidated. See Consolidated financial External reporting, 217 statements External users of accounting information, 6, examples of, A-1\u2013A-33 424, 476 Apple Computer, A-29\u2013A-33 Extraordinary gains and losses, 499\u2013500 Best Buy, A-2\u2013A-18 Extraordinary items Circuit City, A-19\u2013A-23 \u201cActs of God\u201d as, 499 RadioShack, A-24\u2013A-28 classification of, 500, 502 managerial accounting system and, 19, 20 sustainable income and, 499\u2013500 notes to, 438, A-1, A-8\u2013A-18 ExxonMobil, 86 Financial statement analysis, 474\u2013502 analysis reporting, 496 Facility level activities, 137 building blocks of, 477, 501 Facility level costs, 137, 137n, 139 defined, 476 Factory, 88 demonstration problem, 496\u2013499 Factory overhead, 16, 55 horizontal analysis, 478\u2013483 in manufacturer\u2019s income statement, 16 comparative balance sheets, 479\u2013481, 497 predetermined overhead rate for, 55, 56 comparative income statements, 481 See also Overhead computation of dollar and percent changes, Factory overhead budget, 258 479, 479n Factory overhead costs, 16, 50, 56 trend analysis, 481\u2013483 in cost of goods manufactured, 24 information for analysis, 477 demonstration of, 25 purpose of, 476, 501 in process cost accounting system, 88, 91\u201392 ratio analysis. See Ratio analysis rent and utilities as, 91, 131 standards for comparison, 478, 501 traceability of, 16 sustainable income and. See Sustainable income Factory overhead ledger, 53 tools of, 478, 501\u2013502 Factory utilities, 91, 131 vertical analysis, 478, 483\u2013486, 502 Fair value, A-15 common-size graphics, 485\u2013486 FASB. See Financial Accounting Standards Board common-size statements, 480, 481, 483\u2013485","Index IND-5 Financial statement analysis reports, 496, 502 Flexible overhead budget, 289 Goods in process assigning and reconciling costs, 96 Financial statement formats Flow of manufacturing activities and costs FIFO method of process costing, 106 beginning goods in process, 106\u2013107 comparative format, 478\u2013481 reporting, 17\u201318, 26 ending goods in process, 106, 107, 108 units started and completed, 106, 107 contribution format, 216, 217 materials activity, 17 Goods in process inventory, 14, 23\u201324, 294\u2013295 statement of cash flows, 427, 453 production activity, 17\u201318 Goods in Process Inventory account, 50, 50, 63, 64 Goodwill, A-9 Financial statement preparation, 98 sales activity, 18 Grades of material, 283 Graphical analysis, 187, 482, 486 Financing Focus of information in managerial accounting, balance scorecard reporting, 332, 333 obtaining, 332 5, 6\u20137 break-even chart, 176 of break-even time, 403 Financing activities, 426, 453 Fool.com, 475 common-size graphics, 485\u2013486 in CVP analysis cash flows from, 439\u2013441, 453\u2013454 Ford Motor Company, 101\u2013102, 181 cost behavior, 169 analysis of changes in, 446 Foreign currency translation, 483, 489, A-10 cost-volume-profit (CVP) chart, 176, 185 high-low method, 172 equity analysis, 440 Formats scatter diagrams. See Scatter diagrams step-wise and curvilinear costs, 170 noncurrent liabilities, 439 financial statement formats line graph, 482 organizational responsibility chart, 334 proving cash balances, 428, 433, 441 comparative format, 478\u2013481 overhead variances, 291, 292 trend percent analysis, 482 sources and uses of cash, 441\u2013442 contribution format, 216, 217 Greenberg, Jared, 363 Gross profit three-stage analysis of, 439 statement of cash flows, 427, 453 decline in, 484\u2013485 Growth graphical analysis of, 486 for flexible budget reports, 281 balanced scorecard and, 9 Growth companies, 480 monitoring, 480\u2013481 Form 10-K, A-1 Guidelines (rules of thumb), 478 preparing statement of cash flows, 426, 439 Form 10-KSB, A-1 Harley-Davidson, 339, 436 Harris, Jim, 170 Finished goods, 24, 88, 96, 99 Fraud, 9, 26, 54 Health care industry, 87, 139, 294 Heinz, 86 Finished goods inventory, 14, 15, 88, 99\u2013100, 110 Free cash flows, 442, 495n Hendrix, Jimi, 277 Hershey, 86 Finished Goods Inventory account, 50, 63 Full costing. See Absorption costing Heterogeneity of products, 49 Hewlett-Packard, 323 First-in, first-out method. See FIFO method of Full disclosure principle, 427 Hierarchical levels of management, 11, 12 High-low method, 171, 172\u2013173, 187 process costing Function Historical costs First-stage assignment of overhead costs, 136\u2013140 classification of costs by, 11\u201312 caution in use of, 367 The Hockey Company, 249 First Tennessee National Corporation, 141 Future value(s) Honda, 8, 181 Hood River Juice Company, 85 Fiscal year, A-8 calculations in adjusting for inflation, 399, B-10 Horizontal analysis, 478\u2013483, 502 Fixed budget, 279, 301 concepts, B-1, B-7 comparative financial statements, 478\u2013481 balance sheets, 479\u2013481, 497 Fixed budget performance report, 279 of ordinary annuity, B-6\u2013B-7, B-10, B-11 computation of dollar and percent changes, 479, 479n Fixed cost(s), 10, 13 of single amount, B-3\u2013B-4, B-7, B-10 income statements, 481 capacity to pay fixed interest charges, 491 See also Time value of money trend analysis, 481\u2013483 HRJCO.com, 85 in computing multiproduct break-even point, 182 Future value tables Human behavior, 239 Hurdle rate, 332, 401, 406 constant, 177 future value of annuity of 1 table, B-6, Hybrid costing system, 101\u2013102, 110 cost behavior, 168\u2013169 B-7, B-11 Ideal standard, 284 IFRS (International Financial Reporting Standards) Apago PDF Enhancerestimating for high-low method, 172\u2013173 future value of 1 table, B-4, B-6, B-7, B-10 of IASB, 453 IMA (Institute of Management Accountants), 6, 9 overhead costs. See Fixed overhead costs Immaterial variances, 296 Impairment of asset value, A-9 plotting for CVP chart, 176 GAAP (generally accepted accounting principles), Income relevant range for, 169, 170 6, 142, 213 accumulated other comprehensive income, 501 comprehensive, 501, A-16 variable costs distinguished, 280\u2013281 Gains (losses) computed from sales and costs, 179\u2013180, 185 effect of automation on, 181, 184 Fixed overhead cost deferred in (ending) from disposition of segments, 500 inventory, 213 extraordinary gains and losses, 499\u2013500 Fixed overhead cost recognized from (beginning) gain on retirement of debt, 433, 436, 452 inventory, 213 infrequent, 499 Fixed overhead costs, 19 loss on sale of assets, 452 behavior of, 216 nonoperating items, 435\u2013436 treatment under variable v. absorption costing, reporting other expenses, gains, and losses, 452 207, 208, 214\u2013215 unusual or infrequent, 499 converting variable costing reports to Gap, Inc., 371, 436 absorption costing, 213, 220 Gardner, David, 475 if units produced are less than units sold, Gardner, Tom, 475 211, 212 Garza, Mary E., 425 if units produced exceed units sold, 210, General accounting system, 48 211, 221 General and administrative expense budget, Fixed overhead cost variance, 289, 290\u2013292, 243, 246\u2013247, 255 292\u2013293 General ledger, 428\u2013429 Flexibility, 101, 102 Generally accepted accounting principles (GAAP), Flexibility of practice, 6 6, 142, 213 Flexible budget(s), 278\u2013283, 301, 302 General Motors, 8 budgetary process, 278\u2013280 General-purpose financial statements, 477 budgetary control and reporting, 278\u2013279 Gentilcore, Vince, 277 budget reports for evaluation, 280 Geographic information, A-18 fixed budget performance report, 279 Gift cards, A-11 budget reports, 278, 280\u2013283 Gleason, Julie, 129 flexible budget performance report, 282, Gleason, Tom, 129 283, 302 Global economy, 8 preparation of, 279, 280\u2013282 Global issues purpose of, 280 balanced scorecard, 332 defined, 280 domestic v. international cash flows, 440 flexible overhead budget, 289 in transfer pricing, 339 Flexible budget performance report, 282, 283, Goals in budgets, 239 299, 302 The Gold Standards, 8","IND-6 Index Income\u2014Cont. for nonoperating items, 435\u2013436 Investment center(s), 323 favorable income variance, 282 investment center residual income, 331\u2013332 for operating items not providing or using evaluating performance