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GOAL OF MANAGERIAL ACCOUNTING 4 Planning 4 Budgets for Planning, 4 Control 4 Performance Reports for Control, 5 Decision Making 7 A Comparison of Managerial and Financial Accounting 7 Internal versus External Users, 8 Need to Use GAAP, 8 Detail of Information, 8 Emphasis on Nonmonetary Information, 8 Emphasis on the Future, 8 Similarities between Financial and Managerial Accounting 8 COST TERMS USED IN DISCUSSING PLANNING, CONTROL, AND DECISION MAKING 9 Variable and Fixed Costs 9 Variable Costs, 9 Fixed Costs, 10 Sunk Costs 10 Opportunity Costs 10 Direct and Indirect Costs 10 Controllable and Noncontrollable Costs 11 TWO KEY IDEAS IN MANAGERIAL ACCOUNTING 11 Decision Making Relies on Incremental Analysis 12 You Get What You Measure! 13 THE INFORMATION AGE AND MANAGERIAL ACCOUNTING 14 Competition and Information Technology 14 The Impact of Information Technology on Management of the Value Chain 14 Information Flows between Milano and Customers, 15 Information Flows between Milano and Suppliers, 15 Using Information Technology to Gain Internal Efficiencies, 15 Software Systems That Impact Value Chain Management 16 Enterprise Resource Planning Systems, 16 Supply Chain Management Systems, 16 Customer Relationship Management Systems, 16 ETHICAL CONSIDERATIONS IN MANAGERIAL DECISION MAKING 17 Ethical and Unethical Behavior 17 Sarbanes-Oxley Act, 18 A Framework for Ethical Decision Making 19 IMA Statement of Ethical Professional Practice 20 THE CONTROLLER AS THE TOP MANAGEMENT ACCOUNTANT 20 MAKING BUSINESS DECISIONS 22 SUMMARY OF LEARNING OBJECTIVES 23 APPENDIX IMA STATEMENT OF ETHICAL PROFESSIONAL PRACTICE 24 Principles 24 Standards 24 Resolution of Ethical Conflict 25 ? LINKS TO PRACTICE: Examples of the Impact of SCM, 17 Japanese Companies Creating a New Executive Position¿The CFO!, 22 Key Terms 25 Self Assessment 26 Interactive Learning 27 Questions 27 Exercises 27 Problems 30 Cases 34 CONTENTS Chapter 1 MANAGERIAL ACCOUNTING IN THE INFORMATION AGE 3 Chapter 2 JOB-ORDER COSTING FOR MANUFACTURING AND SERVICE COMPANIES 37 COST CLASSIFICATIONS FOR MANUFACTURING FIRMS 38 Manufacturing Costs 39 Direct Material, 39 Direct Labor, 40 Manufacturing Overhead, 40 Nonmanufacturing Costs 40 ftoc.qxd 8/22/06 3:41 PM Page xxi xxii CONTENTS Selling Costs, 40 General and Administrative Costs, 41 Product and Period Costs 41 Product Costs, 41 Period Costs, 41 PRODUCT COST INFORMATION IN FINANCIAL REPORTING AND DECISION MAKING 42 BALANCE SHEET PRESENTATION OF PRODUCT COSTS 43 FLOW OF PRODUCT COSTS IN ACCOUNTS 44 INCOME STATEMENT PRESENTATION OF PRODUCT COSTS 45 Cost of Goods Manufactured, 45 Cost of Goods Sold, 46 TYPES OF COSTING SYSTEMS 47 OVERVIEW OF JOB COSTS AND FINANCIAL STATEMENT ACCOUNTS 48 JOB-ORDER COSTING SYSTEM 49 Direct Material Cost 50 Direct Labor Cost 52 Manufacturing Overhead 53 Assigning Costs to Jobs: A Summary 54 EASTLIKE REVISITED: USING JOB COST INFORMATION 55 RELATION BETWEEN THE COSTS OF JOBS AND THE FLOW OF COSTS IN WORK IN PROCESS, FINISHED GOODS, AND COST OF GOODS SOLD 57 ALLOCATING OVERHEAD TO JOBS: A CLOSER LOOK 57 Overhead Allocation Rates 58 The Overhead Allocation Base 58 Activity-Based Costing (ABC) and Multiple Overhead Rates 59 Predetermined Overhead