ATC 1-1Business Applications CaseFinancial versus managerial accounting
An article in the April 12, 2004, edition of BusinessWeek, “The Costco Way—Higher Wages Mean Higher Profits” compared Costco Wholesale Corporation data with Wal-Mart’s Sam’s Club data. The tables below present some of the data used to support this claim.
Is the information in the tables above best described as primarily financial accounting data or managerial accounting data in nature? Explain.
Provide additional examples of managerial and financial accounting information that could apply to Costco.
Explain why a manager of an individual Costco store needs different kinds of information than someone who is considering lending the company money or investing in its common stock.
ATC 1-2Group AssignmentProduct versus upstream and downstream costs
Victor Holt, the accounting manager of Sexton, Inc., gathered the following information for 2006. Some of it can be used to construct an income statement for 2006. Ignore items that do not appear on an income statement. Some computation may be required. For example, the cost of manufacturing equipment would not appear on the income statement. However, the cost of manufacturing equipment is needed to compute the amount of depreciation. All units of product were started and completed in 2006.
Issued $864,000 of common stock.
Paid engineers in the product design department $10,000 for salaries that were accrued at the end of the previous year.
Incurred advertising expenses of $70,000.
Paid $720,000 for materials used to manufacture the company’s product.
Incurred utility costs of $160,000. These costs were allocated to different departments on the basis of square footage of floor space. Mr. Holt identified three departments and determined the square footage of floor space for each department to be as shown in the table below.
Paid cash of $658,000 for salaries of administrative personnel. There was $16,000 of accrued salaries owed to administrative personnel at the end of 2006. There was no beginning balance in the Salaries Payable account for administrative personnel.
Purchased manufacturing equipment two years ago at a cost of $10,000,000. The equipment had an eight-year useful life and a $2,000,000 salvage value.
Paid $390,000 cash to engineers in the product design department.
Paid a $258,000 cash dividend to owners.
Paid $80,000 to set up manufacturing equipment for production.
Paid a one-time $186,000 restructuring cost to redesign the production process to implement a just-in-time inventory system.
Prepaid the premium on a new insurance policy covering nonmanufacturing employees. The policy cost $72,000 and had a one-year term with an effective starting date of May 1. Four employees work in the research and development department and eight employees in the selling and administrative department. Assume a December 31 closing date.
Made 69,400 units of product and sold 60,000 units at a price of $70 each.
Required
Divide the class into groups of four or five students per group, and then organize the groups into three sections. Assign Task 1 to the first section of groups, Task 2 to the second section of groups, and Task 3 to the third section of groups.
Group Tasks
Identify the items that are classified as product costs and determine the amount of cost of goods sold reported on the 2006 income statement.
Identify the items that are classified as upstream costs and determine the amount of upstream cost expensed on the 2006 income statement.
Identify the items that are classified as downstream costs and determine the amount of downstream cost expensed on the 2006 income statement.
Have the class construct an income statement in the following manner. Select a member of one of the groups assigned the first group task identifying the product costs. Have that person go to the board and list the costs included in the determination of cost of goods sold. Anyone in the other groups who disagrees with one of the classifications provided by the person at the board should voice an objection and explain why the item should be classified differently. The instructor should lead the class to a consensus on the disputed items. After the amount of cost of goods sold is determined, the student at the board constructs the part of the income statement showing the determination of gross margin. The exercise continues in a similar fashion with representatives from the other sections explaining the composition of the upstream and downstream costs. These items are added to the income statement started by the first group representative. The final result is a completed income statement.
ATC 1-3Research AssignmentSkills needed by managerial accountants
The September 1999 issue of Strategic Finance contains the article “Counting More, Counting Less: Transformations in the Management Accounting Profession,” written by Keith Russell, Gary Siegel, and C. S. Kuleszo. It appears on pages 38 to 44. This article reviews findings from a survey of managerial accountants conducted by the Institute of Management Accountants (IMA). Read this article and complete the following requirements.
Required
What skills did the management accountants identify as being most important for their success?
Did the respondents see their work as being most closely associated with the accounting or finance function?
Like all business professionals, management accountants must continuously update their skills. What were the five most important skills the respondents said they had acquired in the five years prior to the survey?
Non-accountants often view accountants as persons who work alone sitting at a desk. What percentage of the respondents to the IMA survey said they work on cross-functional teams?
ATC 1-4Writing AssignmentEmerging practices in managerial accounting
The 1998 annual report of the Maytag Corporation contained the following excerpt:
During the first quarter of 1996, the Company announced the restructuring of its major appliance operations in an effort to strengthen its position in the industry and to deliver improved performance to both customers and shareowners. This included the consolidation of two separate organizational units into a single operation responsible for all activities associated with the manufacture and distribution of the Company’s brands of major appliances and the closing of a cooking products plant in Indianapolis, Indiana, with transfer of that production to an existing plant in Cleveland, Tennessee.
The restructuring cost Maytag $40 million and disrupted the lives of many of the company’s employees.
