The manager of the Fleet division of Potlatch Automotive is evaluated on her division’s return on investment and residual income. The company requires that all divisions generate a minimum return on invested assets of 15 percent. Consistent failure to achieve this minimum target is grounds for the dismissal of a division manager. The annual cash bonus paid to division managers is 2 percent of residual income in excess of $75,000. The Fleet division’s operating margin for the year was $800,000, during which time its average invested capital was $4,000,000. Instructions: a. Compute the Fleet division’s return on investment and residual income. b. Will the manager of the Fleet division receive a bonus for her performance? If so, how much will it be? c. In reporting her investment center’s performance for the past 10 years, the manager of the Fleet division accounted for the depreciation of her division’s assets by using an accelerated depreciation method allowed for tax purposes. As a result, virtually all of the assets under her control are fully depreciated. Given that the company’s other division managers use straightline depreciation, is her use of an accelerated method ethical? Defend your answer.
> Why is it important for management to understand cost volume-profit relationships?
> Briefly describe the flow of cash among receivables, cash, and marketable securities.
> How does a balance arise in the Purchase Discounts Lost account? Why would management be interested in monitoring the activity in this account?
> Explain the distinguishing characteristics of (a) a general journal and (b) a special journal.
> Listed are 12 technical accounting terms discussed in this chapter. Each of the following statements may (or may not) describe one of these technical terms. For each statement, indicate the term described, or answer “Noneâ€&
> Briefly contrast the accounting procedures in perpetual and periodic inventory systems.
> Briefly contrast the accounting procedures in perpetual and periodic inventory systems.
> Define the term inventory shrinkage. How is the amount of inventory shrinkage determined in a business using a perpetual inventory system, and how is this shrinkage recorded in the accounting records?
> During the current year, Green Bay Company earned a gross profit of $350,000, whereas New England Company earned a gross profit of only $280,000. Both companies had net sales of $900,000. Does this mean that Green Bay is more profitable than New England?
> What is meant by the statement that revenue has been recognized?
> Under a perpetual inventory system, a company should know the quantity and price of its inventory at any time. Given this, why do companies that use a perpetual inventory system still take a physical count of their merchandise inventory at least once a y
> Joyce Biginskor manages the assembly department at Valance Autoparts, a parts supplier to large auto companies. Valance has recently adopted a balanced scorecard for the entire company. As a result, the plant manager for each production facility has a se
> Shown as follows is selected information from the financial statements of Dickson, Inc., a retail furniture store. Instructions: a. Explain how the interest expense shown in the income statement could be $84,000, when the interest payment appearing in t
> Define the term gross profit margin. Explain several ways in which management might improve a company’s overall profit margin.
> In discussing stock dividends and stock splits in an investments class you are taking, one of the students says, “The definition of stock splits and stock dividends is exactly the same distributions of a company’s stock to existing owners without payment
> The financial statements of Home Depot, Inc., appear in Appendix A of this text. These statements contain information describing the details of the company’s stockholders’ equity. a. What is the par value of the company’s common stock? Did the common st
> A seller generally records sales at the full invoice price, but the buyer often records purchases at net cost. Explain the logic of the buyer and seller recording the transaction at different amounts.
> Tarec is a retail store in a state that imposes a 6 percent sales tax. Would you expect to find sales tax expense and sales tax payable in TireCo’s financial statements? Explain.
> Outback Sporting Goods purchases merchandise on terms of 4/10, n/60. The company has a line of credit that enables it to borrow money as needed from Northern Bank at an annual interest rate of 13 percent. Should Outback pay its suppliers within the 10-da
> European Imports pays substantial freight charges to obtain inbound shipments of purchased merchandise. Should these freight charges be added to the company’s Delivery Expense account? Explain.
> The income statement of a merchandising company includes a major type of cost that does not appear in the income statement of a service-type business. Identify this cost and explain what it represents.
> Under which type of inventory system is an inventory subsidiary ledger maintained?
> Explain several purposes that may be served by preparing a worksheet (or using computer software that achieves the goals of a worksheet).*
> Explain the significance of measuring a company’s return on equity.