Rates 59 Eliminating Overapplied or Underapplied Overhead 60 JOB-ORDER COSTING FOR SERVICE COMPANIES 61 MODERN MANUFACTURING PRACTICES AND PRODUCT COSTING SYSTEMS 62 Just-In-Time (JIT) Production 63 Computer-Controlled Manufacturing 63 Total Quality Management 65 MAKING BUSINESS DECISIONS 67 SUMMARY OF LEARNING OBJECTIVES 67 ? LINKS TO PRACTICE: Product and Period Costs at Dell, 43 Examples of Companies Using Job-Order and Process Costing Systems, 47 Just-in-Time or Just-in-Case?, 64 Computerized Manufacturing of Aircraft Parts, 65 Can There Be Too Much Emphasis on Quality?, 66 Review Problem 68 Key Terms 70 Self Assessment 71 Interactive Learning 72 Questions 72 Exercises 72 Problems 76 Cases 84 Chapter 3 PROCESS COSTING 87 DIFFERENCE BETWEEN JOB-ORDER AND PROCESS COSTING SYSTEMS 88 PRODUCT AND COST FLOWS 90 Product Flows Through Departments 90 Cost Flows Through Accounts 91 Direct Material, 92 Direct Labor, 92 Manufacturing Overhead, 92 Transferred-in Cost, 92 CALCULATING UNIT COST 93 Equivalent Units 93 Cost Per Equivalent Unit 94 CALCULATING AND APPLYING COST PER EQUIVALENT UNIT: MIXING DEPARTMENT EXAMPLE 94 Cost Transferred Out 95 Ending Work in Process 96 PRODUCTION COST REPORT 96 Reconciliation of Units 96 Reconciliation of Costs 98 BASIC STEPS IN PROCESS COSTING: A SUMMARY 98 KENT CHEMICAL REVISITED: ANSWERING STACY¿S QUESTION 99 DEALING WITH TRANSFERRED-IN COST: PACKAGING DEPARTMENT EXAMPLE 99 PROCESS COSTING AND INCREMENTAL ANALYSIS 101 MAKING BUSINESS DECISIONS 103 SUMMARY OF LEARNING OBJECTIVES 103 ftoc.qxd 8/22/06 3:41 PM Page xxii ? LINKS TO PRACTICE: What Type of Costing System Is Used by Kimberly-Clark Corporation?, 88 Virtual Plant Tours for Companies that Use Process Costing, 91 Review Problem 104 Key Terms 106 Self Assessment 106 Interactive Learning 107 Questions 107 Exercises 107 Problems 111 Cases 119 CONTENTS xxiii Chapter 4 COST-VOLUME-PROFIT ANALYSIS 125 COMMON COST BEHAVIOR PATTERNS 126 Variable Costs 126 Fixed Costs 126 Discretionary Versus Committed Fixed Costs, 128 Mixed Costs 128 Step Costs 129 COST ESTIMATION METHODS 130 Account Analysis 130 Scattergraphs 132 High-Low Method 134 Regression Analysis 136 The Relevant Range 137 COST-VOLUME-PROFIT ANALYSIS 138 The Profit Equation 138 Break-Even Point 138 Margin of Safety, 139 Contribution Margin 140 Contribution Margin Ratio 140 ¿What-If¿ Analysis 141 Change in Fixed and Variable Costs, 141 Change in Selling Price, 141 Taxes in CVP Analysis 142 MULTIPRODUCT ANALYSIS 142 Contribution Margin Approach 142 Contribution Margin Ratio Approach 143 ASSUMPTIONS IN CVP ANALYSIS 146 CODECONNECT EXAMPLE REVISITED: ANSWERING MARY¿S QUESTION 147 OPERATING LEVERAGE 148 CONSTRAINTS 149 MAKING BUSINESS DECISIONS 150 SUMMARY OF LEARNING OBJECTIVES 150 ? LINKS TO PRACTICE: Because of Fixed Costs, Utility Wants Rate Increase to Compensate for a Warmer than Average Winter, 128 How to Reach Break-Even, 139 Deciding to Use the Contribution Margin per Unit or the Contribution Margin Ratio, 145 Which Firm Has the Higher Contribution Margin Ratio?, 146 Governmental Organizations Outsource HR to Turn Fixed Costs into Variable Costs, 149 Review Problem 155 Key Terms 156 Self Assessment 157 Interactive Learning 158 Questions 158 Exercises 158 Problems 164 Cases 