of, 331\u2013333 manager bonuses linked to, 213, 214, 217, 221 net income. See Net income cash, 435 with financial measures, 331\u2013332 reporting under absorption costing, 213\u2013214, 221 demonstration of, 444\u2013445 investment center return on total assets, 331 under GAAP, 213 under variable costing, 214, 215, 221 direct method compared, 429, 430\u2013431, 433 with nonfinancial measures, 332\u2013333 sustainable. See Sustainable income target income, 179\u2013180, 183, 185, 187 summary of adjustments, 429, 433, 436 Investment center residual income, 331\u2013332 under variable v. absorption costing demonstration of, 219\u2013220 Industry benchmarks, 478 Investment center return on total assets, 331, 336 if units produced are less than units sold, 211, 212 Industry comparisons, 483 Investment turnover, 336 if units produced equal units sold, 209 if units produced exceed units sold, 210, Industry Norms & K ey Business Ratios IRR. See Internal rate of return 211, 221 income reporting, 213\u2013214, 215, 221 (Dun & Bradstreet), 487 IRS (Internal Revenue Service), 217 reporting issues, 212, 213 Inescapable expenses, 371 Income statement(s) budgeted income statement, 250, 256 Inferences in analysis reports, 496 Jibbitz, 237 common-size, 484\u2013485 comparative, 481, 497\u2013498 Inflation, 399, B-10 Jibbitz.com, 237 consolidated examples of, A-5, A-21, A-26, A-31 Informal communications about budgets, 239 Jiffy Lube, 290 in contribution format, 216 contribution margin income statement, 175, 209 Information storage, 6 JIT (just-in-time) inventory systems, 245 cost assignment and, 221 absorption costing, 208, 209, 210, 211, Information technology budgets, 392 JIT (just-in-time) manufacturing, 8, 89, 108, 214, 220 variable costing, 208, 209, 210, 211, 215, 220 Infrequent gains and losses, 499 111, 212 cost flows to, 20 departmental contribution to overhead shown in, Innovation\/learning Job(s), 48, 49 329n, 330 effects of absorption costing, 208, 209, 210, balanced scorecard for, 332, 333 Job cost sheets, 50, 51, 53, 64 211, 214, 220 form and content of, 502 Inspection time, 21 factory overhead recorded, 55 as information source for preparing statement of cash flows, 430 Institute of Management Accountants (IMA), labor costs, 54 manufacturer\u2019s income statement, 15\u201317, 25 different from merchandiser\u2019s statement, 23, 6, 9 materials requisitioned, 53 24, 26 direct labor, 16 Insurance expense, 327, 328\u2013329 summary, 57 direct materials, 16 factory overhead, 16 Intangible assets, A-9 Job lot, 49 prime and conversion costs, 16 reporting performance in, 16, 17 Intercompany comparisons, 486 Job order cost accounting, 46\u201364 variable costing income statement, 175 Interest cost accounting system, 48 Income taxes note regarding, A-10, A-17 capacity to pay fixed interest charges, 491 demonstration problem, 61\u201364 operating cash payments for, 428, 451\u2013452 payable, 249, 433, 434\u2013435 future values. See Future value(s); Time value for entrepreneurs, 47 prediction of expense, 246 of money ethical issue with allocation rates, 56, 64 Income variance, 282 Incremental costs, 366 present values. See Present value(s); Time value events in job costing, 49, 50, 62 Incremental overhead rate, 367 Incremental revenue, 365, 369 of money job cost sheet, 50, 51 Index numbers, 481, 482 Index number trend analysis, 481\u2013483 Interest expense, 246 job order cost flows and reports, 51\u201359 Indirect costs, 10, 11, 89, 92, 110 Indirect expenses, 324, 343 Interest payable, 433, 434\u2013435 labor cost flows and documents, 51, 53\u201354 Indirect labor, 16, 88, 91, 131 Indirect labor costs, 16 Interest payments, 426, 428, 451\u2013452, 491 materials cost flows and documents, 51\u201353 Indirect materials, 13\u201314, 53, 88, 90 Indirect method of reporting operating cash Apago PDF EnhancerInterest revenue, 426, A-16 overhead cost flows and documents, 51, 54\u201356 flows, 430, 431\u2013436, 453 Internal auditing, 6 summary of, 56\u201358 adjustments to net income, 431 Internal business processes, 9 job order production, 48\u201349 analysis of changes, 446 for changes in current assets and liabilities, Internal control(s), 142, 143, 147\u2013148 overapplied overhead, 60 432\u2013435 Internal control systems, 9 pricing for services, 60, 61, 64, 65 Internal processes, 332, 333 underapplied overhead, 57, 59 Internal rate of return (IRR), 396, 398, 399\u2013401, Job order cost accounting system, 50, 89, 101, 110 406, B-11 Job order operations, 87 compared with other methods, 401, 402 Job order production, 48\u201349, 64 computing with Excel\u00ae, 405\u2013406 Joint costs, 341\u2013342, 343 demonstration of, 403, 405 Joint relation between sales and expenses, 483, 502 with uneven cash flows, 400, B-11 Journal entries use of, 401 in job order costing, 56, 58, 63 Internal Revenue Service (IRS), 217 summary entries, 90 Internal users of accounting information, 5, 6, Julicher, Hank, 47 424, 476 JungleJim.com, 423 International Financial Reporting Standards (IFRS) Jungle Jim\u2019s International Market, 423 of IASB, 453 Just-in-time (JIT) inventory systems, 245 Intracompany benchmarks, 478 Just-in-time (JIT) manufacturing, 8 Inventory(ies), 23, 24, 26, 254, 488 process operations and, 89, 108, 111 Inventory turnover, 323 variable v. absorption costing and, 212 Inventory turnover ratio, 489, 495, 498 Investing activities, 426, 453 Kellogg, 86 assets and, 426, 438 Kernel Season\u2019s, 3 cash flows from, 453\u2013454 KernelSeasons.com, 3 analysis of changes in, 446 Key factors in analysis reports, 496 noncurrent asset analysis, 437\u2013438 Key performance indicators, 332, 333 other asset transactions, 438 sources and uses of cash, 441\u2013442 Labor three-stage analysis of, 437\u2013438 cost flows and documents, 51, 54\u201356, 62, 64 graphical analysis of, 486 direct labor monitoring, 480\u2013481 in cost of goods manufactured, 24 noncash investing activities, 427, 438, 453 costs, 16, 18, 19, 132 transactions affecting long-term assets, 426 direct labor budget, 258 Investment(s) direct labor hours (DLH), 58, 65, 132, 133 evaluating using return on total assets, 333, 343 flow of, 88, 91, 110 note regarding, A-10, A-13 labor rate variance, 295","Index IND-7 indirect labor, 16 Long-term liabilities reporting manufacturing activities, 13\u201320, 26 demonstration problem, 22\u201324 cost flows, 88, 91 analysis of, 428, 432, 433, 439 flow of activities, 17\u201318 manufacturer\u2019s balance sheet, 13\u201314, 23, 26 overhead cost allocation, 131 cash flows from financing activities, 439 manufacturer\u2019s income statement. See Manufacturer\u2019s income statement materials and labor standards, 283\u2013284 note regarding, A-10 manufacturing statement, 18\u201320 quantity and price variations in, 283\u2013284 ratio analysis, 491, 495, 499 users of accounting information, 5, 6 Managerial decisions, 7, 375 Labor contract negotiations, 441, 454 transactions affecting, 426 about capital budgeting. See Capital budgeting Labor costs Long-term planning, 4 to accept special orders, 215\u2013216 effects of distorted product costs on, 132, 134 differences in equivalent units, 93\u201394 Long-term strategic plans, 238 qualitative decision factors, 372 relevant costs and, 364\u2013365, 366, 369 direct labor, 16, 96 Lottery winners, B-1, B-5 role of managerial accounting in, 4 scenarios for, 365\u2013372 flow of, 51, 54\u201356, 62, 64 additional business, 365\u2013367, 372 direct labor, 88, 91, 110 Machine hours (MH), 92, 133 demonstration problems, 373\u2013375 make or buy, 367, 372 indirect labor, 88, 91 Macy\u2019s, 424 qualitative decision factors, 372 sales mix selection, 369\u2013370 in job order costing, 51, 53\u201354 Make or buy decision, 367, 372, 373\u2013375 scrap or rework, 368 segment elimination, 371 in process cost accounting system, 88, 91 Malcolm Baldrige National Quality Award sell or process, 369 steps in decision making, 364\u2013365 Labor cost variances, 302 (MBNQA), 8 uncertainty in, 143 use of CVP analysis in. See Cost-volume-profit demonstration of, 300 Management (CVP) analysis investigating