ACT 500 SEU Creditor and Investor Financial Ratio Analysis Discussion

Managerial AccountingFifteenth Edition
Chapter 16
Financial
Statement
Analysis
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Learning Objectives (1 of 2)
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Obj. 1: Describe the techniques and tools used to
analyze financial statement information.
Obj. 2: Describe and illustrate basic financial statement
analytical methods.
Obj. 3: Describe and illustrate how to use financial
statement analysis to assess liquidity.
Obj. 4: Describe and illustrate how to use financial
statement analysis to assess solvency.
Obj. 5: Describe and illustrate how to use financial
statement analysis to assess profitability.
Obj. 6: Describe the contents of corporate annual
reports.
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Learning Objectives (2 of 2)
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•
Obj. App 1: Describe the reporting of unusual items on
the income statement.
Obj. App 2: Describe the concepts of fair value and
comprehensive income.
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The Value of Financial Statement
Information
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General-purpose financial statements are distributed to
a wide range of potential users, providing each group
with valuable information about a company’s economic
performance and financial condition.
Users typically evaluate this information along three
dimensions:
1. Liquidity
2. Solvency
3. Profitability
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Liquidity
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Short-term creditors such as banks and financial
institutions are primarily concerned with whether a
company will be able to repay short-term borrowings
such as loans and notes.
As such, they are most interested in evaluating a
company’s ability to convert assets into cash, which is
called liquidity.
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Solvency
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Long-term creditors, such as bondholders, loan money
for long periods of time.
Thus, they are interested in evaluating a company’s
ability to make its periodic interest payments and repay
the face amount of debt at maturity, which is called
solvency.
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Profitability
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Investors, such as stockholders, are interested in
evaluating the potential for the price of the company’s
stock to increase.
As such, investors focus on evaluating a company’s
ability to generate earnings, which is called
profitability.
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Techniques for Analyzing Financial
Statements (1 of 2)
•
Financial statement users rely on the following
techniques to analyze and interpret a company’s
financial performance and condition:
– Analytical methods examine changes in the amount
and percentage of financial statement items within and
across periods.
– Ratios express a financial statement item or set of
financial statement items as a percentage of another
financial statement item, in order to measure an
important economic relationship as a single number.
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Techniques for Analyzing Financial
Statements (2 of 2)
•
Both analytical methods and ratios can be used to compare
a company’s financial performance over time or to another
company.
–
–
Comparisons Over Time: The comparison of a financial
statement item or ratio with the same item or ratio from a prior
period often helps the user identify trends in a company’s
economic performance, financial condition, liquidity, solvency,
and profitability.
Comparisons Among Companies: The comparison of a
financial statement item or ratio to another company in the
same industry can provide insight into a company’s economic
performance and financial condition relative to its
competitors.
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Analytical Methods
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Users analyze a company’s financial statements using
a variety of analytical methods. Three such methods
are the following:
1. Horizontal analysis
2. Vertical analysis
3. Common-sized statements
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Horizontal Analysis (1 of 2)
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The analysis of increases and decreases in the amount
and percentage of comparative financial statement
items is called horizontal analysis.
– Each item on the most recent statement is compared
with the same item on one or more earlier statements in
terms of the following:
▪
▪
Amount of increase or decrease
Percent of increase or decrease
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Horizontal Analysis (2 of 2)
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When comparing statements, the earlier statement is
normally used as the base year for computing
increases and decreases.
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Comparative Balance Sheet—Horizontal
Analysis
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Comparative Schedule of Current Assets—
Horizontal Analysis
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Comparative Income Statement—
Horizontal Analysis
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Comparative Retained Earnings
Statement—Horizontal Analysis
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Vertical Analysis (1 of 3)
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The percentage analysis of the relationship of each
component in a financial statement to a total within the
statement is called vertical analysis.
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Vertical Analysis (2 of 3)
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In a vertical analysis of the balance sheet, the
percentages are computed as follows:
– Each asset item is stated as a percent of the total
assets.
– Each liability and stockholders’ equity item is stated as a
percent of the total liabilities and stockholders’ equity.
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Comparative Balance Sheet—Vertical
Analysis
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Vertical Analysis (3 of 3)
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In a vertical analysis of the income statement, each
item is stated as a percent of sales.
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Comparative Income Statement—Vertical
Analysis
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Common-Sized Statements
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In a common-sized statement, all items are
expressed as percentages, with no dollar amounts
shown.
Common-sized statements are often useful for
comparing one company with another or for comparing
a company with industry averages.
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Common-Sized Income Statements
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Check Up Corner: Horizontal and Vertical
Analyses (1 of 2)
Select income statement data for Bukasy Company for
two recent years ended December 31 are as follows:
20Y2
20Y1
Sales
$ 2,200,000
$ 2,000,000
Costs of goods sold
(1,337, 500)
(1,250,000)
Gross profit
$ 862,500
$ 750,000
Selling, general, and
administrative expenses
(440,000)
(400,000)
Operating income
$ 422,500
$ 350,000
Prepare horizontal and vertical analyses of Bukasy’s
income statement. (Round percentages to one decimal
place.)
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Check Up Corner: Horizontal and Vertical
Analyses (2 of 2)
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Analyzing Liquidity
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Liquidity analysis evaluates the ability of a company to
convert current assets into cash.
Liquidity ratios and measures focus upon a company’s
current position (current assets and liabilities),
accounts receivable, and inventory.
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Liquidity Ratios and Measures
Current Position
Analysis
Accounts Receivable
Analysis
Inventory Analysis
Working Capital
Accounts Receivable
Turnover
Inventory Turnover
Current Ratio
Number of Days’ Sales in
Receivables
Number of Days’ Sales in
Inventory
Quick Ratio
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Current Position Analysis
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Current position analysis evaluates a company’s
ability to pay its current liabilities.
This information helps short-term creditors determine
how quickly they will be repaid.
This analysis includes the following:
– Working capital
– Current ratio
– Quick ratio
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Current Position Analysis: Working
Capital (1 of 3)
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A company’s working capital is computed as follows:
Working Capital = Current Assets – Current Liabilities
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Current Position Analysis: Working Capital
(2 of 3)
•
To illustrate, the working capital for Lincoln Company
for 20Y6 and 20Y5 is computed as follows:
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Current Position Analysis: Working
Capital (3 of 3)
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The working capital is used to evaluate a company’s
ability to pay current liabilities.
A company’s working capital is often monitored
monthly, quarterly, or yearly by creditors and other
debtors.
However, it is difficult to use working capital to compare
companies of different sizes.
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Current Position Analysis: Current Ratio
(1 of 3)
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The current ratio, sometimes called the working
capital ratio, is computed as follows:
Current Assets
Current Ratio =
Current Liabilities
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Current Position Analysis: Current Ratio
(2 of 3)
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To illustrate, the current ratio for Lincoln Company is
computed as follows:
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Current Position Analysis: Current Ratio
(3 of 3)
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The current ratio is a more reliable indicator of a
company’s ability to pay its current liabilities than is
working capital, and it is much easier to compare
across companies.
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Current Position Analysis: Quick Ratio
(1 of 3)
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A ratio that measures the “instant” debt-paying ability of a
company is the quick ratio, sometimes called the acid-test
ratio.
The quick ratio is computed as follows:
Quick Assets
Quick Ratio =
Current Liabilities
–
Quick assets are cash and other current assets that can be
easily converted to cash.
▪
Quick assets normally include cash, temporary investments, and
receivables but exclude inventories and prepaid assets.
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Current Position Analysis: Quick Ratio
(2 of 3)
•
To illustrate, the current assets and liabilities for Lincoln
Company and Jefferson Company are as follows:
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Current Position Analysis: Quick Ratio
(3 of 3)
•
To illustrate, the quick ratio for Lincoln Company and
Jefferson Company are computed as follows:
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Accounts Receivable Analysis (1 of 2)
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A company’s ability to collect its accounts receivable is
called accounts receivable analysis.
Accounts receivable analysis includes the computation
and analysis of the following:
– Accounts receivable turnover
– Number of days’ sales in receivables
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Accounts Receivable Analysis (2 of 2)
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Collecting accounts receivable as quickly as possible
does the following:
– Improves a company’s liquidity
– Provides cash to improve or expand operations
– Reduces the risk of uncollectible accounts
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Accounts Receivable Analysis: Accounts
Receivable Turnover (1 of 2)
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The accounts receivable turnover is computed as
follows:
Accounts Receivable Turnover =
Sales
Average Accounts Receivable
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Accounts Receivable Analysis: Accounts
Receivable Turnover (2 of 2)
•
To illustrate, the accounts receivable turnover for
Lincoln Company for 20Y6 and 20Y5 is computed as
follows. Lincoln’s accounts receivable balance at the
beginning of 20Y5 is $140,000.