174 APPENDIX USING REGRESSION IN EXCEL® TO ESTIMATE FIXED AND VARIABLE COSTS 151 Setting Up the Spreadsheet 151 Interpreting the Output of the Regression Program 152 The Plot, 152 R Square, 152 Intercept and Slope of the Regression Line, 154 P-Value, 154 Chapter 5 VARIABLE COSTING 179 FULL (ABSORPTION) AND VARIABLE COSTING 180 Variable Costing Income Statement 180 EFFECTS OF PRODUCTION ON INCOME FOR FULL VERSUS VARIABLE COSTING: THE CLAUSENTUBE EXAMPLE 182 Quantity Produced Equals Quantity Sold 183 Quantity Produced is Greater Than Quantity Sold 185 Quantity Produced is Less Than Quantity Sold 187 Explaining What Happened at CLAUSENTUBE 188 Impact of JIT on the Income Effects of Full versus Variable Costing 188 BENEFITS OF VARIABLE COSTING FOR INTERNAL REPORTING 189 Variable Costing Facilitates C-V-P Analysis 189 ftoc.qxd 8/22/06 3:41 PM Page xxiii xxiv CONTENTS Variable Costing Limits Management of Earnings with Production Volume 189 MAKING BUSINESS DECISIONS 189 SUMMARY OF LEARNING OBJECTIVES 190 ? LINKS TO PRACTICE: GM¿s Profit per SUV Hurt by Reduced Production, 188 Review Problem 190 Key Terms 192 Self Assessment 192 Interactive Learning 193 Questions 193 Exercises 194 Problems 196 Cases 205 Chapter 6 COST ALLOCATION AND ACTIVITY-BASED COSTING 209 PURPOSES OF COST ALLOCATION 210 To Provide Information for Decision Making 210 To Reduce Frivolous Use of Common Resources 211 To Encourage Evaluation of Services 212 To Provide ¿Full Cost¿ Information 213 PROCESS OF COST ALLOCATION 214 Determining the Cost Objective 214 Forming Cost Pools 214 Selecting an Allocation Base 215 ALLOCATING SERVICE DEPARTMENT COSTS 216 Direct Method of Allocating Service Department Costs 217 Allocating Budgeted and Actual Service Department Costs 218 PROBLEMS WITH COST ALLOCATION 218 Responsibility Accounting and Controllable Costs 219 Arbitrary Allocations 219 Unitized Fixed Costs and Lump-Sum Allocations 220 The Problem of Too Few Cost Pools 222 Using Only Volume-Related Allocation Bases 223 ACTIVITY-BASED COSTING 223 The Problem of Using Only Measures of Production Volume to Allocate Overhead 223 The ABC Approach 224 Relating Cost Pools to Products Using Cost Drivers 226 The ABC Approach at Gardenrite Manufacturing: A Comprehensive Example 226 Gardenrite¿s Costs under the Traditional Approach, 226 Gardenrite¿s Costs under the ABC Approach, 227 Pros and Cons of ABC 229 Benefits, 229 Limitations, 231 ACTIVITY-BASED MANAGEMENT (ABM) 231 REMEMBER¿YOU GET WHAT YOU MEASURE! 232 MAKING BUSINESS DECISIONS 233 SUMMARY OF LEARNING OBJECTIVES 233 APPENDIX ACTIVITY BASED MANAGEMENT 234 Step 1: Determine Major Activities 234 Step 2: Identify Resources Used by Each Activity 235 Return Merchandise to Stock if Not Acceptable to Customer or Customer Not Home to Receive Delivery, 235 Wash Delivery Trucks, 235 Step 3: Evaluate the Performance of the Activities 236 Step 4: Identify Ways to Improve the Efficiency and/or Effectiveness of the Activities 236 CONCLUSION 236 ? LINKS TO PRACTICE: Lack of Oversight for Cost-Plus Contracts, 213 The Activity-Based Costing Portal, 224 Avoiding Disastrous Decision by Using ABC, 230 Review Problem 237 Key Terms 239 Self Assessment 239 Interactive Learning 240 Questions 240 Exercises 240 Problems 245 Cases 256 Chapter 7 THE USE OF COST INFORMATION IN MANAGEMENT DECISION MAKING 261 INCREMENTAL ANALYSIS 262 When Your Boss Asks ¿What Does This Product (Service) Cost?