causes of, 288, 302 activity-based management, 142, 323 Manufacturers, 15 rate and efficiency variance, 287\u2013288 budgeting as tool of, 239 budgeting, 259 manufacturing budgets, 244, 257\u2013258 Labor hours, 291 hierarchical levels of, 11, 12 operating budgets, 242 production budgets, 244, 245, 247 Labor operations, 283 influence on budgets, 242 depreciation as product cost for, 16 Labor rate variances, 287\u2013288, 295 levels of, 216 job order manufacturing. See Job order cost Labor unions, 441, 454, 476, 500 Management accounting. See Managerial accounting Manufacturer\u2019s balance sheet Land, 427 accounting different from merchandiser, 23, 26 Lean business model, 7\u20138, 26, 101 Management by exception, 294, 301 finished goods inventory, 14 goods in process inventory, 14 Lean manufacturing, 8 Management Discussion and Analysis (MD&A), raw materials inventory, 13\u201314 Manufacturer\u2019s income statement, 15\u201317, 25 Lean practices, 7\u20138, 212 477, A-1 different from merchandiser\u2019s statement, 23, Learning Management\u2019s report on financial statements and 24, 26 direct labor, 16 balanced scorecard and, 9 on internal controls, A-1 direct materials, 16 factory overhead, 16 Leases, A-9, A-16\u2013A-17 Manager(s) prime and conversion costs, 16 reporting performance in, 16, 17 Least-squares regression department managers, 91, 98, 108 Manufacturing activities, 138, 147 Manufacturing budgets, 244, 257\u2013258, 259 measurement of past behavior, 171, 173, 186, 187 division managers, 341 Manufacturing margin, 210 Manufacturing statement, 18\u201320, 26 prepared using Excel\u00ae, 173, 186 evaluating performance of, 322\u2013323 demonstration problem, 24\u201325 direct labor costs, 18, 19 Legal issues, 499 middle- and lower-level managers, 7 direct materials computations, 18 job order costing, 64 Lenders (creditors), 425 in service companies, 13 product costs in, 11 Marginal costing. See Variable costing Lending, 488, 492, 502 Apago PDF Enhancersummaries of reports to top-level Margin of safety Letter to shareholders, A-1 managers, 335 in CVP analysis, 180 Marketable securities. See Short-term investments Liabilities Manager bonuses Market-based transfer price, 340 Market prices, 341 current, adjustments for changes in, 432\u2013435 effect on sales forecasts, 244 Market prospects, 477 Market prospects ratios, 495 accounts payable, 433, 434 as ethical issue, 215, 217, 221 dividend yield ratio, 494, 495 price-earnings ratio, 493\u2013494, 495 income taxes payable, 433, 434\u2013435 linked to income, 213, 214, 217, 221 Markup, 372 Martin, Christian F., 277 interest payable, 433, 434\u2013435 tied to return on investment, 336, 343 MartinGuitar.com, 277 long-term Managerial accounting, 2\u201326 analysis of, 428, 432, 433, 439 allocation of costs. See Cost allocation cash flows from financing activities, 439 basics of, 4\u201310, 26 note regarding, A-10 business environment and, 7\u20139 ratio analysis, 491, 495, 499 fraud and ethics, 9, 26 transactions affecting, 426 managerial decision making, 7 secured liabilities, 491 nature of, 5\u20137 Linear costs. See Variable cost(s) purposes, 4\u20135 Linear programming, 370 budgeting. See Budgeting; Capital budgeting; Line graph, 482 Flexible budget(s) Link Wood Products, 323 cost-volume-profit analysis. See Cost-volume- Liquidity, 477, 487 profit (CVP) analysis Liquidity and efficiency ratios, 487\u2013490, 495 cycle efficiency, 21, 26 accounts receivable turnover, 489, 495, 498 cycle time, 20\u201321, 26 acid-test ratio, 488\u2013489, 495, 498 defined, 4 days\u2019 cash expense coverage ratio, 495n demonstration problems, 21\u201325 days\u2019 sales in inventory, 490, 495 cost behavior and classification, 21\u201322 days\u2019 sales uncollected, 489\u2013490, 495, 498 manufacturing statement, 24\u201325 inventory turnover, 489, 495, 498 reporting, 22\u201324 total asset turnover, 490, 492, 495, 499 ethical issues in, 7, 26 List of directors and officers in annual job order cost accounting. See Job order cost report, A-1 accounting L.L. Bean, 86 managerial cost concepts, 10\u201313 Loans cost classifications, 10\u201312 repayment of, 249 identification of classifications, 12, 13 Long-lived assets, A-9 for service companies, 12\u201313 Long-range operating budgets, 242 performance evaluation. See Performance Long-term assets, 426 evaluation Long-term investments process cost accounting. See Process cost note regarding, A-13 accounting","IND-8 Index Martin Guitar Company, 277 Motorola, 323 Notes to financial statements Master budgets, 240\u2013251, 258, 259 Move time, 21 in annual report, A-1 Multiple departmental overhead rates, 136, examples of, A-8\u2013A-18 capital expenditures budget, 247, 248 noncash investing and financing, 438 components of, 240\u2013243 146\u2013147 financial budgets, 247\u2013251 Multiproduct break-even point, 181\u2013183, 187 NPV. See Net present value Murto, Bill, 170 NYSE (New York Stock Exchange), 493 budgeted balance sheet, 250, 250n, 251, 256 budgeted income statement, 250, 256 National Hockey League (NHL), 249 1-800-GOT-JUNK, 391 cash budget, 243, 244, 246, 247, 248\u2013249 components of, 242 Negative values, 479 1-800gotjunk.com, 391 preparation of, 243 operating budgets, 244\u2013247 Negotiated transfer price, 341 100% quality inspection, 102, 110\u2013111 general and administrative expense budget, Net cash flows On-time deliveries, 323 243, 246\u2013247 merchandise purchases budget, 243, cumulative total of, 394 Operating activities, 425\u2013426, 453 245\u2013246, 254 investments expected to produce, 393 Operating budgets, 244\u2013247, 259 sales budget, 244 selling expense budget, 246 net present value method, 397 components of, 242 Materiality of variances, 296 Materiality principal, 14 present value of, 402 general and administrative expense budget, 243, Materials activity flow of, 17, 18 Net cash inflow, 425 246\u2013247 Materials and labor standards, 283\u2013284 Materials consumption report, 90 Net cash outflow, 425 merchandise purchases budget, 245\u2013246 Materials costs cost flows and documents, 51\u201353, 62, 64 Net cost of goods manufactured, 19 sales budget, 244 differences in equivalent units, 93\u201394 direct materials Net income selling expense budget, 246 computing cost per equivalent unit for, 96 flow of, 88, 90, 110 adjustments to, 431 Operating cash flows, 430\u2013436 incremental costs, 366 flow of indirect materials, 88, 90 analysis of changes, 446 net income contrasted, 436 in process cost accounting system, 88, 90 Materials cost variances, 286\u2013287, 300, 302 for changes in current assets and liabilities, payments, 432, 448, 449\u2013452 Materials ledger cards, 51, 52 Materials requisitions, 52, 53, 55, 56, 90 432\u2013435 receipts, 432, 448 MBNQA. See Malcolm Baldrige National Quality Award for nonoperating items, 435\u2013436 reporting directly. See Direct method of McCartney, Paul, 277 MD&A (management discussion and analysis), for operating items not providing or using reporting operating cash flows 477, A-1 Median values, 479, 479n cash, 435 reporting indirectly. See Indirect method of Medium-term strategic plans, 238 Merchandise, 248\u2013249, 449\u2013450 computed using accrual accounting, 431 reporting operating cash flows Merchandise inventory(ies), 15, 433\u2013434, A-8 Merchandise purchases budget, 245\u2013246 operating cash flows contrasted, 436 sources and uses of cash, 441\u2013442 demonstration of, 254 just-in-time inventory systems and, 245 Net interest income, A-16 See also Statement of cash flows preparation of, 243, 245\u2013246 safety stock and, 245 Net present value (NPV), 393, 396, 397\u2013399, 406 Operating cash flow to sales ratio, 442 Merchandisers budgeting for, 244 compared with other methods, 401, 402 Operating cash payments merchandise purchases budget, 243, computing with Excel\u00ae, 405\u2013406 reporting, 432, 448, 449\u2013452 245\u2013246, 254 operating budgets, 242 decision rule for, 397 for interest and income taxes, 428, 451\u2013452 financial statements of, 23, 24, 26 reconstruction analysis of purchases by, 449\u2013450 demonstration