> Bob Banker is the manager of one location of the Fastwhere Inc. chain, which is a delivery service. Banker’s location is currently earning an ROI of 14 percent on existing average capital of $750,000. The minimum required return for Fas
> Explain the need for closing entries and describe the process by which temporary owners’ equity accounts are closed at year-end
> Twin Towns, Inc., was authorized to issue 300,000 shares of common stock and originally issued 100,000 shares of $10 par value stock at $18 per share. Subsequently, 25,000 shares were repurchased at $20, of which 10,000 were subsequently resold at $23. A
> How does depreciation expense differ from other operating expenses?
> Explain why speeding up the collection of accounts receivable provides only a one-time increase in cash receipts.
> Explain the accounting principle of adequate disclosure.
> What are interim financial statements? Do accounts that appear in a company’s interim balance sheet require any special computations to be reported correctly? Explain.
> Can a company be profitable but not liquid? Explain.
> Which accounts appear in a company’s after-closing trial balance? How do these accounts differ from those reported in an adjusted trial balance?
> A particular investment proposal has a payback period that exceeds the investment’s expected life. The investment has no salvage value. Will this proposal’s net present value be positive or negative? Explain your answer.
> What factors might a company consider in establishing a minimum required return on an investment proposal?
> The present value of an investment depends on the timing of its future cash flows. Explain what this statement means by giving a specific example of two investments that have significant timing differences and discussing the implications of those timing
> Tootsie Roll Industries has two business segments, one for operations in the United States and one for operations in Mexico and Canada. The following information (in thousands) comes from a recent annual report. Find the ROI for each segment for each yea
> Minor Company is authorized to sell 1,200,000 shares of $10 par value common stock and 60,000 shares of $100 par value 6 percent preferred stock. As of the end of the current year, the company has actually sold 550,000 shares of common stock at $12 per s
> What nonfinancial considerations should be taken into account regarding a proposal to install a fire sprinkler system in a finished goods warehouse?
> Discounting cash flows takes into consideration one characteristic of the earnings stream that is ignored in the computation of return on average investment. What is this characteristic and why is it important?
> Discounting a future cash flow at 15 percent results in a lower present value than does discounting the same cash flow at 10 percent. Explain why.
> What is a liquidating dividend, and how does it relate to a regular (no liquidating) dividend?
> What is the major shortcoming of using the payback period as the only criterion in making capital budgeting decisions?
> Identify some conditions where upper management might allow some divisions to have a lower required rate of return.
> Why is it important to consider income tax consequences when deciding whether to replace an asset?
> What are some types of capital investment projects in which nonfinancial factors may outweigh financial factors?
> What steps can a firm take to ensure that employee estimates of the costs, revenue, and cash flows from a proposed capital investment are not overly optimistic or pessimistic?
> Depreciation expense does not require payment in cash. However, it is an important consideration in the discounting of an investment’s future cash flows. Explain why.
> Ashton Company was experiencing financial difficulty late in the current year. The company’s income was sluggish, and the market price of its common stock was tumbling. On December 21, the company began to buy back shares of its own stock in an attempt t
> What can be said about an investment proposal that has a net present value of zero?
> Is an investment’s average estimated net income used to compute its return on average investment the same thing as the incremental annual cash flows used to compute its net present value? Explain your answer.
> What is capital budgeting? Why are capital budgeting decisions crucial to the long-run financial health of a business enterprise?
> How would you expect the components of return on investment to be different for a mostly Internet-based retailer compared to a more traditional bricks-and-mortar retailer (e.g., Amazon.com versus Barnes & Noble)?
> Explain the concept of peak pricing and provide an example from your own experience.
> In designing a compensation plan for the manager of the international operations of Tootsie Roll Industries (which, in addition to the United States, include Mexico and Canada), what trade-offs might the company’s board of directors take into considerati
> Why is residual income suggested as an improvement over ROI for business measurement?
> What are some problems that companies have encountered in using the balanced scorecard?