¿ You Should Say ¿Why Do You Want To Know?¿ 264 ANALYSIS OF DECISIONS FACED BY MANAGERS 265 Additional Processing Decision 265 Make-or-Buy Decision: the General Refrigeration Example 267 ftoc.qxd 8/22/06 3:41 PM Page xxiv Dropping A Product Line 270 Beware of the Cost Allocation Death Spiral! 272 Summary of Incremental, Avoidable, Sunk, and Opportunity Costs 272 DECISIONS INVOLVING JOINT COSTS 273 Allocation of Joint Costs 274 Additional Processing Decisions and Joint Costs 276 QUALITATIVE CONSIDERATIONS IN DECISION ANALYSIS 277 MAKING BUSINESS DECISIONS 278 SUMMARY OF LEARNING OBJECTIVES 279 APPENDIX THE THEORY OF CONSTRAINTS (TOC) 279 THE FIVE-STEP PROCESS OF TOC 279 Step 1: Identify the Binding Constraint 280 Step 2: Optimize Use of the Constraint 280 Step 3: Subordinate Everything Else to the Constraint 281 Step 4: Break the Constraint 281 Step 5: Identify a New Binding Constraint 281 IMPLICATIONS OF TOC FOR INSPECTIONS, BATCH SIZES, AND ACROSS THE BOARD CUTS 281 Inspections, 282 Batch Sizes, 282 Across the Board Cuts, 282 YOU GET WHAT YOU MEASURE AND TOC 282 ? LINKS TO PRACTICE: Alaska Airlines Outsources Baggage Handling, 269 The Sunk Cost Effect, 275 Qualitative Considerations in Outsourcing to China, 277 Review Problem 282 Key Terms 283 Self Assessment 283 Interactive Learning 284 Questions 285 Exercises 285 Problems 290 Cases 298 CONTENTS xxv Chapter 8 PRICING DECISIONS, ANALYZING CUSTOMER PROFITABILITY, AND ACTIVITY-BASED PRICING 301 THE PROFIT MAXIMIZING PRICE 302 PRICING SPECIAL ORDERS 303 COST-PLUS PRICING 304 TARGET COSTING 306 ANALYZING CUSTOMER PROFITABILITY: REVISITING THE WHOLESALE OFFICE SUPPLY CASE 308 ACTIVITY-BASED PRICING 311 ? LINKS TO PRACTICE: Insull¿s Most Radical Innovation Wasn¿t Technology¿ It Was Pricing!, 306 Target Costing Seminars Help Companies Join the Target Costing Bandwagon, 307 Customers Requiring ¿Display-Ready¿ Pallets Can Hurt Profitability, 311 MAKING BUSINESS DECISIONS 312 SUMMARY OF LEARNING OBJECTIVES 312 Review Problem 313 Key Terms 315 Self Assessment 315 Interactive Learning 316 Questions 316 Exercises 317 Problems 321 Cases 326 Chapter 9 CAPITAL BUDGETING AND OTHER LONG-RUN DECISIONS 329 CAPITAL BUDGETING DECISIONS 330 EVALUATING INVESTMENT OPPORTUNITIES: TIME VALUE OF MONEY APPROACHES 331 Basic Time Value of Money Calculations 332 The Net Present Value Method 333 Steps in the NPV Method, 334 An Example of the NVP Approach, 334 The Internal Rate of Return Method 336 The Internal Rate of Return Method With Unequal Cash Flows 337 ftoc.qxd 8/22/06 3:41 PM Page xxv xxvi CONTENTS Summary of Net Present Value and Internal Rate of Return Methods 339 CONSIDERING ¿SOFT¿ BENEFITS IN INVESTMENT DECISIONS 339 Calculating the Value of Soft Benefits Required to Make an Investment Acceptable 340 ESTIMATING THE REQUIRED RATE OF RETURN 341 ADDITIONAL CASH FLOW CONSIDERATIONS 342 Cash Flows, Taxes, and the Depreciation Tax Shield 342 Adjusting Cash Flows for Inflation 345 OTHER LONG-RUN DECISIONS 345 SIMPLIFIED APPROACHES TO CAPITAL BUDGETING 347 Payback Period Method 347 Accounting Rate of Return 348 CONFLICT BETWEEN PERFORMANCE