Required
Assume that you are Maytag’s vice president of human relations. Write a letter to the employees who are affected by the restructuring. The letter should explain why it was necessary for the company to undertake the restructuring. Your explanation should refer to the ideas discussed in the section “Emerging Trends in Managerial Accounting” of this chapter (see Appendix B).
ATC 1-5Ethical DilemmaProduct cost versus selling and administrative expense
Eddie Emerson is a proud woman with a problem. Her daughter has been accepted into a prestigious law school. While Ms. Emerson beams with pride, she is worried sick about how to pay for the school; she is a single parent who has worked hard to support herself and her three children. She had to go heavily into debt to finance her own education. Even though she now has a good job, family needs have continued to outpace her income and her debt burden is staggering. She knows she will be unable to borrow the money needed for her daughter’s law school.
Ms. Emerson is the Chief Financial Officer (CFO) of a small manufacturing company. She has just accepted a new job offer. Indeed, she has not yet told her employer that she will be leaving in a month. She is concerned that her year-end incentive bonus may be affected if her boss learns of her plans to leave. She plans to inform the company immediately after receiving the bonus. She knows her behavior is less than honorable, but she believes that she has been underpaid for a long time. Her boss, a relative of the company’s owner, makes twice what she makes and does half the work. Why should she care about leaving with a little extra cash? Indeed, she is considering an opportunity to boost the bonus.
Ms. Emerson’s bonus is based on a percentage of net income. Her company recently introduced a new product line that required substantial production start-up costs. Ms. Emerson is fully aware that GAAP requires these costs to be expensed in the current accounting period, but no one else in the company has the technical expertise to know exactly how the costs should be treated. She is considering misclassifying the start-up costs as product costs. If the costs are misclassified, net income will be significantly higher, resulting in a nice boost in her incentive bonus. By the time the auditors discover the misclassification, Ms. Emerson will have moved on to her new job. If the matter is brought to the attention of her new employer, she will simply plead ignorance. Considering her daughter’s needs, Ms. Emerson decides to classify the start-up costs as product costs.
Required
Based on this information, indicate whether Ms. Emerson believes the number of units of product sold will be equal to, less than, or greater than, the number of units made. Write a brief paragraph explaining the logic that supports your answer.
Explain how the misclassification could mislead an investor or creditor regarding the company’s financial condition.
Explain how the misclassification could affect income taxes.
Identify the specific components of the fraud triangle that were present in this case.
Review the standards of ethical conduct shown in Exhibit 1-15 and identify at least two standards that Ms. Emerson’s misclassification of the start-up costs violated.
Describe the maximum penalty that could be imposed under the Sarbanes-Oxley Act for the actions Ms. Emerson has taken.
Comment on how proper internal controls could have prevented the fraudulent reporting in this case.
The following transactions pertain to 2006, the first year of operations of the Barlett Company. All inventory was started and completed during 2006. Assume that all transactions are cash transactions.
Acquired $2,000 cash by issuing common stock.
Paid $400 for materials used to produce inventory.
Paid $600 to production workers.
Paid $200 rental fee for production equipment.
Paid $160 to administrative employees.
Paid $80 rental fee for administrative office equipment.
Produced 300 units of inventory of which 200 units were sold at a price of $7.00 each.
Required
Construct a spreadsheet that includes the income statement, balance sheet, and statement of cash flows.
ATC 1-7Spreadsheet AssignmentMastering Excel
Mantooth Manufacturing Company experienced the following accounting events during its first year of operation. With the exception of the adjusting entries for depreciation, assume that all transactions are cash transactions.
Acquired $50,000 by issuing common stock.
Paid $8,000 for the materials used to make its products, all of which were started and completed during the year.
Paid salaries of $4,400 to selling and administrative employees.
Paid wages of $7,000 to production workers.
Paid $9,600 for furniture used in selling and administrative offices. The furniture was acquired on January 1. It had a $1,600 estimated salvage value and a four-year useful life.
Paid $13,000 for manufacturing equipment. The equipment was acquired on January 1. It had a $1,000 estimated salvage value and a three-year useful life.
Sold inventory to customers for $25,000 that had cost $14,000 to make.
Construct a spreadsheet of the financial statements model as shown here:
Place formulas in row 16 to automatically add the columns. Also add formulas in column S to calculate net income after each event, and add formulas in row 18 to compute total assets and equity. Notice that you must enter the events since only the first one is shown as an example.
Spreadsheet Tips
The column widths are set by choosing Format, then Column, and then Width.
The shading in columns B, N, and T is added by highlighting a column and choosing Format, then Cells, and then clicking on the tab titled Patterns and choosing a color.
The sum function is an easy way to add a column or row. For example, the formula in cell C16 is = SUM(C6:C15).
As an example of the formulas in column S (net income), the formula in cell S7 is = O7–Q7.
If you find that some of the columns are too far to the right to appear on your screen, you can set the zoom level to show the entire spreadsheet. The zoom is set by choosing View, then Zoom, and then clicking on Custom and typing 100 percent in the box. The shortcut method to set the zoom is to click in the box on the right side of the top tool bar that appears immediately below the menu.