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Accounts Receivable Analysis: Number of
Days’ Sales in Receivables (1 of 3)
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The number of days’ sales in receivables is
computed as follows:
Average Accounts Receivable
Number of Days’ Sales inReceivable s =
Average Daily Sales
where
Sales
Average Daily Sales =
365 Days
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Accounts Receivable Analysis: Number of
Days’ Sales in Receivables (2 of 3)
•
To illustrate, the number of days’ sales in receivables
for Lincoln Company is computed as follows:
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Accounts Receivable Analysis: Number of
Days’ Sales in Receivables (3 of 3)
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The number of days’ sales in receivables is an estimate
of the time (in days) that the accounts receivable have
been outstanding.
The number of days’ sales in receivables is often
compared with a company’s credit terms to evaluate
the efficiency of the collection of receivables.
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Inventory Analysis (1 of 2)
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A company’s ability to manage its inventory effectively
is evaluated using inventory analysis.
Inventory analysis includes the computation and
analysis of the following:
– Inventory turnover
– Number of days’ sales in inventory
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Inventory Analysis (2 of 2)
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Excess inventory does the following:
– Decreases liquidity by tying up funds (cash) in inventory
– Increases insurance expense, property taxes, storage
costs, and other related expenses
– Increases the risk of losses because of price declines or
obsolescence of the inventory
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Inventory Analysis: Inventory Turnover
(1 of 2)
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The inventory turnover is computed as follows:
Costs of goods sold
Inventory Turnover =
Average Inventory
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Inventory Analysis: Inventory Turnover
(2 of 2)
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To illustrate, the inventory turnover for Lincoln
Company for 20Y6 and 20Y5 is computed as follows:
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Inventory Analysis: Number of Days’ Sales
in Inventory (1 of 3)
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The number of days’ sales in inventory is computed
as follows:
Number of Days’ Sales inInventory =
Average Inventory
Average Daily Cost of Goods Sold
where
Average Daily Cost of Goods Sold =
Costs of Goods Sold
365 Days
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Inventory Analysis: Number of Days’ Sales
in Inventory (2 of 3)
•
To illustrate, the number of days’ sales in inventory for
Lincoln Company is computed as follows:
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Inventory Analysis: Number of Days’ Sales
in Inventory (3 of 3)
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The number of days’ sales in inventory is a rough
estimate of the length of time it takes to purchase, sell,
and replace the inventory.
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Check Up Corner: Liquidity Analysis (1 of 2)
Select financial statement data for OM&M Inc. for two recent years
follows:
Based on these data, calculate the following liquidity measures for 20Y2:
A. Current ratio
B. Quick ratio
C. Accounts receivable turnover
D. Inventory turnover
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Check Up Corner: Liquidity Analysis (2 of 2)
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Analyzing Solvency
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Solvency analysis evaluates a company’s ability to pay
its long-term debts.
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Solvency Ratios
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Ratio of Fixed Assets to Long-Term
Liabilities (1 of 2)
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The ratio of fixed assets to long-term liabilities
provides a measure of how much fixed assets a
company has to support its long-term debt.
This measures a company’s ability to repay the face
amount of debt at maturity and is computed as follows:
Ratio of Fixed Assets to Long − Term Liabilities =
Fixed Assets (net)
Long − Term Liabilities
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Ratio of Fixed Assets to Long-Term
Liabilities (2 of 2)
•
To illustrate, the ratio of fixed assets to long-term
liabilities for Lincoln Company is computed as follows:
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Ratio of Liabilities to Stockholders’ Equity
(1 of 2)
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The ratio of liabilities to stockholders’ equity
measures how much of the company is financed by
debt and equity. It indicates the margin of safety for
creditors.
The ratio of liabilities to stockholders’ equity is
computed as follows:
Ratio of Liabilities to Stockholde rs’ Equity =
Total Liabilities
Total Stockholde rs’ Equity
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Ratio of Liabilities to Stockholders’ Equity
(2 of 2)
•
To illustrate, the ratio of liabilities to stockholders’ equity
for Lincoln Company is computed as follows:
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Times Interest Earned (1 of 2)
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The times interest earned, sometimes called the
coverage ratio, measures the risk that interest
payments will not be made if earnings decrease.
The times interest earned is computed as follows:
Times Interest Earned =
•
Income Before Income Tax + Interest Expense
Interest Expense
The higher the ratio, the more likely interest payments
will be paid if earnings decrease.
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Times Interest Earned (2 of 2)
•
To illustrate, the times interest earned for Lincoln
Company is computed as follows:
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Check Up Corner: Solvency Analysis (1 of 2)
The following are select balance sheet and income statement data
for Wilton Strand Inc. for a recent year:
Based on these data, calculate the following solvency measures:
A. Ratio of fixed assets to long-term liabilities
B. Ratio of liabilities to stockholders’ equity
C. Times interest earned
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Check Up Corner: Solvency Analysis (2 of 2)
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Profitability Analysis
•
Profitability analysis evaluates the ability of a company
to generate future earnings.
– This ability depends on the relationship between the
company’s operating results and the assets the
company has available for use in its operations.
▪
Thus, the relationship between income statement and
balance sheet items is used to evaluate profitability.
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Profitability Ratios
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Asset Turnover (1 of 2)
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The asset turnover measures how effectively a
company uses its assets.
The asset turnover is computed as follows:
Asset Turnover =
–
Sales
Average Total Assets (excluding long − term investment s)
Note that long-term investments are excluded in
computing asset turnover because long-term investments
are unrelated to normal operations and sales.
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Asset Turnover (2 of 2)
•
To illustrate, the asset turnover for Lincoln Company is
computed as follows:
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Return on Total Assets (1 of 3)
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The return on total assets measures the profitability of total
assets, without considering how the assets are financed.
–
•
In other words, this rate is not affected by the portion of assets
financed by creditors or stockholders.
The return on total assets is computed as follows:
Return on Total Assets =
–
–
Net income + Interest Expense
Average Total assets
By adding interest expense to net income, the effect of whether the
assets are financed by creditors (debt) or stockholders (equity) is
eliminated.
Because net income includes any income earned from long-term
investments, the average total assets includes long-term investments
and the net operating assets.
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Return on Total Assets (2 of 3)
•
To illustrate, the return on total assets by Lincoln
Company is computed as follows:
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Return on Total Assets (3 of 3)
•
•
The return on operating assets is sometimes computed
when there are large amounts of nonoperating income
and expense.
The return on operating assets is computed as follows:
Operating Income
Return on Operating Assets =
Average Operating Assets
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Return on Stockholders’ Equity (1 of 4)
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The return on stockholders’ equity measures the
rate of income earned on the amount invested by the
stockholders.
The return on stockholders’ equity is computed as
follows:
Net Income
Return on Stockholde rs’ Equity =
Average Total Stockholde rs’ Equity
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Return on Stockholders’ Equity (2 of 4)
•
To illustrate, the return on stockholders’ equity for
Lincoln Company is computed as follows:
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Return on Stockholders’ Equity (3 of 4)
•
The return on stockholders’ equity is normally higher
than the return on total assets.
– This is because of the effect of leverage.
▪
Leverage involves using debt to increase the return on an
investment.
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Return on Stockholders’ Equity (4 of 4)
•
For Lincoln Company, the effect of leverage for 20Y6
and 20Y5 is computed as follows:
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Effect of Leverage
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Return on Common Stockholders’ Equity
(1 of 3)
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The return on common stockholders’ equity
measures the rate of profits earned on the amount
invested by the common stockholders.a
The return on common stockholders’ equity is
computed as follows:
Return on Common
Net Income − Preferred Dividends
=
Stockholde rs’ Equity Average Common Stockholde rs’ Equity
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Return on Common Stockholders’ Equity
(2 of 3)
•
To illustrate, the return on common stockholders’ equity
for Lincoln Company is computed as follows:
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Return on Common Stockholders’ Equity
(3 of 3)
•
Lincoln’s return on common stockholders’ equity differs
from the returns on total assets and stockholders’
equity because of leverage.
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Earnings per Share on Common Stock
(1 of 3)
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Earnings per share (EPS) on common stock
measures the share of profits that are earned by a
share of common stock.
EPS must be reported in the income statement.
EPS on common stock is computed as follows:
Earnings per Share (EPS)
Net Income − Preferrred Dividends
=
on Common Stock
Shares of Common Stock Outstandin g
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Earnings per Share on Common Stock
(2 of 3)
•
To illustrate, the earnings per share (EPS) of common
stock for Lincoln Company is computed as follows:
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Earnings per Share on Common Stock
(3 of 3)
•
•
Many corporations have complex capital structures with
various types of equity securities outstanding, such as
convertible preferred stock, stock options, and stock
warrants.
In such cases, the possible effects of such securities
on the shares of common stock outstanding are
reported separately as earnings per common share
assuming dilution or diluted earnings per share.