EVALUATION AND CAPITAL BUDGETING 350 WILSON AIR EXAMPLE REVISITED 351 MAKING BUSINESS DECISIONS 352 SUMMARY OF LEARNING OBJECTIVES 353 APPENDIX A: USING EXCEL® TO CALCULATE NPV AND IRR 354 APPENDIX B: PRESENT VALUE TABLES 357 ? LINK TO PRACTICE: Starbucks Plans Major Investment in Asia Pacific Region, 331 Investment in Energy Efficient Equipment Can Yield High Returns, 337 Use of NPV and IRR by CFOs, 339 Cost of Capital for Various Business Sectors, 341 Depreciation Tax Shield at United Airlines, 344 Review Problem 358 Key Terms 359 Self Assessment 359 Interactive Learning 360 Questions 361 Exercises 361 Problems 363 Cases 370 Chapter 10 BUDGETARY PLANNING AND CONTROL 373 USE OF BUDGETS IN PLANNING AND CONTROL 374 Planning 374 Control 374 DEVELOPING THE BUDGET 376 Budget Time Period 377 Zero-Base Budgeting 377 THE MASTER BUDGET 378 Sales Budget 378 Production Budget 379 Direct Material Purchase Budget 381 Direct Labor Budget 381 Manufacturing Overhead Budget 382 Selling and Administrative Expense Budget 382 Budgeted Income Statement 384 Capital Acquisitions Budget 384 Cash Receipts and Disbursement Budget 385 Budgeted Balance Sheet 387 USE OF COMPUTERS IN THE BUDGET PLANNING PROCESS 388 BUDGETARY CONTROL 388 Budgets as a Standard for Evaluation 389 Static and Flexible Budgets 389 INVESTIGATING BUDGET VARIANCES 391 CONFLICT IN PLANNING AND CONTROL USES OF BUDGETS 392 Why Budget-Based Compensation Can Lead to Budget Padding and Income Shifting 392 EVALUATION, MEASUREMENT, AND MANAGEMENT BEHAVIOR 394 THE PRESTON JOYSTICK CASE REVISITED 394 MAKING BUSINESS DECISIONS 394 SUMMARY OF LEARNING OBJECTIVES 395 ? LINKS TO PRACTICE: Problems with Five-Year Budgets, 376 Budgets Getting Better?, 377 Budget Process in Great Britain, 379 Spreadsheets for Budgeting, 388 Review Problem 395 Key Terms 397 Self Assessment 398 Interactive Learning 398 Questions 399 Exercises 399 Problems 403 Cases 415 ftoc.qxd 8/22/06 3:41 PM Page xxvi STANDARD COSTS 420 Standard Costs and Budgets 420 Development of Standard Costs 421 Ideal Versus Attainable Standards 422 A GENERAL APPROACH TO VARIANCE ANALYSIS 422 MATERIAL VARIANCES 423 Material Price Variance 424 Material Quantity Variance 424 DIRECT LABOR VAIANCES 425 Labor Rate Variance 426 Labor Efficiency Variance 426 OVERHEAD VARIANCES 426 Controllable Overhead Variance 427 Overhead Volume Variance 427 Computing the Overhead Volume Variance, 428 Interpreting the Overhead Volume Variance, 428 CALCULATING THE FINANCIAL IMPACT OF OPERATING AT MORE OR LESS THAN PLANNED CAPACITY 429 COMPREHENSIVE EXAMPLE: DARRINGTON ICE CREAM 430 Material Variances 432 Labor Variances 432 Overhead Variances 432 INVESTIGATION OF STANDARD COST VARIANCES 433 Management by Exception 434 ¿Favorable¿ Variances May be Unfavorable 434 Can Process Improvements Lead to ¿Unfavorable¿ Variances? 