of, 403, 404, 405 for merchandise, 449\u2013450 Mergers and acquisitions, 243 MH (machine hours), 92, 133 Apago PDF Enhancerinflation and, 399, B-10 other expenses, gains, and losses, 452 Microsoft Excel\u00ae, 171, 186 Minimum cash balance negative, 399, 405 for wages and operating expenses, 432, maintaining, 249 Minority interest, 493 salvage value and accelerated depression, 450\u2013451, 451n Misclassification of cash flows, 426 Mixed costs, 10, 169\u2013170, 281 393, 399 Operating cash receipts, 429, 432, 448, 449 Moes.com, 167 Moe\u2019s Southwest Grill, 167 simplified computations, 398, 398n, B-11 Operating efficiency Monthly budgets, 240, 241 Moody\u2019s, 476, 478 with uneven cash flows, 398 components of, 492, 493 Most likely cost estimates, 181 The Motley Fool, 475 use in capital investment decisions, 399 Operating expenses, 432, 450\u2013451, 451n Net working capital, 487 Operating leverage, 184 New York Stock Exchange (NYSE), 493 Opportunity costs, 11, 12, 27, 365 NHL (National Hockey League), 249 of additional business decision, 367 Nike, 49, 442, 496 of scrap or rework decision, 368 Nissan, 8, 341 in transfer pricing, 340 No-free-lunch adage, 168 Optimistic cost estimates, 181 Noncash accounts, 429\u2013430 Ordinary annuity Noncash charges, 431 future value of, B-6\u2013B-7, B-10, B-11 Noncash credits, 431 present value of, B-2, B-5, B-7, B-10, B-11 Noncash expenses, 435 OregonIceCream.com, 129 Noncash investing and financing activities, 427, Oregon Ice Cream Company, 129 438, 453 Organizational responsibility chart, 334 Noncash revenues, 435 Out-of-pocket costs, 11, 365 Non-controllable costs, 11 Output measures, 177 Noncurrent assets, 437\u2013438 Outsourcing of payroll activities, 368 Noncurrent liabilities. See Long-term liabilities Overapplied overhead, 60, 64, 92 Nonfinancial factors Overhead in evaluating investment, 400 actual v. allocated, 58 in make or buy decision, 367 allocation of overhead costs. See Overhead in transfer pricing, 341 cost(s) Nonfinancial information, 5, 364 computing cost per equivalent unit for, 96 Nonfinancial performance measures, 323 computing EUP for, 96 Nonlinear costs, 170 cost flows and documents, 51, 54\u201356, 62, 64 Nonoperating items, 435\u2013436 depreciation, rent, and utilities as, 91 Non-value-added time, 21 differences in equivalent units, 93\u201394 Notes flow of costs, 88, 91\u201392, 110 short-term, 489 overapplied, 59, 92 Notes payable, 428, 432, 433, 439 in process cost accounting system, 88, 91\u201392 Notes receivable, 426 underapplied, 57, 59","Index IND-9 Overhead cost(s), 11 computing with uneven cash flows, 394 Pledged assets, 491 Point-of-sale systems, 323 allocation of, 50, 56 demonstration of, 403, 404 Practical standard, 284 Prairie Sticks Bat Company, 363 accounting information in, 132 factors in using, 394\u2013395 PrairieSticks.com, 363 Precision Lube, 290 actual overhead and, 58 Payless, 13 Predetermined overhead rate, 55, 56, 288, 289 Predicted costs, 4 advantages of activity-based costing in, 142 Payout ratio, 495n Prepaid expenses (deferrals), 433, 434 Present value(s) allocation base for factory overhead, 55 Payroll activities of annuities allocation rate formula, 56 outsourcing of, 368 annuity of 1, 400 ordinary annuity, B-2, B-5, B-7, B-10, B-11 allocation rates, 56, 64 Payroll costs, 88, 91 concepts, 396, B-1, B-7 for custom products, 131 PBP. See Payback period of net cash flows, 402 of single amount, B-1\u2013B-3, B-7, B-10 factory overhead costs, 50, 56 Pecking order, 11, 12 See also Time value of money Present value factor, 400 indirect labor, 131 Penn Inc., 86, 332 Present value of 1 factors, 397 Present value tables, 397 machine hours (MH) in, 133 pennracquet.com\/factory.html, 86 present value of annuity of 1 table, B-5, traceability of costs in, 133 Pepsi Bottling, 90 B-7, B-11 present value of 1 table, B-3, B-5, B-7, B-10 two-stage method, 325, 343 PepsiCo, 478 Price-earnings (PE) ratio, 493\u2013494, 495 Price setting, 215\u2013216, 372\u2013373 using direct labor hours, 58, 65, 132, 133 PE (price-earnings) ratio, 493\u2013494, 495 Price variance, 282 computing, 285\u2013286 complexity of, 134\u2013135, 136 Percent changes materials variances, 286\u2013287 Prime costs, 16 computation of per-unit costs, 141 computation of, 479, 479n Prince Sports Inc., 339 Process(es), 86 increase in, 132 Performance evaluation, 323 Process cost accounting, 48, 84\u2013110 demonstration problem, 102\u2013105 incremental, 366, 367 budget reports used for, 280 equivalent units of production, 88, 93\u201394 shown in manufacturing statement, 19 cost allocation for differences for materials, labor, and overhead, 93\u201394 tracing to cost pools, 131, 138\u2013139 demonstration problem, 337\u2013339 goods in process, 93 Overhead cost assignment, 130\u2013136 departmental evaluation, 322\u2013323 FIFO method, 105\u2013109 activity-based rates and costing method, investment center performance, 331\u2013333 assigning and reconciling costs, 106, 107\u2013108, 109 135\u2013136, 147 with financial measures, 331\u2013332 computing cost per equivalent unit, 105, 107 cost flows under, 135, 136, 147 investment center return on total assets, 331 computing equivalent units of production, differences from multiple departmental with nonfinancial measures, 332\u2013333 106\u2013107, 108 determining physical flow of units, 105\u2013106 rates, 136 manager evaluation, 98, 108 hybrid costing system, 101\u2013102 illustration of. See Process costing illustration departmental overhead rate method, 130, See also Responsibility accounting process cost accounting system, 89\u201393 direct and indirect costs, 89 133\u2013135, 147 Performance reporting, 16, 17, 208\u2013213 factory overhead costs, 88, 91\u201392 labor costs, 88, 91 advantages and disadvantages of, 134\u2013135 converting variable costing reports to absorption materials costs, 88, 90 process operations, 86\u201388 application of, 133\u2013134 costing, 213, 220 effect of lean business model on, 101 illustration of, 87\u201388, 100 cost flows under, 133, 147 if units produced equal units sold, 209 job order operations compared, 87 organization of, 87 demonstration of, 146\u2013147 if units produced exceed units sold, 208, 210, Process cost accounting system, 89 direct and indirect costs, 89 summary of, 141 211, 221 factory overhead costs, 88, 91\u201392 labor costs, 88, 91 Apago PDF Enhancerplantwide overhead rate method, 130, 147 materials costs, 88, 90 if units produced less than units sold, 211, 212 Process cost allocation, 92, 108, 109 Process costing illustration, 94\u2013101, 110 advantages and disadvantages of, 132 reports issued assigning and reconciling costs, 96\u201399 cost of units completed and transferred, 97 application of, 131\u2013132 fixed budget performance report, 279 cost of units for ending goods in process, 97 process cost summary, 95, 96, 97, 98\u201399, cash flows under, 131 in responsibility accounting, 334\u2013335 108, 109, 110 Overhead cost control, 142 for service companies, 294 computing cost per equivalent unit, 96 computing equivalent units of production, 95\u201396 Overhead cost pool, 131, 144 variances identified in, 285 Overhead cost variance(s), 290, 302 summary of, 212 demonstration of, 300\u2013301 Period costs, 11, 12, 16, 26 fixed, 289, 290\u2013292, 292\u2013293 Periodic inventory system, 48 variable, 290\u2013292 Perpetual inventory system, 48, 55\u201356 fixed overhead cost variances, 289, 292 Personalized products, 49 overhead variance reports, 292\u2013293 Per unit costs, 215 See also Variance(s) Per-unit overhead costs, 132 Overhead cost variance analysis, 290\u2013293 Pessimistic cost estimates, 181 controllable overhead and volume variances, Petroleum refining, 86 290\u2013292 Pfizer, 86 overhead variance reports, 292\u2013293 Physical basis of allocating joint costs, 341, 342 variable and fixed variances, 290 Physical flow reconciliation, 95, 103, 105\u2013106 variable overhead cost variances, 292 Planning, 4\u20135 Overhead standards and variances, 288\u2013293 long-term strategic plans, 238 overhead cost variance analysis, 290\u2013293 