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Price-Earnings Ratio (1 of 2)
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•
The price-earnings (P/E) ratio on common stock
measures a company’s future earnings prospects.
The price-earnings ratio is computed as follows:
Price − Earnings (P/E) Ratio =
Market Price per Share of Common Stock
Earnings per Share on Common Stock
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Price-Earnings Ratio (2 of 2)
•
To illustrate, the price-earnings (P/E) ratio for Lincoln
Company is computed as follows:
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Dividends per Share (1 of 3)
•
•
Dividends per share measures the extent to which
earnings are being distributed to common
shareholders.
Dividends per share is computed as follows:
Dividend per shares =
Dividends on Common Stock
Shares of Common Stock Outstandin g
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Dividends per Share (2 of 3)
•
To illustrate, the dividends per share for Lincoln
Company are computed as follows:
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Dividends per Share (3 of 3)
•
Comparing dividends per share and earnings per share
indicates the extent to which earnings are being
retained for use in operations.
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Dividends and Earnings per Share of
Common Stock
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Dividend Yield (1 of 2)
•
•
•
The dividend yield on common stock measures the
rate of return to common stockholders from cash
dividends.
It is of special interest to investors whose objective is to
earn revenue (dividends) from their investment.
The dividend yield is computed as follows:
Dividends per Share of Common Stock
Dividend Yield =
Market Price per Share of Common Stock
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Dividend Yield (2 of 2)
•
To illustrate, the dividend yield for Lincoln Company is
computed as follows:
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Check Up Corner: Profitability Analysis (1 of 3)
The following data were taken from the financial
statements of French Broad Steel Works Inc. for a recent
year:
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Check Up Corner: Profitability Analysis (2 of 3)
Based on these data, determine the following profitability
measures:
A. Asset turnover
B. Return on total assets
C. Return on stockholders’ equity
D. Earnings per share
E. Price-earnings ratio
F. Dividend yield
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Check Up Corner: Profitability Analysis (3 of 3)
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Summary of Analytical Measures (1 of 2)
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Summary of Analytical Measures (2 of 2)
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Corporate Annual Reports
•
In addition to the financial statements and the
accompanying notes, corporate annual reports
normally include the following sections:
– Management discussion and analysis
– Report on internal control
– Report on fairness of the financial statements
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Management Discussion and Analysis
(1 of 2)
•
•
•
Management’s Discussion and Analysis (MD&A) is
required in annual reports filed with the Securities and
Exchange Commission.
It includes management’s analysis of current operations
and its plans for the future.
Typical items included in the MD&A are as follows:
– Management’s analysis and explanations of any
significant changes between the current and the prior
years’ financial statements.
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Management Discussion and Analysis
(2 of 2)
– Important accounting principles or policies that could
affect interpretation of the financial statements, including
the effect of changes in accounting principles or the
adoption of new accounting principles.
– Management’s assessment of the company’s liquidity
and the availability of capital to the company.
– Significant risk exposures that might affect the company.
– Any “off-balance-sheet” arrangements such as leases
not included in the financial statements.
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Report on Internal Control (1 of 2)
•
The Sarbanes-Oxley Act of 2002 requires a report on
internal control by management.
– The report states management’s responsibility for
establishing and maintaining internal control.
– In addition, management’s assessment of the
effectiveness of internal controls over financial reporting
is included in the report.
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Report on Internal Control (2 of 2)
•
Sarbanes-Oxley also requires a public accounting firm
to verify management’s conclusions on internal control.
– Thus, two reports on internal control, one by
management and one by a public accounting firm, are
included in the annual report.
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Report on Fairness of the Financial
Statements
•
All publicly held corporations are required to have an
independent audit (examination) of their financial statements.
•
The Certified Public Accounting (CPA) firm that conducts the
audit renders an opinion, called the Report of Independent
Registered Public Accounting Firm, on the fairness of the
statements.
–
An opinion stating that the financial statements present fairly the
financial position, results of operations, and cash flows of the
company is said to be an unmodified opinion, sometimes called a
clean opinion.
–
Any report other than an unmodified opinion raises a “red flag” for
financial statement users and requires further investigation as to its
cause.
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Appendix 1: Unusual Items on the Income
Statement
•
Generally accepted accounting principles require that
unusual items be reported separately on the income
statement.
– This is because such items do not occur frequently and
are typically unrelated to current operations.
•
Unusual items on the income statement are classified
as one of the following:
– Affecting the current period income statement
– Affecting a prior period income statement
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Appendix 1: Unusual Items Affecting the
Current Period’s Income Statement
•
Discontinued operations are an unusual item that affect
the current period’s:
– income statement presentation.
– earnings per share presentation.
•
Discontinued operations are reported separately on the
income statement for any period in which they occur.
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Appendix 1: Unusual Items Affecting the Current Period’s
Income Statement—Income Statement Presentation
•
A company may discontinue a component of its operations
by selling or abandoning the component’s operations.
–
–
If the discontinued component is (1) the result of a strategic
shift and (2) has a major effect on the entity’s operations and
financial results, any gain or loss on discontinued operations
is reported on the income statement as a Gain (or loss) from
discontinued operations.
A note to the financial statements should describe the
operations sold, including the date operations were
discontinued, and details about the assets, liabilities, income,
and expenses of the discontinued component.
Copyright © 2019 Cengage. All Rights Reserved.
Unusual Items in the Income Statement
Copyright © 2019 Cengage. All Rights Reserved.
Appendix 1: Unusual Items Affecting the Current
Period’s Income Statement—Earnings per Share
•
Earnings per common share should be reported
separately for discontinued operations.
Copyright © 2019 Cengage. All Rights Reserved.
Income Statement with Earnings per Share
Copyright © 2019 Cengage. All Rights Reserved.
Appendix 1: Unusual Items Affecting the
Prior Period’s Income Statement
•
An unusual item may occur that affects a prior period’s
income statement.
– Two such items are as follows:
1. Errors in applying generally accepted accounting
principles
2. Changes from one generally accepted accounting
principle to another
Copyright © 2019 Cengage. All Rights Reserved.
Appendix 2: Fair Value
•
Fair value is the price that would be received for
selling an asset if it were sold today.
– This differs from historical cost, in that the amount
reported on the balance sheet changes each period to
reflect the asset’s fair (current) value at the balance
sheet date.
▪
The change in an asset’s fair value from one period to the
next is recorded in the financial statements as either:
o
o
a gain or loss on the income statement, or
an increase or decrease in stockholders’ equity reported as
other comprehensive income.
Copyright © 2019 Cengage. All Rights Reserved.
Appendix 2: Comprehensive Income (1 of 2)
•
When a change in an asset’s fair value is not recorded as a gain
or a loss on the income statement, it is recorded as an element of
other comprehensive income.
–
•
•
These include changes in the fair value of certain investment
securities, foreign currency exposures, and pension assets.
The elements of other comprehensive income are included in the
computation of comprehensive income, which is defined as all
changes in stockholders’ equity during a period, except those
resulting from dividends and stockholders’ investments.
Comprehensive income is determined as follows:
Copyright © 2019 Cengage. All Rights Reserved.
Appendix 2: Comprehensive Income (2 of 2)
•
Companies must report comprehensive income in the
financial statements either:
– on the income statement, directly below net income, or
– in a separate statement of comprehensive income.
Copyright © 2019 Cengage. All Rights Reserved.
Appendix 2: Reporting Comprehensive
Income on the Income Statement (1 of 2)
•
Bart Company purchased investment securities during
the year that had an increase of $2,600 in fair value.
Because of the accounting methods selected by Bart,
this increase in fair value is recorded as an element of
other comprehensive income and is called an
unrealized gain. If Bart elects to report other
comprehensive income on the income statement, the
elements of other comprehensive income are added to
or subtracted from net income at the bottom of the
income statement as follows:
Copyright © 2019 Cengage. All Rights Reserved.
Appendix 2: Reporting Comprehensive
Income on the Income Statement (2 of 2)
Copyright © 2019 Cengage. All Rights Reserved.
Appendix 2: Reporting Comprehensive Income in
the Statement of Comprehensive Income (1 of 2)
•
As an alternative to reporting comprehensive income on the
income statement, companies may elect to report
comprehensive income on a separate statement of
comprehensive income.
–
This statement should immediately follow the income
statement.
Copyright © 2019 Cengage. All Rights Reserved.
Appendix 2: Reporting Comprehensive Income in
the Statement of Comprehensive Income (2 of 2)
Copyright © 2019 Cengage. All Rights Reserved.
Appendix 2: Reporting Accumulated Other
Comprehensive Income on the Balance Sheet
•
The cumulative effect of the elements of other
comprehensive income is reported on the balance sheet as
accumulated other comprehensive income.
–
Bart Company’s unrealized gain of $2,600 would be reported
as accumulated other comprehensive income in the
Stockholders’ Equity section of the balance sheet, as follows:
Copyright © 2019 Cengage. All Rights Reserved.