434 Beware¿Evaluation in Terms of Variances Can Lead to Excess Production 435 RESPONSIBILITY ACCOUNTING AND VARIANCES 436 MAKING BUSINESS DECISIONS 436 SUMMARY OF LEARNING OBJECTIVES 436 APPENDIX: RECORDING STANDARD COSTS IN ACCOUNTS 437 Recording Material Costs 437 Recording Labor Cost 438 Recording Manufacturing Overhead 438 Recording Finished Goods 439 Recording Cost of Goods Sold 439 Closing Variance Accounts 440 ? LINKS TO PRACTICE: Starbucks Uses Standard Costs, 421 You Get What You Measure!, 425 Review Problem 440 Key Terms 442 Self Assessment 442 Interactive Learning 443 Questions 443 Exercises 444 Problems 448 Cases 454 CONTENTS xxvii Chapter 11 STANDARD COSTS AND VARIANCE ANALYSIS 419 Chapter 12 DECENTRALIZATION AND PERFORMANCE EVALUATION 457 WHY FIRMS DECENTRALIZE 458 Advantages of Decentralization 458 Disadvantages of Decentralization 459 WHY COMPANIES EVALUATE THE PERFORMANCE OF SUBUNITS AND SUBUNIT MANAGERS 460 Responsibility Accounting and Performance Evaluation 461 COST CENTERS, PROFIT CENTERS, AND INVESTMENT CENTERS 462 Cost Centers 462 Profit Centers 463 Investment Centers 463 EVALUATING INVESTMENT CENTERS WITH ROI 464 Measuring Income and Invested Capital When Calculating ROI 466 Problems With Using ROI 467 Problems of Overinvestment and Underinvestment: You Get What You Measure! 468 Evaluation in Terms of Profit Can Lead to Overinvestment, 469 Evaluation in Terms of ROI Can Lead to Underinvestment, 469 EVALUATION USING ECONOMIC VALUE ADDED (EVA) 470 Residual Income (RI) 470 Revisiting the Situation at Action Industries, 471 Solving the Overinvestment and Underinvestment Problems 471 Economic Value Added (EVA) 471 EVA Example 472 USING A BALANCED SCORECARD TO EVALUATE PERFORMANCE 476 ftoc.qxd 8/22/06 3:41 PM Page xxvii xxviii CONTENTS Tying the Balanced Scorecard Measures to the Strategy for Success 476 Scenario 1. Learning and Growth Dimension, 477 Scenario 2. Internal Process Dimension, 477 Scenario 3. Customer Dimension, 477 Scenario 4. Financial Dimension, 478 How Balance is Achieved in a Balanced Scorecard 478 DEVELOPING A STRATEGY MAP FOR A BALANCED SCORECARD 479 KEYS TO A SUCCESSFUL BALANCED SCORECARD: TARGETS, INITIATIVES, RESPONSBILITY, FUNDING, TOP MANAGEMENT SUPPORT 480 MAKING BUSINESS DECISIONS 481 SUMMARY OF LEARNING OBJECTIVES 482 APPENDIX TRANSFER PRICING 483 Market Price as the Transfer Price 483 Market Price and Opportunity Cost 484 Variable Cost as the Transfer Price 486 Full Cost Plus Profit as the Transfer Price 486 Negotiated Transfer Prices 487 Transfer Pricing and Income Taxes in an International Context 488 ? LINKS TO PRACTICE: Subunits at Nordstrom, 464 The Focus on ROI and Shareholder Value is NOT the Same in France, Germany, and Japan as It is in the United States and Even Great Britain, 466 Companies that Use EVA, 472 Focus on EVA Affects Key Decisions Across the Organization, 475 Bringham and Women¿s Hospital Receives Award for Its Balanced Scorecard, 481 Undervalued Intellectual Property Transferred Offshore to Cut U.S. Taxes, 488 Review Problem 488 Key Terms 491 Self Assessment 492 Interactive Learning 492 Questions 493 Exercises 493 Problems 496 Cases 503 Chapter 13 ANALYZING FINANCIAL STATEMENTS: A MANAGERIAL PERSPECTIVE 507 WHY MANAGERS ANALYZE FINANCIAL STATEMENTS 508 Control of Operations 508 Assessment of Vendors, Customers, and Other Business Partners 509 Assessment of Appearance to Investors and Creditors 509 REVIEW OF THE THREE BASIC FINANCIAL STATEMENTS 509 The Balance Sheet 510 Current and Noncurrent Assets and Liabilities, 511 The Income Statement 511 The Statement of Cash Flows 512 Operating Activities, 512 Investing Activities, 512 Financing Activities, 512 HORIZONTAL AND