use of CVP analysis in. See Cost-volume-profit controllable overhead and volume variances, (CVP) analysis 290\u2013292 Plant assets overhead variance reports, 292\u2013293 loss on sale of, 433, 436, 452 variable and fixed variances, 290 plant asset age, 495n variable overhead cost variances, 292 purchase or disposal of, 247 setting standards, 288\u2013290 reconstruction analysis of, 428, 432, 433, Overhead variance reports, 292\u2013293 437\u2013438 Overpriced stocks, 494 total asset turnover ratio, 490, 492, 495, 499 useful life of, 495n Paging Network, 181 Plantwide overhead rate method, 130 Participatory budgeting, 239, 240, 244 advantages and disadvantages of, 132, 147 Past performance, 238, 239, 280 application of, 131\u2013132 Payback period (PBP), 393\u2013395, 406 cash flows under, 131 compared with other methods, 401, 402 demonstration of, 145\u2013147 computing with even cash flows, 393\u2013394 summary of, 141","IND-10 Index Process costing illustration\u2014Cont. consolidated statements of income, A-26 Reconstructed entries, 437\u2013438, 439 determining physical flow of units, 95 summary of cost flows, 100 consolidated statements of stockholders\u2019 Reconstruction analysis transfers to finished goods and cost of goods sold, 88, 99\u2013100, 110 equity and comprehensive income, A-27 in preparing statement of cash flows, 428, Process cost summary, 95, 96, 97, 98\u201399, 110 Rate variance (labor), 287\u2013288 432, 433 equivalent units of production shown in, 108, 109 use in preparing financial statements, 98 Rath, Todd, 321 common stock transactions, 440 Process improvement, 142 Rath, Tom, 321 merchandise purchases, 449\u2013450 Process operations, 86\u201388, 110 Ratio(s), 486\u2013487 notes payable transactions, 439 effects of lean business model on, 101 illustration of, 87\u201388, 100 Ratio analysis, 478, 486\u2013495, 502 plant asset transactions, 428, 432, 433, job order operations compared, 87 organization of, 87 accounts receivable turnover ratio, 489, 495, 498 437\u2013438 Process time, 21 Procter & Gamble, 86, 323 acid-test ratio, 488\u2013489, 495, 498 retained earnings transactions, 440 Product(s), 134, 207 Product cost information, 130 cash coverage of debt ratio, 442, 495n Recording transactions Product costs, 11, 12, 18, 26, 130 Production activity cash coverage of growth ratio, 442, 495n in job order costing, 53, 55 flow of, 17\u201318 Production budgets, 243, 244, 245, 247, 259 cash flow on total assets ratio, 442, 453, 495n Redhook Ale, 287 Production capacity, 370 Production costs, 209 contribution margin ratio, 174, 175, 180, 185 Regulatory agencies, 491 Production departments, 87 Production margin, 210 credit risk ratio, 495n Relevance Production planning, 208, 213\u2013215 Production report, 95, 96, 97, 98\u201399 current ratio, 480, 487\u2013488, 495, 498, 502 classification of costs by, 11, 12 Production scheduling, 49 Production volume, 169 days\u2019 cash expense coverage, 495n Relevant benefits, 365 Product level activities, 137 Product level costs, 139 days\u2019 sales in inventory ratio, 490, 495 Relevant costs, 364\u2013365, 366, 369, 375 Product mix, 182\u2013183 Product price days\u2019 sales in receivables, 489\u2013490, 495, 498 Relevant range for fixed costs, 169, 170 setting, 372\u2013373 Profitability, 477, 492 days\u2019 sales uncollected, 489\u2013490, 495, 498 Relevant range of operations, 177 Profitability index, 399 Profitability ratios, 492\u2013493, 495 debt ratio, 491, 495, 499 Rent expense profit margin, 492, 495, 499 return on common stockholders\u2019 equity, 493, debt-to-equity ratio, 491, 495, 499 allocation of indirect expenses, 325, 327\u2013328 495, 499 dividend yield, 494, 495 as factory overhead item, 91 return on total assets, 333, 343, 492\u2013493, 495, 499 Profit centers, 323, 325, 329\u2013330 earnings per share, 500, A-15 as product cost for manufacturers, 16 Profit margin, 336 Profit margin ratio, 492, 495, 499 equity ratio, 491, 495 Reportable segments, 485 Progress reports, 278 Property and equipment, A-8\u2013A-9 foreign currency translation and, 489 Report cards, 278 Property taxes, 169 Publicly-traded companies, 239 inventory ratios Reporting Public utilities, 476 Purchasing department, 284, 287 days\u2019 sales in inventory ratio, 490, 495 FASB on, 426 Qualitative decision factors, 372 inventory turnover ratio, 489, 495, 498 financial reporting, 477 Quality, 287 Quantity discounts, 297, 302 liquidity and efficiency ratios, 487\u2013490, 495 limited under variable costing, 217 Quantity of input, 282 Quantity of material, 283 accounts receivable turnover, 489, 495, 498 manufacturing activities, 13\u201320, 26 Quantity variance, 282 acid-test ratio, 488\u2013489, 495, 498 demonstration problem, 22\u201324 computing, 285\u2013286 materials variances, 286\u2013287 days\u2019 cash expense coverage ratio, 495n flow of activities, 17\u201318 Quarterly budgets, 240, 241 Quick ratio. See Acid-test ratio days\u2019 sales in inventory, 490, 495 manufacturer\u2019s balance sheet, 13\u201314, 23, 26 RadioShack Apago PDF Enhancerdays\u2019 sales uncollected, 489\u2013490, 495, 498 manufacturer\u2019s income statement, 15\u201317 analysis of financial statements, 476 graphical analysis, 482, 486 inventory turnover, 489, 495, 498 manufacturing statement, 18\u201320 ratio analysis, 487\u2013495 financial statements of, A-24\u2013A-28 total asset turnover, 490, 492, 495, 499 for merchandising operations, 449\u2013450 consolidated balance sheets, A-25 consolidated statements of cash flows, A-28 market prospects ratios, 495 operating cash payments, 432, 448, 449\u2013452 dividend yield ratio, 494, 495 for interest and income taxes, 428, 451\u2013452 price-earnings ratio, 493\u2013494, 495 for merchandise, 449\u2013450 operating cash flow to sales ratio, 442 other expenses, gains, and losses, 452 price-earnings ratio, 493\u2013494, 495 for wages and operating expenses, 432, profitability ratios, 492\u2013493, 495 450\u2013451, 451n profit margin, 492, 495, 499 operating cash receipts, 429, 432, 448, 449 return on common stockholders\u2019 equity, 493, performance reporting, 208\u2013213 495, 499 converting variable costing reports to return on total assets, 333, 343, 492\u2013493, absorption costing, 213, 220 495, 499 if units produced equal units sold, 209 profit margin ratio, 492, 495, 499 if units produced exceed units sold, 208, 210, return on common stockholders\u2019 equity ratio, 211, 221 493, 495, 499 if units produced less than units sold, 211, 212 return on total assets ratio, 333, 343, 492\u2013493, summary of, 212 495, 499 quarterly or monthly budgets, 240, 241 solvency ratios, 491\u2013492, 495 reports issued debt ratio, 491, 495, 499 budget reports. See Budget reports debt-to-equity ratio, 491, 495, 499 departmental contribution reports, 329n, equity ratio, 491, 495 330, 343 times interest earned ratio, 491\u2013492, 495, 499 financial statement analysis reports, 496, 502 summary of ratios, 494, 495 in job order cost accounting. See Job order times interest earned ratio, 491\u2013492, 495, 499 cost accounting total asset turnover ratio, 490, 492, 495, 499 overhead variance reports, 292\u2013293 Raw materials, 49 performance reports, 285 Raw materials inventory, 13\u201314 physical flow reconciliation, 95 Raw Materials Inventory account, 90 summaries given to top-level managers, 335 \u201cReasonableness\u201d criterion, 483, 502 2006 Report to the Nation (ACFE), 9 Receivables Residual income, 332 accounts receivable, 432\u2013433, 499\u2013500 Resources, 142 notes receivable, 426 Responsibility accounting, 333\u2013336, 334n, 343 write-offs of, 499\u2013500 controllable v. direct costs, 334 Receiving reports, 51, 52 responsibility accounting system, 334\u2013335","Index IND-11 Responsibility accounting budgets, 334 Second-stage assignment of overhead costs, Spaly, Brian, 205 Special orders, 215\u2013216 Responsibility accounting performance report, 140\u2013141 Speedee Oil Change and Tune-Up, 290 Spending variance, 291 334\u2013335 Secured liabilities, 491 \u201cSplit-off point,\u201d 341 Spreadsheet(s) Responsibility accounting