Financial Statement Analysis
Discussion Question:
Q- Financial Ratios
Select one type of creditor or investor from the list below:
• vendor (supplier of goods or products)
• bank providing short-term financing
• bank providing long-term loan (10 years or more)
• bond investor
• investor in common stock
Discuss at least three specific financial ratios that creditors or investors would be most interested in
when analyzing financial statements, and why.
Directions:
• Discuss the concepts, principles, and theories from your textbook. Cite your textbooks and
cite any other sources if appropriate.
• Your initial post should address all components of the question with a 600 word limit.
Learning Outcomes:
1. Examine the components of the balance sheet and income statement.
2. Analyze financial statements using vertical and horizontal analysis, liquidity, and profitability
ratios.
3. Evaluate cost centers, profit centers and investment centers and understand how a balanced
scorecard aligns performance with organizational goals.
Readings
Required:
• Chapter 16 in Managerial Accounting
• Ding, K., Peng, X., & Wang, Y. (2019). A machine learning-based peer selection method with
financial ratios. Accounting Horizons, 33(3), 75–87.
Recommended:
• Module 14 PowerPoint Presentation
• Corporate Finance Institute (2015-2021). Analysis of financial statements: Guide to analyizing
financial statements for financial analysts.
Managerial
Accounting
Carl S. Warren
Professor Emeritus of Accounting
University of Georgia, Athens
William B. Tayler
Brigham Young University
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
15e
Managerial Accounting, 15e
Carl S. Warren
William B. Tayler
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Intellectual Property Analyst: Reba Frederics
Library of Congress Control Number: 2018954981
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Carly Belcher
ISBN: 978-1-337-91202-0
Cengage
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Boston, MA 02210
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Printed in the United States of America
Print Number: 01
Print Year: 2018
Preface
Roadmap for Success
Warren/Tayler Managerial Accounting, 15e, provides a sound pedagogy for giving s­ tudents a solid
foundation in managerial accounting. Warren/Tayler covers the fundamentals AND ­motivates students to learn by showing how accounting is important to businesses.
Warren/Tayler is successful because it reaches students with a combination of new and tried-andtested pedagogy.
This revision includes a range of new and existing features that help Warren/Tayler provide
­students with the context to see how accounting is valuable to business. These include:
▪▪ New! Make a Decision section
▪▪ New! Pathways Challenge
▪▪ New! Certified Management Accountant (CMA®) Examination Questions
Warren/Tayler also includes a thorough grounding in the fundamentals that any business student
will need to be successful. These key features include:
▪▪ Presentation style designed around the way students learn
▪▪ Updated schema
▪▪ At the start of each chapter, a schema, or roadmap, shows students what they are going to
learn and how it is connected to the larger picture. The schema illustrates how the chapter
content lays the foundation with managerial concepts and principles. Then it moves students
through developing the information and ultimately into evaluating and analyzing information
in order to make decisions.
Chapter
15
Statement
of Cash Flows
Principles
Chapter 1 Introduction to Managerial Accounting
Developing Information
COST SYSTEMS
Chapter 2
Chapter 3
Chapter 4
COST ALLOCATIONS
Chapter 5
Chapter 5
Job Order Costing
Process Costing
Support Departments
Joint Costs
Activity-Based Costing
Decision Making
PLANNING AND EVALUATING TOOLS
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Cost-Volume-Profit Analysis
Variable Costing
Budgeting Systems
Standard Costing and Variances
Decentralized Operations
STRATEGIC TOOLS
Chapter 12
Chapter 13
Chapter 13
Chapter 14
Chapter 14
Capital Investment Analysis
Lean Manufacturing
Activity Analysis
The Balanced Scorecard
Corporate Social Responsibility
Differential Analysis
Chapter 15
Financial
accounting
Statement
of Cash Flows
Managerial
accounting
Chapter 16
Financial Statement
Analysis
698
12020_ch15_rev02_698-757.indd 698
8/4/18 11:45 AM
iii
iv
Preface
312
Chapter 7 Variable Costing for Management Analysis
▪▪ Link to the “opening company” of each chapter
examples
how
the byconcepts
The $80,000calls
increaseout
in operating
income underof
Proposal
2 is caused
the allocation of the
fixed manufacturing costs of $400,000 over a greater number of units manufactured. Specifically,
introduced in the chapter are connected to the
opening
company.
This
shows
how
accountan increase in production from 20,000 units to 25,000 units means that the
fixed manufacturing
cost per unit decreases from $20 ($400,000 ÷ 20,000 units) to $16 ($400,000 ÷ 25,000 units). Thus,
ing is used in the real world by real companies.
the cost of goods sold when 25,000 units are manufactured is $4 per unit less, or $80,000 less in
total (20,000 units sold × $4). Since the cost of goods sold is less, operating income is $80,000
more when 25,000 units rather than 20,000 units are manufactured.
Managers should be careful in analyzing operating income under absorption costing when finished goods inventory changes. Increases in operating income may be created by simply increasing finished goods inventory. Thus, managers could misinterpret such increases (or decreases) in
operating income as due to changes in sales volume, prices, or costs.
Adobe Systems Inc.
A
ssume that you have three different options for a summer job.
How would you evaluate these options? Naturally there are
many things to consider, including how much you could earn from
each job.
Determining how much you could earn from each job may
not be as simple as comparing the wage rate per hour. For example, a job as an office clerk at a local company pays $8 per hour. A
job delivering pizza pays $10 per hour (including estimated tips),
although you must use your own transportation. Another job working in a beach resort over 500 miles away from your home pays $8
per hour. All three jobs offer 40 hours per week for the whole summer. If these options were ranked according to their pay per hour,
the pizza delivery job would be the most attractive. However, the
costs associated with each job must also be evaluated. For example, the office job may require that you pay for downtown parking and purchase office clothes. The pizza delivery job will require
you to pay for gas and maintenance for your car. The resort job will
require you to move to the resort city and incur additional living
costs. Only by considering the costs for each job will you be able to
determine which job will provide you with the most income.
Just as you should evaluate the relative income of various
choices, a business also evaluates the income earned from its
choices. Important choices include the products offered and the
geographical regions to be served.
A company will often evaluate the profitability of products
and regions. For example, Adobe Systems Inc. (ADBE),
one of the largest software companies in the world, determines
the income earned from its various product lines, such as Acrobat®,
Photoshop®, Premiere®, and Dreamweaver® software. Adobe uses
this information to establish product line pricing, as well as sales,
support, and development effort. Likewise, Adobe evaluates the
income earned in the geographic regions it serves, such as the
United States, Europe, and Asia. Again, such information aids management in managing revenue and expenses within the regions.
In this chapter, how businesses measure profitability using
absorption costing and variable costing is discussed. After illustrating and comparing these concepts, how businesses use them for
controlling costs, pricing products, planning production, analyzing
market segments, and analyzing contribution margins is described
and illustrated.
Link to
Adobe Systems
Under variable costing, operating income is $200,000, regardless of whether 20,000 units or
25,000 units are manufactured. This is because no fixed manufacturing costs are allocated to the
units manufactured. Instead, all fixed manufacturing costs are treated as a period expense.
To illustrate, Exhibit 8 shows the variable costing income statements for Frand for the
production of 20,000 units, 25,000 units, and 30,000 units. In each case, the operating income
is $200,000.
Chapter 2
Pete Jenkins/AlAmy stock Photo
Exhibit 8
Variable Costing
Income Statements
for Three Production
Levels
52
Job Order Costing
In a recent absorption costing income statement, Adobe Systems reported (in millions) total revenue
of $5,854, cost of revenue of $820, gross profit of $5,034, operating expenses of $3,541, and operating
income of $1,493.
Frand Manufacturing Company
Variable Costing Income Statements
Sales (20,000 units × $75) . . . . . . . . . . . . . . . .
Variable cost of goods sold:
Variable cost of goods manufactured:
(20,000 units × $35) . . . . . . . . . . . . . . .
(25,000 units × $35) . . . . . . . . . . . . . . .
(30,000 units × $35) . . . . . . . . . . . . . . .
Ending inventory:
(0 units × $35) . . . . . . . . . . . . . . . . . . . .
(5,000 units × $35) . . . . . . . . . . . . . . . .
(10,000 units × $35) . . . . . . . . . . . . . . .
Total variable cost of goods sold . . . . . .
Manufacturing margin. . . . . . . . . . . . . . . . . . .
Variable selling and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contribution margin. . . . . . . . . . . . . . . . . . . . .
Fixed costs:
Fixed manufacturing costs . . . . . . . . . . .
Fixed selling and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed costs . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . .
20,000 Units
Manufactured
25,000 Units
Manufactured
30,000 Units
Manufactured
$1,500,000
$1,500,000
$ 1,500,000
$ (700,000)
$ (875,000)
$(1,050,000)
0
175,000
$ (700,000)
$ 800,000
$ (700,000)
$ 800,000
350,000
$ (700,000)
$ 800,000
(100,000)
$ 700,000
(100,000)
$ 700,000
(100,000)
$ 700,000
no discrepancies, a journal entry is made to record the purchase. The journal
entry$ to
record$ (400,000)
the
$ (400,000)
(400,000)
supplier’s invoice related to Receiving Report No. 196 in Exhibit 4 is as follows:
(100,000)
(100,000)
(100,000)
Link to Adobe Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 305, 309, 312, 316, 319
$ (500,000)
$ 200,000
$ (500,000)
$ 200,000
$ (500,000)
$ 200,000
303
12020_ch07_ptg01_302-351.indd 303
A 5 L 1
1
1
a.
E
Materials
Accounts Payable
Materials purchased during December.
10,500
10,500
7/12/18 12:15 PM
The storeroom releases materials for use in manufacturing when a materials requisition is
received. Examples of materials requisitions are shown in Exhibit 4.
The materials requisitions for each job serve as the basis for recording materials used. For direct
materials, the quantities and amounts from the materials requisitions are posted to job cost sheets. Job
▪▪ To
aid comprehension
and to demonstrate
themake
impact
journal
entriesledger.
include
cost
sheets,
which are also illustrated
in Exhibit 4,
up of
thetransactions,
work in process
subsidiary
the
net
effect
of
the
transaction
on
the
accounting
equation.
Exhibit 4 shows the posting of $2,000 of direct materials to Job 71 and $11,000 of direct
materials to Job 72.2 Job 71 is an order for 20 units of Jazz Series guitars, while Job 72 is an order
for 60 units of American Series guitars.
A summary of the materials requisitions is used as a basis for the journal entry recording the
materials used for the month. For direct materials, this entry increases (debits) Work in Process and
decreases (credits) Materials as follows:
12020_ch07_ptg01_302-351.indd 312
A 5 L 1
12
E
b.
Work in Process
Materials
Materials requisitioned to jobs
($2,000 + $11,000).
13,000
13,000
Many companies use computerized information processes to record the use of materials. In
such cases, storeroom employees electronically record the release of materials, which automatically updates the materials ledger and job cost sheets.
Ethics: Do It!
ETHICS
Phony
Invoice Scams
this information to create a fictitious invoice. The invoice
7/12/18 12:15 PM
Preface
▪▪ Located in each chapter, Why It M
­ atters shows students how accounting is important
to ­businesses with which they are familiar. A Concept Clip icon indicates which Why It
Matters features have an accompanying concept clip video in CNOWv2.
CONCEPT CLIP
476
Chapter 10
Evaluating Decentralized Operations
Why It Matters
CONCEPT CLIP
Coca-Cola Company: Go West Young Man
A
major decision early in the history of Coca-Cola (KO) was to ex314
Chapter 7 Variable Costing
for Management
pand
outside Analysis
of the United States to the rest of the world. As a result,
Coca-Cola
is known today the world over. What is revealing is how
Solution:
a. (1)
this
decision has impacted the revenues and profitability of Coca-Cola across
Absorption Costing Income Statements
(30,000 The
units produced
× $40 variable
its international and
North
following
table shows
Proposal 2: segments.
Proposal
1: American
manufacturing cost per unit) + $600,000
40,000 Units
30,000 Units
the percent of revenues
and percent
of operating
fixed cost income from the internaManufactured Manufactured
Sales (30,000 unitstional
× $100) and North American
$ 3,000,000 geographic
$ 3,000,000 segments.
(40,000 units produced × $40 variable manufacturing
Cost of goods sold:
Cost of goods manufactured
Ending inventory
Total cost of goods sold
Gross profit
Selling and administrative expenses
Operating income
$(1,800,000)
—
$(1,800,000)
$ 1,200,000
(350,000)
$ 850,000
$(2,200,000)
550,000
$(1,650,000)
$ 1,350,000
(350,000)
$ 1,000,000
$(1,200,000)
$ 1,800,000
(210,000)
$ 1,590,000
$(1,200,000)
$ 1,800,000
(210,000)
$ 1,590,000
$ (600,000)
(140,000)
$ (740,000)
$ 850,000
$ (600,000)
(140,000)
$ (740,000)
$ 850,000
different story. More than 65% of Coca- Cola’s profitability comes
from international segments. Given the revenue segmentation,
this suggests that the international profit margins must be higher
than the North American profit margin. Indeed this is the case, as
can be seen in the following table:
Profit Margin
International average
North America
cost per unit) + $600,000 fixed cost
Operating
10,000 units (40,000 produced
– 30,000 sold)
× $55 per unit ($2,200,000 ÷ 40,000 units)
Revenues
Income
48.4%
24.2%
The average profit margin for all the international segments is
two times as large as the North American segment. These results
(2)
reflect the heart of the Coca-Cola marketing strategy. In international markets, Coca-Cola is able to charge relatively higher prices
Proposal 2:
Proposal 1:
due to high demand and less competition as compared to the North
Units 7 Variable
30,000 Units350 40,000
Chapter
Costing
Management
Analysis
30,000
units for
produced
× $40 variable
The first column
showsManufactured
that the international
provide
Manufactured
manufacturing costsegments
per unit
American market.
Sales (30,000 units × $100)
2. units
Chassen
Company,
a cracker and cookie manufacturer, has the following unit costs for the
produced
× $40 variable
over 58% of the$ 3,000,000
revenues,$ 3,000,000
while North40,000
America
provides
almost
Variable cost of goods sold:
month
June:
manufacturing
costofper
unit
Variable cost of goods
$(1,200,000) However,
$(1,600,000)
Variable manufacturing
cost The Coca-Cola
$5.00
Source:
Company, Form 10-K for the Fiscal Year Ended December 31, 2017.
42%manufactured
of the revenues.
the 10,000
operating
income
a
units (40,000 produced
– 30,000 tells
Ending inventory
—
400,000
International segments
North American segment
Variable
Total Costing Income Statements
Total variable cost of goods sold
Manufacturing margin
Variable selling and administrative expenses
Contribution margin
Fixed costs:
Fixed manufacturing costs
Fixed selling and administrative expenses
Total fixed costs
Operating income
(30,000 units sold × $7 variable selling cost per
unit) + $140,000
58.4%
41.6
Variable Costs
100%
65.6%
34.4
100%
sold) × $40 variable cost per unit
Variable marketing cost
Fixed manufacturing cost
Fixed marketing cost
3.50
2.00
4.00
30,000 units sold × $7 variable
selling cost
unitof 100,000 units were manufactured during June, of which 10,000 remain in ending
A per
total
the only finished goods inventory at June 30. Under the absorption costing concept, the
Residualare Income
inventory. Chassen uses the first-in, first-out (FIFO) inventory method, and the 10,000 units
Fixed Costs
value of Chassen’s June 30 finished goods inventory would be:
▪▪ New! Pathways Challenge encourages
students’
interest
in accounting
emphasizes of the return on investment.
Residual income
is useful
in overcoming
some of and
the disadvantages
a. $50,000.
b. $70,000.
Residual income
is
the
excess
of
operating
income
over
aChallenge
minimum acceptable operating income,
the
critical
thinking
aspect
of
accounting.
A
suggested
answer
to
the
Pathways
$85,000.
b. The difference (in a.) is caused by including $150,000 fixed manufacturing costs (10,000 units × $15 fixedc.manufacturing
cost per unit) in the
d. $145,000. 7.
ending inventory, which decreases the cost of goods sold and increases theas
operating
income byin
$150,000.
shown
Exhibit
is provided at the end of the chapter. 3. Mill Corporation had the following unit costs for the recent calendar year:
Check Up Corner
Manufacturing
Nonmanufacturing
Pathways
Challenge
Exhibit
7
Variable
Fixed
$8.00
2.00
$3.00
5.50
Operating Inventory
income for Mill’s sole product totaled 6,000 units on January 1 and 5,200 units on
December 31. When
compared
to variable
income, Mill’s absorption costing income is:
Minimum acceptable
operating
income
ascosting
a
a. $2,400 lower.
Economic Activity
percent ofb.invested
assets
$2,400 higher.
Absorption costing is required by generally accepted accounting principles (GAAP) for reporting to exterc. $6,800 lower.
Residual
nal stakeholders. Thus, auto manufacturers like Ford
Motor income
Company (F) and General Motors
$ XXX
Residual
Income
This is
Accounting!
(XXX)
$ XXX
$6,800 higher.
Company (GM) use absorption costing in preparing their financiald.statements.