VERTICAL ANALYSIS 513 Analysis of the Balance Sheet 513 Analyzing the Income Statement 515 EARNINGS MANAGEMENT AND THE NEED TO COMPARE EARNINGS AND CASH FLOW INFORMATION 516 OTHER SOURCES OF INFORMATION ON FINANCIAL PERFORMANCE 517 Management Discussion and Analysis 517 Credit Reports 517 News Articles 517 RATIO ANALSYSIS 518 Profitability Ratios 518 Financial Leverage, 519 Summary of Profitability Ratios, 520 Turnover Ratios 520 Summary of Turnover Ratios, 521 Debt Related Ratios 522 Summary of Debt Related Ratios, 523 A MANAGERIAL PERSPECTIVE ON THE ANALYSIS OF HGW¿S FINANCIAL STATEMENTS 523 Control of Operations 523 Stability of Vendors, Customers, and Other Business Partners 523 Returning to the Situation Facing Valley Home Loan, 524 Appearance to Investors and Creditors 524 SUMMARY OF ANALYSES 524 MAKING BUSINESS DECISIONS 525 SUMMARY OF LEARNING OBJECTIVES 526 ? LINKS TO PRACTICE: Watching Cash Flow Versus Earnings, 516 Comparative Ratio Data, 524 Review Problem 526 Key Terms 528 Self Assessment 528 ftoc.qxd 8/22/06 3:41 PM Page xxviii Interactive Learning 529 Questions 530 Exercises 530 Problems 535 Cases 546 LIST OF CASES xxix Chapter 14 STATEMENT OF CASH FLOWS 551 NEED FOR A STATEMENT OF CASH FLOWS 551 TYPES OF BUSINESS ACTIVITIES AND THE CLASSIFICATION OF CASH FLOWS 552 Operating Activities 552 Investing Activities 554 Financing Activities 555 THE STATEMENT OF CASH FLOWS PREPARED USING THE DIRECT METHOD 555 PREPARING THE STATEMENT OF CASH FLOWS USING THE INDIRECT METHOD 559 Statement of Cash Flows for Ravira Restaurant Supply¿Indirect Method 560 INTERPRETING INFORMATION IN THE STATEMENT OF CASH FLOWS¿THE SITUATION AT RAVIRA RESTAURANT SUPPLY 563 MAKING BUSINESS DECISIONS 563 SUMMARY OF LEARNING OBJECTIVES 564 ? LINKS TO PRACTICE: Spotting a Cash Cow, 562 Review Problem 564 Key Terms 566 Self Assessment 566 Questions 567 Exercises 568 Problems 573 Cases 582 Glossary 583 Photo Credits 589 Index 591 LIST OF CASES Each chapter of Managerial Accounting includes one of more cases that: ¿ Promote critical thinking and decision making skills. ¿ Provide an opportunity for group work and/or written communication work. ¿ Integrate information from other business disciplines. Chapter 1 1¿1: LOCAL 635 A union is disputing ¿cost of meal¿ charges to hotel employees. 1¿2: BOSWELL PLUMBING PRODUCTS A senior manager wants to know a product¿s cost. But the ¿cost¿ information needed depends on the decision the senior manager is facing. ftoc.qxd 8/22/06 3:41 PM Page xxix xxx LIST OF CASES Chapter 2 2¿1: Ethics Case: BRIXTON SURGICAL DEVICES To meet an aggressive earnings target, two senior executives are planning to increase production to ¿bury¿ fixed overhead costs in inventory. 2¿2: YSL MARKETING RESEARCH A marketing research firm is considering various costs when bidding on a job. 2¿3: DUPAGE POWDER COATING A company¿s product costs are being distorted by its approach to overhead allocation. Chapter 3 3¿1: Tech-Tonic Sports Drink A producer of a sports drink is considering alternative treatments for the cost of lost units. 3¿2: JENSEN PVC, INC. A company is considering lowering prices to increase sales and reduce unit costs by making better use of excess capacity. Chapter 4 4¿1: ROTHMUELLER MUSEUM A curator at a museum is trying to estimate the financial impact of a planned exhibit. 