> Assume you are the manager of the finished goods warehouse of a computer manufacturer. Which warehouserelated business measures might help the company achieve its balanced scorecard goals?
> Green Thumb operates a chain of lawn fertilizer stores. Although the fertilizer is sold under the Green Thumb label, it is purchased from an independent manufacturer. Sue Smith, president of Green Thumb, is studying the advisability of opening another st
> Distinguish between the four lenses of the balanced scorecard and provide an example of a business measure for each category for a family owned grocery store
> Consider the Empire Hotel discussed in Problem 25.1A. The manager of the restaurants department complains that sales and resulting earnings for the restaurants are not higher due to the poor reputation of the hotel rooms department. Because the hotel roo
> What activities would make up the learning and growth component of the balanced scorecard for a large public accounting firm?
> Suppose you are interested in opening a new restaurant in your area. What specific activities would you identify as goals for your restaurant?
> Identify the costs and benefits of a competitive incentive plan in which only one individual out of a group receives the bonus if he or she outperforms the others in the group.
> Identify the costs and benefits of a cooperative incentive plan in which a team of individuals equally shares a bonus pool if the team achieves a predetermined goal.
> Assume sales remain constant from year 1 to year 2 and return on sales (ROS) increases from year 1 to year 2. Identify two reasons why the return on sales ratio might increase from year 1 to year 2
> If a company’s total stockholders’ equity is unchanged by the distribution of a stock dividend, how is it possible for a stockholder who received shares in the distribution of the dividend to benefit?
> For which perspective of the balanced scorecard would the output from a standard cost system (e.g., variances) provide useful performance measurement information? Explain.
> Exhibit 25–9 identifies balanced scorecard performance measures. Review this exhibit and identify two measures from the customer perspective category that in the short run might be in conflict with some of the measures listed in the fin
> Ashton Company was experiencing financial difficulty late in the current year. The company’s income was sluggish, and the market price of its common stock was tumbling. On December 21, the company began to buy back shares of its own stock in an attempt t
> Custodian Commandos, Inc., provides janitorial services to public school systems. The business adjusts its accounts monthly, but closes them only at year-end. Its fiscal year ends on December 31. A summary of the company’s total revenue
> At the end of the year, the following information was obtained from the accounting records of Harrison Electronics, Inc. Instructions: a. From the information given, compute the following. 1. Inventory turnover. 2. Accounts receivable turnover. 3. Total
> Early in 2019, Feller Corporation was formed with authorization to issue 50,000 shares of $1 par value common stock. All shares were issued at a price of $8 per share. The corporation reported net income of $95,000 in 2019, $27,500 in 2020, and $75,700 i
> Techno Corporation is the producer of popular business software. Recently, an investment service published the following per-share amounts relating to the company’s only class of stock. Instructions: a. Without reference to dollar amo
> Parsons, Inc., is a publicly owned company. The following information is excerpted from a recent balance sheet. Dollar amounts (except for per-share amounts) are stated in thousands. Instructions: From this information, answer the following questions.
> Fowler, Inc., declared a 4 percent stock dividend on its 750,000 shares of common stock. The $10 par value common stock was originally sold for $14 and was selling at $17 at the time the stock dividend was declared. Prepare the general journal entries to
> The year-end balance sheet of Ft. Smith Products includes the following stockholders’ equity section (with certain details omitted). Instructions: From this information, compute answers to the following questions. a. How many shares
> Early in the year Bill Shares and several friends organized a corporation called Shares Communications, Inc. The corporation was authorized to issue 50,000 shares of $100 par value, 10 percent cumulative preferred stock and 400,000 shares of $2 par value
> Maria Martinez organized Manhattan Transport Company in January 2018. The corporation immediately issued at $8 per share one-half of its 200,000 authorized shares of $2 par value common stock. On January 2, 2019, the corporation sold at par value the ent
> McMinn Publications was organized early in 2016 with authorization to issue 20,000 shares of $100 par value preferred stock and 1 million shares of $1 par value common stock. All of the preferred stock was issued at par, and 300,000 shares of common stoc
> Early in 2018, Robbinsville Press was organized with authorization to issue 100,000 shares of $100 par value preferred stock and 500,000 shares of $1 par value common stock. Ten thousand shares of the preferred stock were issued at par, and 170,000 share
> As of December 31 of the current year, Petersen Corporation has prepared the following information regarding its liabilities and other obligations Instructions: a. Prepare a listing of the Petersen Corporation’s current and long-term
> The following items were taken from the accounting records of Murfreesboro Telephone Corporation (MTC) for the year ended December 31, 2021 (dollar amounts are in Other Information: 1. The 63⁄4 percent bonds due in February 2022 will
> On September 1, 2021, Evansville Lumber Company issued $80 million in 20-year, 10 percent bonds payable. Interest is payable semiannually on March 1 and September 1. Bond discounts and premiums are amortized at each interest payment date and at year-end.