system, 322 Securities and Exchange Commission (SEC), A-1 analyzing \u201cwhat-if\u201d strategies, 170 Responsibility centers, 335 Segment elimination decision, 371 in computing NPV, 398 departmental expense allocation sheet, 326n, Retirement of debt, 433, 436, 452 Segment information, A-18 326\u2013329, 338 Retrospective application of change in accounting Selling, general, and administrative expenses departmental spreadsheet analysis, 323 in financial statement analysis, 480 principle, 501 (SG&A), A-12 in finding present value of annuity, B-5 in preparing budgeted balance sheet, 250n Return on average investment, 393, 395\u2013396 Selling costs, 142 preparing statement of cash flows, 445\u2013448, 454 Return on common stockholders\u2019 equity ratio, 493, Selling departments, 323 analysis of changes, 446\u2013448 indirect method spreadsheet, 432, 495, 499 Selling expense budget, 243, 246, 254 445\u2013446, 447 Return on investment, 331, 336, 343 Selling expenses, 366 use in CVP analysis, 170 use preparing least squares regression, 173, 186 Return on total assets ratio, 333, 343, 492\u2013493, Selling price per unit, 177 Sprinturf, 47 Sprinturf.com, 47 495, 499 Sell or process decision, 369 Sprock, Martin, 167 Stair-step costs, 170 Reuters.com\/finance, 487 Sensitivity analysis, 181 Standard cost(s), 283\u2013296, 301 cost variances, 284n, 284\u2013288 Revenue(s) Sequential processing, 87, 89 computation of, 285\u2013286 incremental revenue, 365, 369 Service companies materials and labor variances, 286\u2013288 variance analysis, 285 interest revenue, 426, A-16 activity-based costing in, 144\u2013147 extensions of, 294\u2013296 for control, 294 noncash revenues, 435 cost concepts for, 12\u201313 for services, 294 standard cost accounting system, 286, 287, Revenue centers, 323 current ratio of, 488 294\u2013296, 302 Revenue recognition, A-10\u2013A-11 executive education, 60 materials and labor standards Revised break-even point, 171, 175, 178, 181 expenses of identifying, 283\u2013284 setting, 284 Risk, 392, 394\u2013395, 396 as period costs, 12 overhead standards and variances, 288\u2013293 overhead cost variance analysis, 290\u2013293 Ritz-Carlton Hotel, 8 job order cost accounting for, 48 setting standards, 288\u2013290 Standard cost accounting system, 286, 287, 292, Robert Morris Associates, 487 process operations in, 86, 87 294\u2013296, 302 Standard cost card, 284 RockBottomGolf.com, 321 use of standard costs, 294 Standardization, 101, 102 Standard overhead cost rate, 289 Rolling budgets, 238, 240, 241 variable costing for, 216 StandardPoor.com, 477 Standard & Poor\u2019s, 476, 477, 478 Ryan, David, 85 Service departments Standard & Poor\u2019s Industry Surveys, 487 Standards for comparison (benchmarks), 478 allocating expenses of, 325, 326n, 326\u2013329 Starbucks, 436 Start-up businesses, 428, 454 Safety fixed costs, 169 Statement of cash flows, 422\u2013454 basics of, 453 as performance measure, 323 use of standard costs for, 294 classification of cash flows, 425\u2013426 format of, 427, 453 Safety stock, 245 Services importance of, 424\u2013425 measuring cash flows, 425 Salaries, 169, 246\u2013247, 249, 324\u2013325 make or buy decision, 368 noncash investing and financing, 427, 438, 453 purpose of, 424 Sale of plant assets pricing using job order costing, 60, 61, 64, 65 cash flows from financing activities, 439\u2013441 equity analysis, 440 loss on, 433, 436, 452 Apago PDF EnhancerSG&A (selling, general, and administrative noncurrent liabilities, 439 Sales expenses), A-12 proving cash balances, 428, 433, 441 three-stage analysis of, 439 computed for target income, 179\u2013180 Short selling, 494, 496 cash flows from investing activities noncurrent asset analysis, 437\u2013438 computing income from, 179 Short-term financial plans. See Budget(s) other asset transactions, 438 three-stage analysis of, 437 constant relation with cost of goods sold, 246 Short-term investments cash flows from operating activities. See flow of sales activity, 18 marketable equity securities, A-13 Operating cash flows free product with purchase, 168 in securities, 426 graphing in CVP chart, 176 Short-term loans, 248 joint relation with expenses, 483, 502 Short-term notes, 489 Sales budget, 239, 243, 244, 254 Short-term planning, 4\u20135 Sales forecasts, 244 Short-term strategic plans, 238 Sales incentives, A-11 Single plantwide overhead rate method. See Sales mix, 181, 370 Plantwide overhead rate method Sales mix selection decision, 369\u2013370 Six Flags, 143\u2013144 Sales price, 49 Ski resorts, 244 Sales price variance, 296\u2013297, 301\u2013302 Software, 429 Sales representatives, 169\u2013170 Solvency, 477 Sales volume, 177, 281\u2013282 Solvency ratios, 491\u2013492, 495 Sales volume variance, 296\u2013297, 302 debt ratio, 491, 495, 499 Salvage value of asset, 393, 396, 399 debt-to-equity ratio, 491, 495, 499 Sarbanes-Oxley Act of 2002 (SOX), 9 equity ratio, 491, 495 Scatter diagrams, 171, 180, 187 times interest earned ratio, 491\u2013492, 495, 499 changes in estimates, 178 Source documents, 50, 51 created with Excel\u00ae, 171, 186 Sources of cash, 441\u2013442 measurement of past behavior, 171\u2013172, 173 Sources of information for preparing statement of Schedule of cost of goods manufactured. See cash flows, 430, 432\u2013436, 449, 452 Manufacturing statement analysis of equity, 440 Schedule of manufacturing activities. See comparative balance sheets. See Comparative Manufacturing statement balance sheets Schmelzer, Rich, 237 financing activities, 426, 439 Schmelzer, Sheri, 237 investing activities, 437\u2013438 Scrap or rework decision, 368, 374, 375 notes payable transactions, 428, 432, 433, 439 Scudamore, Brian, 391 plant asset transactions, 428, 432, 433, 437\u2013438 Sears, Roebuck & Co., 322 reconstruction analysis. See Reconstruction Seasonal businesses, 244, 259 analysis SEC (Securities and Exchange Commission), A-1 Southwest Airlines, 12\u201313","IND-12 Index Statement of cash flows\u2014Cont. Technology Trend percents, 481, 482 consolidated examples of, A-7, A-23, A-28, A-33 automation, 86, 92, 181, 184 TSC (Toronto Sticks Company), 257 defined, 424 demonstration problem, 443\u2013445 bar-coding, 143 Two-stage cost allocation, 325, 343 for entrepreneurs, 423 noncash investing and financing activities, 427, information produced due to, 335 438, 453 adjustments for noncash expenses, 435 Telecom companies, 394 Unavoidable expenses, 371 analyzing noncash accounts, 429\u2013430 preparation of, 428\u2013430, 453 Temporary accounts, 54, 295\u2013296 Uncontrollable costs, 11, 216, 334 analyzing cash account, 428\u2013429 analyzing noncash accounts, 429\u2013430 Temporary investments. See Short-term Underapplied overhead, 57, 59, 64, 92 proving cash balances, 428, 433, 441 T-accounts used in, 433, 449 investments Uneven cash flows, 393 using spreadsheet. See Spreadsheet(s) sources of information for preparing, 430, Theme parks, 400 computing IRR with, 400 432\u2013436, 449, 452 analysis of equity, 440 Three-stage analysis, 437\u2013438, 439 computing NPV with, 398 Comparative balance sheets. See Comparative balance sheets Ticker prices, 494 computing payback period with, 394 financing activities, 426, 439 investing activities, 437\u2013438 Ticker tape, 494 Unfavorable variances, 279 notes payable transactions, 428, 432, 433, 439 Time and motion studies, 283 goods in process inventory, 294\u2013295 plant asset transactions, 428, 432, 433, 437\u2013438 Time dimension of managerial accounting, 6 in goods in process inventory, 294\u2013295 reconstruction analysis. See Reconstruction analysis Timeliness of information, 6 long-term, 284n Statement of Ethical Professional Practice Time period, 240\u2013241 preparation of flexible budgets and, (of IMA), 9 Times interest earned ratio, 491\u2013492, 282, 302 Statement of retained earnings, 256 Statements of shareholders\u2019 equity, A-6, A-22, 495, 499 Unit contribution margin, 174, 180, 185, 218 A-27, A-32 Time tickets, 53, 54, 55, 56 Unit costs Static (fixed) budget, 279 Step-wise costs, 170 Time value of money, B-10, B-11, B\u2013B-7 of goods transferred