Under absorption costing,
fixed manufacturing costs are included in inventory. Thus, the4.
moreBethany
cars the auto
companies
lower
Company
hasmake,
just the
completed
the first month of producing a new product but has
the fixed cost per car and the smaller the cost of goods sold. In the years
preceding
the U.S.
and The product incurred variable manufacturing costs of
not yet
shipped
anyfinancial
of this crisis
product.
economic downturn of 2008, Ford and General Motors produced more
cars than were
to customers.1 costs of $2,000,000, variable marketing costs of $1,000,000,
$5,000,000,
fixedsold
manufacturing
Critical Thinking/Judgment
and fixed marketing costs of $3,000,000.
Under the variable costing concept, the inventory value of the new product would be:
The minimum acceptable operating income is computed by multiplying the company minimum
return on investment by the invested assets. The minimum rate is set by top management, based
d. $11,000,000.
on such factors
as theanswer
cost
ofof chapter.
financing.
Suggested
at end
Marielle Segarra, “Why the Big Three Put Too Many Cars on the
CFO.com (ww2.cfo.com/management-accounting/2012/02/
ToLot,”illustrate,
assume that DataLink Inc. has established 10% as the minimum acceptable return
why-the-big-three-put-too-many-cars-on-the-lot/), February 2, 2012.
Pathways
Challenge
on investment
for divisional
assets. The residual incomes for the three divisions are shown in
Exhibit 8.
This is Accounting!
If Ford and General Motors have high fixed costs and low variable costs,
how would producing more cars
a. $5,000,000.
affect their operating income under absorption costing? under variable
b. costing?
$6,000,000.
If absorption costing allows companies like Ford and General Motors to change their operating income by
c. $8,000,000.
increasing or decreasing production, why does GAAP require absorption costing?
1
Information/Consequences
12020_ch07_ptg01_302-351.indd 314
Exhibit 8
7/12/18 12:15 PM
By producing more cars than were sold, Ford (F) and General Motors (GM) increased their operating income reported under absorption costing. This is because a portion of their fixed manufacturing costs
were included in ending inventory rather than cost of goods sold.
Northern Division
Residual Income—
DataLink, Inc.
12020_ch07_ptg01_302-351.indd 350
Central Division
Southern Division
Underincome
variable costing, producing more cars would not affect operating
income, because all fixed manufacOperating
$ 70,000
$ 84,000
turing costs are included in cost of goods sold regardless of how many cars are produced.
$ 75,000
Minimum acceptable operating income
A reason often given for why GAAP requires absorption costing is that it focuses on operating income “over
as a percent
invested
assets:
the longof
term.
” In other words,
while operating income may vary from year to year, all manufacturing costs
are eventually
reported on the income statement as cost of goods sold
or as a write-down of inventory using
$350,000
× 10%
(35,000)
the lower-of-cost-or-market rule. Thus, over the life of a company, the total amount of operating income will
be the same
regardless of whether absorption or variable costing is used.
$700,000
× 10%
(70,000)
$500,000 × 10%
Suggested Answer
Residual income
$ 35,000
$ 14,000
(50,000)
$ 25,000
7/12/18 12:15 PM
v
Preface
▪▪ To aid learning and problem solving, throughout each chapter the Check Up Corner
exercises provide students with step-by-step guidance on how to solve problems. Problemsolving tips help students avoid common errors.
Chapter 10
Check Up Corner 10-1
Evaluating Decentralized Operations
467
Cost Center Responsibility Measures
Delinco Tech Inc. manufactures corrosion-resistant water pumps and fluid meters. Its Commercial Products
Division is organized as a cost center. The division’s budget for the month ended July 31 is as follows
(in thousands):
Materials
Factory wages
Supervisor salaries
Utilities
Depreciation of plant equipment
Maintenance
Insurance
Property taxes
$140,000
77,000
15,500
8,700
9,000
3,200
750
800
$254,950
During July, actual costs incurred in the Commercial Products Division were as follows:
Materials
Factory wages
Supervisor salaries
Utilities
Depreciation of plant equipment
Maintenance
Insurance
Property taxes
$152,000
77,800
15,500
8,560
9,000
3,025
750
820
$267,455
Prepare a budget performance report for the director of the Commercial Products Division for July.
Solution:
The report shows the budgeted costs and
actual costs along with the differences.
Budget Performance Report
Director, Commercial Products Division
For the Month Ended July 31
Materials ………………………………..
Factory wages ………………………….
Supervisor salaries…………………….
Utilities…………………………………..
Depreciation of plant equipment ….
Maintenance……………………………
Insurance ……………………………….
Property taxes ………………………….
Actual
Budget
$152,000
77,800
15,500
8,560
9,000
3,025
750
820
$267,455
$140,000
77,000
15,500
8,700
9,000
3,200
750
800
$254,950
}
vi
Over
Budget
The report allows cost center
managers to focus on areas
of significant differences.
(Under)
Budget
$12,000
800
$(140)
Each difference is classified as
over budget or under budget.
(175)
20
$12,820
$(315)
Check Up Corner
Preface
▪▪ Analysis for Decision ­Making ­highlights how companies use accounting ­information to make
decisions and evaluate their business. This provides students with context of why accounting
is important 376
to companies.
Chapter 8 Budgeting
Analysis for Decision Making
Objective 6
Describe and
illustrate the use of
staffing budgets for
nonmanufacturing
businesses.
Nonmanufacturing Staffing Budgets
The budgeting illustrated in this chapter is similar to budgeting used for nonmanufacturing
businesses. However, many nonmanufacturing businesses often do not have direct materials
purchases budgets, direct labor cost budgets, or factory overhead cost budgets. Thus, the budgeted income statement is simplified in many nonmanufacturing settings.
A primary budget in nonmanufacturing businesses is the labor, or staffing, budget. This budget, which is highly flexible to service demands, is used to manage staffing levels. For example,
a theme park will have greater staffing in the summer vacation months than in the fall months.
Likewise, a retailer will have greater staffing during the holidays than on typical weekdays.
To illustrate, Concord Hotel operates a hotel in a business district. The hotel has 150 rooms
that average 120 guests per night during the weekdays and 50 guests per night during the weekend. The housekeeping staff is able to clean 10 rooms per employee. The number of housekeepers required for an average weekday and weekend is determined as follows:
Weekday
Weekend
120
÷ 10
12
50
÷ 10
5
Number of guests per day
Rooms per housekeeper
Number of housekeepers per day
If each housekeeper is paid $15 per hour for an eight-hour shift per day, the annual budget
for the staff is as follows:
Weekday
Number of housekeepers per day
Hours per shift
Days per year
Number of hours per year
Rate per hour
Housekeeping staff annual budget
12
8
260*
24,960
×
$15
Weekend
Total
5
8
104**
4,160
× $15
×
×
×
×
$374,400
$62,400
$436,800
* 52 weeks × 5 days
** 52 weeks × 2 days
The budget can be used to plan and manage the staffing of the hotel. For example,
if a wedding were booked for the weekend, the budgeted increase in staffing could be
compared with the increased revenue from the wedding to verify the profit plan.
Make a Decision
Nonmanufacturing Staffing Budgets
Analyze Johnson Stores’ staffing budget for holidays (MAD 8-1)
▪▪ Make a Decision in the end-of-chapter
material gives students a chance to analyze real-world
Analyze Mercy Hospital’s staffing budget (MAD 8-2)
Chapter 6 Cost-Volume-Profit Analysis
297
business decisions.
Analyze Adventure Park’s staffing budget (MAD 8-3)
Analyze Ambassador Suites’ staffing budget (MAD 8-4)
Make a Decision
Make a Decision
Cost-Volume-Profit Analysis for Service Companies
MAD 6-1 Analyze Global Air’s cost-volume-profit relationships
Obj. 6
Global Air is considering a new flight between Atlanta and Los Angeles. The average fare per
seat for the flight is $760. The costs associated with the flight are as follows:
12020_ch08_ptg01_352-409.indd 376
Fixed costs for the flight:
Crew salaries . . . . . . . . . . . . . . . . . . $ 5,000
Operating costs . . . . . . . . . . . . . . . 50,000
Aircraft depreciation . . . . . . . . . . 25,000
Total . . . . . . . . . . . . . . . . . . . . . . . . $80,000
Variable costs per passenger:
Passenger check-in . . . . . . . . . . .
Operating costs . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . .
16/07/18 6:34 am
$ 20
100
$120
The airline estimates that the flight will sell 175 seats.
a. Determine the break-even number of passengers per flight.
b. Based on your answer in (a), should the airline add this flight to its schedule?
c. How much profit should each flight produce?
What additional issues might the airline consider in this decision?
d.
MAD 6-2 Analyze Ocean Escape Cruise Lines’ cost-volume-profit relationships
Obj. 6
Ocean Escape Cruise Lines has a boat with a capacity of 1,200 passengers. An eight-day ocean
cruise involves the following costs:
Crew
Fuel
Fixed operating costs
$240,000
60,000
800,000
The variable costs per passenger for the eight-day cruise include the following:
Meals
Variable operating costs
$900
400
The price of the cruise is $2,400 per passenger.
a. Determine the break-even number of passengers for the eight-day cruise.
b. Assume 900 passengers booked the cruise. What would be the profit or loss for the cruise?
c. Assume the cruise was booked to capacity. What would be the profit or loss for the cruise?