> Green Mountain Power Company obtained authorization to issue 20-year bonds with a face value of $10 million. The bonds are dated May 1, 2021, and have a contract rate of interest of 10 percent. They pay interest on November 1 and May 1. The bonds were is
> On September 1, 2021, Speedy Lube signed a 30-year, $1,080,000 mortgage note payable to Johnstown Bank and Trust in conjunction with the purchase of a building and land. The mortgage note calls for interest at an annual rate of 12 percent (1 percent per
> Briefly explain the gross profit method of estimating inventories. In what types of situations is this technique likely to be useful?
> During the fiscal year ended December 31, Swanson Corporation engaged in the following transactions involving notes payable. Instructions: a. Prepare journal entries (in general journal form) to record these transactions. Use a 360-day year in making t
> The following are selected items from the accounting records of Denver Chocolates for the year ended December 31, 2021. Other Information: 1. The note payable to Northwest Bank is due in 60 days. Arrangements have been made to renew this note for an ad
> Fifteen transactions or events affecting Technology Specialists, Inc., are as follows. a. Made a year-end adjusting entry to accrue interest on a note payable. b. A liability classified for several years as long term becomes due within the next 12 months
> Walmart uses LIFO to account for its inventories. Recent financial statements were used to compile the following information (dollar figures are in millions). Instructions: a. Using the information provided, compute the following measures based upon th
> Between The Ears (BTE.com) is a popular Internet music store. During the current year, the company’s cost of goods available for sale amounted to $462,000. The retail sales value of this merchandise amounted to $840,000. Sales for the year were $744,000.
> The owners of Health Foods are offering the business for sale. The partial income statements of the business for the three years of its existence are summarized as follows. In negotiations with prospective buyers of the business, the owners of Health Fo
> Clear Sound Audio uses a periodic inventory system. One of the store’s most popular products is an MP8 car stereo system. The inventory quantities, purchases, and sales of this product for the most recent year are as follows. Instructi
> Mary’s Nursery uses a perpetual inventory system. At December 31, the perpetual inventory records indicate the following quantities of a particular blue spruce tree. A year-end physical inventory, however, shows only 310 of these trees
> Speed World Cycles sells high-performance motorcycles and motocross racers. One of Speed World’s most popular models is the Kazomma 900 dirt bike. During the current year, Speed World Cycles purchased eight of these bikes at the followi
> On January 15, 2021, Sports World sold 1,000 Ace-5 fishing reels to Angler’s Warehouse. Immediately prior to this sale, Sports World perpetual inventory records for Ace-5 reels included the following cost layers. Instructions: Note: W
> Gammon, Inc., declared dividends during the current year as follows. Prepare the general journal entries to record the declaration and payment of these dividends, assuming the declaration is recorded directly in retained earnings.
> Give two examples of cash receipts and two examples of cash payments that fit into each of the following classifications: a. Operating activities. b. Investing activities. c. Financing activities.
> Manufacturing Engineering, Inc., is a leading provider of lean manufacturing solutions. Its website is at the following address: www.mfgeng.com. On its website, Manufacturing Engineering lists several categories of projects. With a team of students choos