out of process, 93 \u201cStep-wise\u201d expense allocation, 326 Stock, 493, 494 capital budgeting with, 392, 396\u2013402 under variable v. absorption costing, 207, 208, Stock dividends, 427, 440 Stockholders, 476 internal rate of return, 398, 399\u2013401, B-11 220, 221 Stockholders\u2019 equity, 493, 495, 499 Stock market, 492 net present value, 393, 396, 397\u2013399, 406 Unit level activities, 137 Stock splits, 440 Straight-line depreciation, 395\u2013396, 399 capital budgeting without, 392\u2013396 Unit level costs, 139 Strategic budgeting, 238 Subsequent events, 6 accounting rate of return, 393, 395\u2013396 Unit sales, 180 Subsidiary ledger, 50, 51 Subsidiary records, 50, 51 break-even time and, 402 Units of output, 282 Subunits (departments), 322 Summaries, 335 payback period, 393\u2013395 Units of product, 257 Summary entries, 100, 104\u2013105 Sunk costs, 11, 365, 368, 369 in evaluating alternative investments, 406 Unusual gains and losses, 499 Suppliers, 51, 476 Sustainable income, 499\u2013501 future value Users of accounting information, 424, 476, changes in accounting principles, of ordinary annuity, B-6\u2013B-7, B-10, B-11 496, 502 500\u2013501 of single amount, B-3\u2013B-4, B-7, B-10 Utilities, 91 comprehensive income, 500\u2013501 continuing operations, 499 present and future value concepts, B-1, B-7 Utilities expense, 324, 325, 327, 328 discontinued segments, 499, 500 earnings per share, 500 present value extraordinary items, 499\u2013500 of ordinary annuity, B-2, B-5, B-7, Value T-accounts, 433, 449 Target cost, 49 Apago PDF EnhancerB-10, B-11 determinants of, 8\u20139 Target income, 179\u2013180, 183, 185, 187 Target numbers, 429 of single amount, B-1\u2013B-3, B-7, B-10 Value-added time, 21 Tax rate, 179 Tax Reform Act of 1986, 217 Timing of budgets, 240\u2013241 Value basis of allocating joint costs, Tax reporting, 217 Taylor, Brian, 3 Tools of financial statement analysis, 478 341, 342 Total asset turnover ratio, 490, 492, 495, 499 Value chain, 18 Total cost method, 372\u2013373 Value engineering, 49 Total costs Variable budgets. See Flexible budget(s) graphing, 176 Variable cost(s), 10 Total overhead variance, 290 in computing multiproduct break-even Total quality management (TQM), 8 point, 182 Total variable costs, 177 cost behavior, 169 Toyota Motor Corporation, 8, 181 cost per unit, 169, 172, 177, 215 TQM (total quality management), 8 fixed costs distinguished, 280\u2013281 Traceability of costs in sales mix selection decision, 370 classification by, 10, 11, 12, 26 special orders and, 215\u2013216 factory overhead costs, 16 Variable costing, 206, 207 in overhead cost allocation, 133 absorption costing compared, 207, 208, Trade names, A-9 213\u2013217, 221 Trading securities cost control, 216 cash receipts and payments from, 425\u2013426 cost of goods sold, 209\u2013212 Training and education, 60 price setting, 215\u2013216 Transaction analysis, 430 production planning, 208, 213\u2013215 financing activities, 426, 439 reporting issues, 217 investing activities, 426, 438 treatment of fixed overhead costs. See Fixed notes payable transactions, 428, 432, 433, 439 overhead costs plant asset transactions, 428, 432, 433, treatment of income. See Income 437\u2013438 unit costs, 207, 208, 220, 221 Transfer prices, 339 computing unit cost, 207, 208 alternative prices, 339\u2013340 converting reports to absorption costing, 213, market-based, 340 220, 221 negotiated, 341 implications for performance reporting. See Transfer pricing system, 325, 339\u2013341, 343 Performance reporting additional issues in, 341 income reporting under, 214, 215, 221 alternative transfer prices, 339\u2013340 limitation of reports using, 217 Trek, 7 Variable costing income statement, 175 Trend analysis, 481\u2013483 Variable overhead, 19","Index IND-13 Variable overhead cost variance, 290 Variance accounts, 295\u2013296 Waste computing, 290\u2013292 Variance analysis, 282, 284n, 284\u2013288 elimination of, 8 fixed overhead cost variances, 289, 292 overhead variance reports, 292\u2013293 cost variance analysis, 285 Weighted-average contribution margin, cost variance computation, 285\u2013286 182\u2013183 Variance(s), 240, 241, 301 overhead cost variance analysis. See Overhead controllable, 291, 293, 295 Weighted average method, 94\u2013101, 96 efficiency variance(s), 287\u2013288, 291 cost variance analysis \u201cWhat-if\u201d questions, 179 favorable, 279, 282, 284n Vertical analysis, 478, 483\u2013486, 502 \u201cWhat-if\u201d situations, 280 identified in performance reports, 285 \u201cWhat-if\u201d strategies, 170 labor rate variance, 287\u2013288, 295 common-size graphics, 485\u2013486 Whittaker, Andrew \u201cJack,\u201d B-5 materiality of, 296 common-size statements, 480, 481, 483\u2013485 Work centers, 87 price variances, 282, 285\u2013287 Working capital, 487 quality as factor in, 287 balance sheets, 483, 484 Working paper. See Spreadsheet(s) quantity variances, 282, 285\u2013287 income statements, 484\u2013485 Work in process inventory, 14 sales variances Vice president (VP), 335 Work sheet. See Spreadsheet(s) price variance, 296\u2013297, 301\u2013302 Volume variances, 291, 292, 295 Workstations, 87 volume variance, 296\u2013297, 302 Vouchers, 55 Worst case scenario, 280 spending variance, 291 VP (vice president), 335 Write-downs of inventory, 499\u2013500 total overhead variance, 290 Write-offs of receivables, 499\u2013500 unfavorable, 279 W. T. Grant Co., 425 Written budgets, 239 flexible budgets and, 282, 302 Wages www.SEC.gov, A-1 in goods in process inventory, 294\u2013295 long-term, 284n allocation of indirect expenses, 324\u2013325 Xerox, 86 volume variances, 291, 292, 295 reporting cash flows from, 432, 450\u2013451, 451n See also Cost variances spending variances, 291 Zinger, Dan, 363 Wait time, 21 Wall Street, 493 The Wall Street Journal, 494 Walmart Stores, Inc., 323, 332, 423 Apago PDF Enhancer","CA Chart of Accounts Chart of Accounts Following is a typical chart of accounts. Each company has its own unique accounts and numbering system. Assets 168 Accumulated depreciation\u2014_______ Unearned Revenues equipment Current Assets 230 Unearned consulting fees 169 Machinery 231 Unearned legal fees 101 Cash 170 Accumulated depreciation\u2014Machinery 232 Unearned property management fees 102 Petty cash 173 Building _______ 233 Unearned _______ fees 103 Cash equivalents 174 Accumulated depreciation\u2014Building _______ 234 Unearned _______ fees 104 Short-term investments 175 Building _______ 235 Unearned janitorial revenue 105 Market adjustment, _______ securities (S-T) 176 Accumulated depreciation\u2014Building _______ 236 Unearned _______ revenue 106 Accounts receivable 179 Land improvements _______ 238 Unearned rent 107 Allowance for doubtful accounts 180 Accumulated depreciation\u2014Land 108 Legal fees receivable Notes Payable 109 Interest receivable improvements _______ 110 Rent receivable 181 Land improvements _______ 240 Short-term notes payable 111 Notes receivable 182 Accumulated depreciation\u2014Land 241 Discount on short-term notes payable 119 Merchandise inventory 245 Notes payable 120 __________ inventory improvements _______ 251 Long-term notes payable 121 __________ inventory 183 Land 252 Discount on long-term notes payable 124 Office supplies 125 Store supplies Natural Resources Long-Term Liabilities 126 _______ supplies 128 Prepaid insurance 185 Mineral deposit 129 Prepaid interest 186 Accumulated depletion\u2014Mineral deposit 131 Prepaid rent 132 Raw materials inventory Intangible Assets 253 Long-term lease liability 133 Goods in process inventory, _______ 134 Goods in process inventory, _______ 191 Patents PDF 255 Bonds payable 135 Finished goods inventory Apago192 Leasehold Enhancer256 Discount on bonds payable Long-Term Investments 257 Premium on bonds payable 193 Franchise 258 Deferred income tax liability 194 Copyrights 195 Leasehold improvements 196 Licenses 197 Accumulated amortization\u2014_______ Equity 141 Long-term investments Liabilities Owner\u2019s Equity 142 Market adjustment, _______ securities (L-T) 144 Investment in _______ Current Liabilities 