If the cruise cannot book enough passengers to break even, how might the cruise
d.
line respond?
MAD 6-3 Analyze Star Stream’s cost-volume-profit relationships
Obj. 6
Star Stream is a subscription-based video streaming service. Subscribers pay $120 per year for the
service. Star Stream licenses and develops content for its subscribers. In addition, Star Stream leases
servers to hold this content. These costs are not variable to the number of subscribers, but must
be incurred regardless of the subscriber base. In addition, Star Stream compensates telecommunication companies for bandwidth so that Star Stream customers receive fast streaming services.
vii
viii
Preface
▪▪ At the end of each chapter, Let’s Review is a new chapter summary and self-assessment feature
that is designed to help busy students prepare for an exam. It includes a summary of each
learning objective’s key points, key terms, multiple-choice questions, exercises, and a sample
problem that students may use to practice.
▪▪ Sample multiple-choice questions allow students to practice with the type of assessments they
are likely to see on an exam.
▪▪ Short exercises and a longer problem allow students to apply their knowledge.
▪▪ Answers provided at the end of the Let’s Review section let students check their knowledge
immediately.
▪▪ Take It Further in the end-of-chapter activities allows instructors to assign other special activities related to ethics, communication, and teamwork.
▪▪ NEW! Certified Management Accountant (CMA®) Examination Questions help students
­prepare for the CMA exam so they can earn CMA certification.
CengageNOWv2
CengageNOWv2 is a powerful course management and online homework resource that provides
control and customization to optimize the student learning experience. Included are many proven
resources, such as algorithmic activities, a test bank, course management tools, reporting and
assessment options, and much more.
NEW! Excel Online
Cengage and Microsoft have partnered in CNOWv2 to provide students with a uniform, authentic
Excel experience. It provides instant feedback, built-in video tips, and easily accessible spreadsheet
work. These features allow you to spend more time teaching college accounting applications and
less time troubleshooting Excel.
These new algorithmic activities offer pre-populated data directly in Microsoft Excel Online. Each
student receives his or her own version of the problem to perform the necessary data calculations
in Excel Online. Their work is constantly saved in Cengage cloud storage as a part of homework
assignments in CNOWv2. It’s easily retrievable so students can review their answers without cumbersome file management and numerous downloads/uploads.
Motivation: Set Expectations and Prepare Students
for the Course
CengageNOWv2 helps motivate students and get them ready to learn by reshaping their misconceptions about the introductory accounting course and providing a powerful tool to engage students.
CengageNOWv2 Start-Up Center
Students are often surprised by the amount of time they need to spend outside of class working
through homework assignments in order to succeed. The CengageNOWv2 Start-Up Center will help
students identify what they need to do and where they need to focus in order to be successful
with a variety of new resources.
▪▪ What Is Accounting? Module ensures students understand course expectations and how to be
successful in the introductory accounting course. This module consists of two assignable videos: Introduction to Accounting and Success Strategies. The Student Advice Videos offer advice
from real students about what it takes to do well in the course.
▪▪ Math Review Module, designed to help students get up to speed with necessary math skills,
includes math review assignments and Show Me How math review videos to ensure that students have an understanding of basic math skills.
▪▪ How to Use CengageNOWv2 Module focuses on learning accounting, not on a particular software system. Quickly familiarize your students with CengageNOWv2 and direct them to all of
its built-in student resources.
Preface
Motivation: Prepare Them for Class
With all the outside obligations accounting students have, finding time to read the textbook before
class can be a struggle. Point students to the key concepts they need to know before they attend
class.
▪▪ Video: Tell Me More. Short Tell Me More lecture activities explain the core concepts of the
chapter through an engaging auditory and visual presentation. Available either on a standalone basis or as an assignment, they are ideal for all class formats—flipped model, online,
hybrid, or face-to-face.
Provide Help Right When Students Need It
The best way to learn accounting is through practice, but students often get stuck when attempting homework assignments on their own.
▪▪ Video: Show Me How. Created for the most frequently assigned end-of-chapter items,
Show Me How problem demonstration videos provide a step-by-step model of a similar problem. Embedded tips help students avoid common mistakes and pitfalls.
SHOW ME HOW
ix
x
Preface
Help Students Go Beyond Memorization to True
Understanding
Students often struggle to understand how concepts relate to one another. For most students, an
introductory accounting course is their first exposure to both business transactions and the accounting system. While these concepts are already difficult to master individually, their combination
and interdependency in the introductory accounting course often pose a challenge for students.
▪▪ Mastery Problems. Mastery Problems enable you to assign problems and activities designed to
test students’ comprehension and mastery of difficult concepts.
MindTap eReader
The MindTap eReader for Warren/Tayler’s Managerial Accounting is the most robust digital
reading experience available. Hallmark features include:
▪▪ Fully optimized for the iPad.
▪▪ Note taking, highlighting, and more.
▪▪ Embedded digital media.
▪▪ The MindTap eReader also features ReadSpeaker®, an online text-to-speech application that
vocalizes, or “speech-enables,” online educational content. This feature is ideally suited for
both instructors and learners who would like to listen to content instead of (or in addition
to) reading it.
Cengage Unlimited
Cengage Unlimited is a first of-its-kind digital subscription designed specifically to lower costs.
Students get total access to everything Cengage has to offer on demand—in one place. That’s
20,000 eBooks, 2,300 digital learning products, and dozens of study tools across 70 disciplines and
over 675 courses. Currently available in select markets. Details at www.cengage.com/unlimited.
New to This Edition
In all chapters, the following improvements have been made:
▪▪ Chapter schemas revised throughout.
▪▪ Link to page references added at the beginning of the
chapter allow students to easily locate the ties to the
opening company throughout the chapter.
▪▪ New learning objective for Analysis for Decision Making.
▪▪ Stock ticker symbol has been inserted for all real-world
(publicly listed) companies. This helps students to use
financial websites to locate real company data.
▪▪ New Pathways Challenge feature added, consistent with
the work of the Pathways Commission. This feature
emphasizes the critical thinking aspect of accounting. A
Suggested Answer to the Pathways Challenge is provided
at the end of the chapter.
▪▪ New Make a Decision section at the end of the Analysis
for Decision Making directs students and instructors to
the real-world company end-of-chapter materials related
to Analysis for Decision Making. Also, the continuing company analysis is identified and referenced in this Make a
Decision section.
▪▪ New items have been added to the Take It Further section
at the end of the chapter.
▪▪ New Certified Management Accountant (CMA®) Examination Questions help students prepare for the CMA exam
so they can earn CMA certification.
Chapter 1
▪▪ “Managerial Accounting in the Organization” section significantly revised to discuss horizonal and vertical business units; McAfee, Inc., is used as an illustration.
▪▪ New Why It Matters features the IMA and CMA.
▪▪ New Why It Matters features vertical and horizontal
­functions for service companies.
▪▪ Discussion of sustainability and accounting moved to new
Chapter 14.
Chapter 2
▪▪ Discussion of sustainability and accounting moved to new
Chapter 14.
▪▪ Added one new Analysis for Decision Making item.
Preface
Chapter 3
▪▪ Why It Matters feature (Sustainable Papermaking) moved
to Chapter 14.
▪▪ Lean manufacturing discussion with related homework
items moved to Chapter 13.
▪▪ Added one new Analysis for Decision Making item.
xi
▪▪ Added four new revenue variance exercises.
▪▪ Added one new Analysis for Decision Making item.
Chapter 10
▪▪ Balanced scorecard discussion moved to new Chapter 14.
▪▪ Added one new Analysis for Decision Making item.
Chapter 4
Chapter 11
▪▪ Added Learning Objective 7: Describe and illustrate the use
of activity-based costing information in decision making.
▪▪ Total cost and variable cost concepts for product pricing
were moved to an end-of-chapter appendix.
▪▪ Added one new Make a Decision item.
Chapter 5—NEW Chapter
▪▪ Learning Objectives:
▪▪ Describe support departments and support department
costs.
▪▪ Describe the allocation of support department costs
using a single plantwide rate, multiple department
rates, and activity-based costing.
▪▪ Allocate support department costs to production
departments using the direct method, sequential
method, and reciprocal services method.
▪▪ Describe joint products and joint costs.
▪▪ Allocate joint costs using the physical units, weighted
average, market value at split-off, and net realizable
value methods.
▪▪ Describe and illustrate the use of support department
and joint cost allocations to evaluate the performance
of production managers.
Chapter 6
▪▪ Added one new Analysis for Decision Making item.
Chapter 7
▪▪ Contribution margin analysis deleted from chapter.