4¿2: MAYFIELD SOFTWARE, CUSTOMER TRAINING The customer training facility of a software company is showing a loss. The manager needs to determine the number of classes that must be offered to break even. 4¿3: KROG METALFAB, INC. A company is estimating the lost profit related to fire damage so it can submit an insurance claim. Chapter 5 5¿1: MicroImage Technology, INC. A start-up company has a negative gross margin and it appears that ¿the more it sells, the more it loses.¿ Use of variable costing reveals that this is not the case. 5¿2: RainRuler Stains A variable-costing income statement is used to show the financial impact of sales related to a new customer category. Chapter 6 6¿1: EASTSIDE MEDICAL TESTING This case presents a service company example of ABC. 6¿2: QuantumTM This case shows how ABC affects product costs and considers the use of ABC information in decision making. Chapter 7 7¿1: PRIMUS CONSULTING GROUP A consulting firm is considering a client offer of a fee that is less than standard rates. 7¿2: FIVE STAR TOOLS A tool manufacturer is faced with a production constraint, and needs to consider the financial impact of a plan to deal with the situation. ftoc.qxd 8/22/06 3:41 PM Page xxx Chapter 8 8¿1: PRESTON CONCRETE The company is considering moving away from its cost-plus pricing approach when an increase in interest rates reduces housing starts and the demand for concrete. 8¿2: GALLOWAY UNIVERSITY MEDICAL CENTER PHARMACY A university hospital pharmacy is considering the profit implications of alternative approaches to encouraging prescription renewals from ¿out-of-area¿ patients. Chapter 9 9¿1: Ethics Case: JUNIPER PACKAGING SOLUTIONS, INC. A plant manager is considering a plan to circumvent a freeze on capital expenditures. 9¿2: SERGO GAMES A game company is considering outsourcing manufacturing of CDs. Chapter 10 10¿1: Ethics Case: COLUMBUS PARK¿WASTE TREATMENT FACILITY The manager of a waste-treatment facility is planning to pad costs in her budget because the city controller is likely to cut whatever budget is submitted. 10¿2: ABRUZZI OLIVE OIL COMPANY A small producer of olive oil is preparing production budgets to consider the impact of various sales levels. (Note that this case is best ¿solved¿ using a spreadsheet.) Chapter 11 11¿1: JACKSON SOUND Work in process inventory is building up at Jackson Sound even though the company has a JIT system. 11¿2: CHAMPION INDUSTRIES A purchasing manager is considering a material that has a price higher than standard, but also a number of desirable properties. Chapter 12 12¿1: HOME VALUE STORES A company that operates membership warehouse stores is evaluating using EVA. 12¿2: WinTech Motors Owners of a sports and luxury auto dealership are faced with negative EVA and must cut their investment in inventory. Chapter 13 13¿1: JORDAN-WILLIAMS, INCORPORATED A publisher of college textbooks is evaluating the financial condition of a potential business partner. Chapter 14 14¿1: WELLCOMP COMPUTERS A computer company is considering the impact of a price reduction on cash flow. LIST OF CASES ftoc.qxd 8/22/06 3:41 PM Page 1
Library of Congress Subject Headings for this publication:
Managerial accounting.