301 ______________, Capital 145 Bond sinking fund 302 ______________, Withdrawals 201 Accounts payable 303 ______________, Capital Plant Assets 202 Insurance payable 304 ______________, Withdrawals 203 Interest payable 305 ______________, Capital 151 Automobiles 204 Legal fees payable 306 ______________, Withdrawals 152 Accumulated depreciation\u2014Automobiles 207 Office salaries payable 153 Trucks 208 Rent payable Paid-In Capital 154 Accumulated depreciation\u2014Trucks 209 Salaries payable 155 Boats 210 Wages payable 307 Common stock, $ _______ par value 156 Accumulated depreciation\u2014Boats 211 Accrued payroll payable 308 Common stock, no-par value 157 Professional library 214 Estimated warranty liability 309 Common stock, $ _______ stated value 158 Accumulated depreciation\u2014Professional 215 Income taxes payable 310 Common stock dividend distributable 216 Common dividend payable 311 Paid-in capital in excess of par value, library 217 Preferred dividend payable 159 Law library 218 State unemployment taxes payable Common stock 160 Accumulated depreciation\u2014Law library 219 Employee federal income taxes payable 312 Paid-in capital in excess of stated value, 161 Furniture 221 Employee medical insurance payable 162 Accumulated depreciation\u2014Furniture 222 Employee retirement program payable No-par common stock 163 Office equipment 223 Employee union dues payable 313 Paid-in capital from retirement of common 164 Accumulated depreciation\u2014Office equipment 224 Federal unemployment taxes payable 165 Store equipment 225 FICA taxes payable stock 166 Accumulated depreciation\u2014Store equipment 226 Estimated vacation pay liability 314 Paid-in capital, Treasury stock 167 _______ equipment 315 Preferred stock 316 Paid-in capital in excess of par value, Preferred stock","Chart of Accounts CA-1 Retained Earnings 583 Direct labor price variance Miscellaneous Expenses 584 Factory overhead volume variance 318 Retained earnings 585 Factory overhead controllable variance 655 Advertising expense 319 Cash dividends (or Dividends) 656 Bad debts expense 320 Stock dividends Expenses 657 Blueprinting expense 658 Boat expense Other Equity Accounts Amortization, Depletion, and 659 Collection expense Depreciation 661 Concessions expense 321 Treasury stock, Common 662 Credit card expense 322 Unrealized gain\u2014Equity 601 Amortization expense\u2014_______ 663 Delivery expense 323 Unrealized loss\u2014Equity 602 Amortization expense\u2014_______ 664 Dumping expense 603 Depletion expense\u2014_______ 667 Equipment expense Revenues 604 Depreciation expense\u2014Boats 668 Food and drinks expense 605 Depreciation expense\u2014Automobiles 671 Gas and oil expense 401 ______________ fees earned 606 Depreciation expense\u2014Building _______ 672 General and administrative expense 402 ______________ fees earned 607 Depreciation expense\u2014Building _______ 673 Janitorial expense 403 ______________ services revenue 608 Depreciation expense\u2014Land 674 Legal fees expense 404 ______________ services revenue 676 Mileage expense 405 Commissions earned improvements _______ 677 Miscellaneous expenses 406 Rent revenue (or Rent earned) 609 Depreciation expense\u2014Land 678 Mower and tools expense 407 Dividends revenue (or Dividend earned) 679 Operating expense 408 Earnings from investment in _______ improvements _______ 680 Organization expense 409 Interest revenue (or Interest earned) 610 Depreciation expense\u2014Law library 681 Permits expense 410 Sinking fund earnings 611 Depreciation expense\u2014Trucks 682 Postage expense 413 Sales 612 Depreciation expense\u2014_______ equipment 683 Property taxes expense 414 Sales returns and allowances 613 Depreciation expense\u2014_______ equipment 684 Repairs expense\u2014_______ 415 Sales discounts 614 Depreciation expense\u2014_______ 685 Repairs expense\u2014_______ 615 Depreciation expense\u2014_______ 687 Selling expense 688 Telephone expense Cost of Sales Employee-Related Expenses 689 Travel and entertainment expense 690 Utilities expense Cost of Goods Sold 620 Office salaries expense 691 Warranty expense 621 Sales salaries expense 695 Income taxes expense 502 Cost of goods sold 505 Purchases Apago PDF622 Salaries expense Enhancer Gains and Losses 506 Purchases returns and allowances 623 _______ wages expense 507 Purchases discounts 624 Employees\u2019 benefits expense 701 Gain on retirement of bonds 508 Transportation-in 625 Payroll taxes expense 702 Gain on sale of machinery 703 Gain on sale of investments Manufacturing Financial Expenses 704 Gain on sale of trucks 705 Gain on _______ 520 Raw materials purchases 630 Cash over and short 706 Foreign exchange gain or loss 521 Freight-in on raw materials 631 Discounts lost 801 Loss on disposal of machinery 530 Factory payroll 632 Factoring fee expense 802 Loss on exchange of equipment 531 Direct labor 633 Interest expense 803 Loss on exchange of _______ 540 Factory overhead 804 Loss on sale of notes 541 Indirect materials Insurance Expenses 805 Loss on retirement of bonds 542 Indirect labor 806 Loss on sale of investments 543 Factory insurance expired 635 Insurance expense\u2014Delivery equipment 807 Loss on sale of machinery 544 Factory supervision 636 Insurance expense\u2014Office equipment 808 Loss on _______ 545 Factory supplies used 637 Insurance expense\u2014_______ 809 Unrealized gain\u2014Income 546 Factory utilities 810 Unrealized loss\u2014Income 547 Miscellaneous production costs Rental Expenses 548 Property taxes on factory building Clearing Accounts 549 Property taxes on factory equipment 640 Rent expense 550 Rent on factory building 641 Rent expense\u2014Office space 901 Income summary 551 Repairs, factory equipment 642 Rent expense\u2014Selling space 902 Manufacturing summary 552 Small tools written off 643 Press rental expense 560 Depreciation of factory equipment 644 Truck rental expense 561 Depreciation of factory building 645 _______ rental expense Standard Cost Variance Supplies Expenses 580 Direct material quantity variance 650 Office supplies expense 581 Direct material price variance 651 Store supplies expense 582 Direct labor quantity variance 652 _______ supplies expense 653 _______ supplies expense","For the Price-Conscious Student on the Go\u2026 Looking for easy, interactive, and eco-friendly ways to study? We have the answers: Apple iPod\u00ae Content Our innovative approach allows you to download audio and video presentations directly onto your iPod and take learning materials with you wherever you go. Whether it\u2019s in the car, on the train, or waiting between classes\u2014it\u2019s easy to get a quick refresher on key course content. Now review and study time is as easy as putting in headphones! Visit the Wild Online Learning Center at www.mhhe.com\/wildMA2e to learn more about available iPod content. CourseSmart McGraw-Hill Connect\u2122 CourseSmart is a new way to accounting Accounting \ufb01nd and buy eTextbooks. At Has your instructor chosen CourseSmart you can save up to 50% of the cost of your print to use McGraw-Hill Connect in your Accounting class? If so, textbook, reduce your impact on the environment, and gain you have the option of purchasing Connect Plus Accounting access to powerful web tools for learning. You can search, which includes an Interactive Online Version of the Textbook highlight, take notes and share with friends, as well as print Apago PDF Enhancerthe pages you need. Try a free chapter to see if it\u2019s right for at 55% of the cost of the printed text. Connect Plus soft- you. Visit www.CourseSmart.com and search by title, author, ware gives you 24\/7 direct access to an online edition of the or ISBN. text while you work assignments within the Connect system at your own pace and on your own schedule. Simply click the \u201ceBook Hint\u201d links to jump directly to relevant content in the online edition of the text. Visit the Online Learning Center at www.mhhe.com\/wildMA2e to purchase access to McGraw-Hill Connect Plus Accounting. ISBN 978-0-07-337958-6 MHID 0-07-337958-1 90000 9 780073 379586 www.mhhe.com"]
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