▪▪ Revenue variance added as an appendix to Chapter 9.
Chapter 8
▪▪ Added one new Analysis for Decision Making item.
Chapter 9
▪▪ Added new appendix on revenue variances.
▪▪ Nonfinancial performance measures (previously Learning
Objective 6) moved to new Chapter 14.
Chapter 12
▪▪ Analysis for Decision Making on capital investment for
sustainability has been moved to new Chapter 14.
▪▪ Added new Analysis for Decision Making entitled “Uncertainty: Sensitivity and Expected Value Analyses.”
▪▪ Added six new Make a Decision items.
Chapter 13
▪▪ Added Objective 4: Describe and illustrate the use of lean
principles and activity analysis in a service or administrative setting.
Chapter 14—NEW chapter
▪▪ Learning objectives:
▪▪ Describe the concept of a performance measurement
system.
▪▪ Describe and illustrate the basic elements of a balanced scorecard.
▪▪ Describe and illustrate the balance scorecard, including
the use and impact of strategy maps, measure maps,
strategic learning, scorecard cascading, and cognitive
biases.
▪▪ Describe corporate social responsibility (CSR), including methods of measuring and encouraging social
responsibility using the balanced scorecard.
▪▪ Use capital investment analysis to evaluate CSR projects.
Acknowledgements
The many enhancements to this edition of Managerial Accounting are the direct result of reviews, surveys, and focus groups
with instructors at institutions across the country. We would like to take this opportunity to thank those who have helped
us better understand the challenge of the financial accounting course and provided valuable feedback on our content and
digital assets.
John Alpers, Tennessee Wesleyan
Anne Marie Anderson, Raritan Valley
Community College
Maureen Baker, Long Beach City
College
Cindy Bolt, The Citadel
Julie Bonner, Central Washington
University
Charles Boster, Salisbury University
Jerold K. Braun, Daytona State College
Shauna Butler, St. Thomas Aquinas
College
Kirk Canzano, Long Beach City College
Dixon Cooper, Ouachita Baptist
University
Bryan Corsnitz, Long Beach City
College
Pat Creech, Northeastern Oklahoma
A&M
Daniel De La Rosa, Fullerton College
Heather Demshock, Lycoming College
xii
Scott Dotson, Tennessee Wesleyan
University
Hong Duong, Salisbury University
James Emig, Villanova University
Dave Fitzgerald, Jackson College
Kenneth Flug, St. Thomas Aquinas
College
Thomas Heikkinen, Jackson College
Susanne Holloway, Salisbury University
Daniel Kim, Midlands Technical
College
Angela Kirkendall, South Puget Sound
Community College
Satoshi Kojima, East Los Angeles
College
Tara Maciel, San Diego Mesa College
Annette Maddox, Georgia Highlands
College
LuAnn Bean Mangold, Florida Institute
of Technology
Allison McLeod, University of North Texas
Rodney Michael
Shawn Miller, Lone Star College
Dr. April Poe, University of the
Incarnate Word
Francisco Rangel, Riverside City
College
Benjamin Reyes, Long Beach City
College
Lauran B. Schmid, The University of
Texas Rio Grande Valley
Meghna Singhvi, Loyola Marymount
University
Margie Snow, Norco College
Michael Stoots, UCLA extension
Patricia Tupaj, Quinsigamond
Community College
Randi Watts, Baker College
Cammy Wayne, Harper College
Melissa Youngman, National Technical
Institute for the Deaf, RIT
About the Authors
Carl S. Warren
©Terry R. Spray InHisImage Studios
Dr. Carl S. Warren is Professor Emeritus of Accounting at the University of Georgia, Athens. Dr.
Warren has taught classes at the University of Georgia, University of Iowa, Michigan State University, and University of Chicago. He has focused his teaching efforts on principles of accounting
and auditing. Dr. Warren received his Ph.D. from Michigan State University and his BBA and MA
from the University of Iowa. During his career, Dr. Warren published numerous articles in professional journals, including The Accounting Review, Journal of Accounting Research, Journal of
Accountancy, The CPA Journal, and Auditing: A Journal of Practice and Theory. Dr. Warren has
served on numerous committees of the American Accounting Association, the American Institute of
Certified Public Accountants, and the Institute of Internal Auditors. He has consulted with numerous companies and public accounting firms. His outside interests include handball, golfing, skiing,
backpacking, motorcycling, and fly-fishing. He also enjoys interacting with his five grandchildren,
Bella and Mila (twins), Jeremy, and Brooke and Robbie (twins).
William B. Tayler
© Emory University
Dr. William B. Tayler is the Robert J. Smith Professor of Accountancy in the Marriott School of
Business at Brigham Young University (BYU). Dr. Tayler is an internationally renowned, awardwinning accounting researcher and instructor. He has presented his research as an invited speaker
at universities and conferences across the globe. Dr. Tayler earned his Ph.D. and master’s degree at
Cornell University. He teaches in BYU’s Executive MBA Program and in BYU’s School of Accountancy, one of the top ranked accounting programs in the world. Dr. Tayler has also taught at
Cornell University and Emory University and has received multiple teaching awards. Dr. Tayler is
a Certified Management Accountant and consultant specializing in cost accounting, performance
measurement, the assignment of decision rights, and incentive compensation. His work has been
published in top journals, including Accounting Horizons, Accounting, Organizations and Society, The Accounting Review, Contemporary Accounting Research, IMA Educational Case Journal,
Journal of Accounting Research, Journal of Behavioral Finance, Journal of Finance, Review of
Financial Studies, and Strategic Finance. Dr. Tayler serves on the editorial boards of The Accounting Review, Management Accounting Research, and Accounting, Organizations and Society. He is
also director of the Institute of Management Accountants Research Foundation.
xiii
Brief Contents
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Introduction to Managerial Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Job Order Costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46
Process Cost Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94
Activity-Based Costing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150
Support Department and Joint Cost Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
204
Cost-Volume-Profit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
248
Variable Costing for M
­ anagement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
302
Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
352
Evaluating Variances from Standard Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
410
Evaluating Decentralized Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
460
Differential Analysis and Product Pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
510
Capital Investment Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
564
Lean Manufacturing and Activity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
612
The Balanced Scorecard and Corporate Social Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . .
654
Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
698
Financial Statement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
758
Appendix A Interest Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A-1
Nike Inc., Form 10-K for the Fiscal Year Ended May 31, 2017 Selected Excerpts. . . .
B-1
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G-1
Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
I-1
Appendix B
xiv
Contents
1
Introduction to Managerial
Accounting 2
Managerial Accounting 4
Differences Between Managerial and Financial Accounting 5
Managerial Accounting in the Organization 6
The Management Process 8
Uses of Managerial Accounting Information 9
Manufacturing Operations 11
Nature of Manufacturing 11
Direct and Indirect Costs 11
Manufacturing Costs 12
Financial Statements for a Manufacturing Business 17
Balance Sheet 17
Income Statement 18
Analysis for Decision Making 21
Utilization Rates 21
Make a Decision 41
Take It Further 43
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 45
Take It Further 89
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 92
Pathways Challenge 59, 93
3
Process Cost Systems 94
Process Manufacturers 96
Comparing Job Order and Process Cost Systems 97
Cost Flows for a Process Manufacturer 98
Cost of Production Report 101
Step 1: Determine the Units to Be Assigned Costs 102
Step 2: Compute Equivalent Units of Production 102
Step 3: Determine the Cost per Equivalent Unit 106
Step 4: Allocate Costs to Units Transferred
Out and Partially Completed Units 107
Preparing the Cost of Production Report 109
Journal Entries for a Process Cost System 112
Using the Cost of Production Report 116
Pathways Challenge 13, 45
Analysis for Decision Making 116
2
Appendix Weighted Average Method 118
Job Order Costing 46
Cost Accounting Systems Overview 48
Job Order Cost Systems 48
Process Cost Systems 48
Job Order Cost Systems for Manufacturing
Businesses 49
Materials 50
Factory Labor 52
Factory Overhead 54
Work in Process 60
Finished Goods 61
Sales and Cost of Goods Sold 61
Period Costs 62
Summary of Cost Flows for Legend Guitars 62
Job Order Cost Systems for Service Businesses 64
Types of Service Businesses 64
Flow of Costs in a Service Job Order Cost System 64
Analysis for Decision Making 66
Analyzing Job Costs 66
Make a Decision 86
Analyzing Process Costs 116
Determining Costs Using the Weighted
Average Method 118
The Cost of Production Report 120
Make a Decision 142
Take It Further 145
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 147
Pathways Challenge 112, 149
4
Activity-Based Costing 150
Product Costing Allocation Methods 152
Single Plantwide Factory
Overhead Rate Method 153
Multiple Production Department Factory
Overhead Rate Method 155
Department Overhead Rates and Allocation 156
Distortion of Product Costs 157
xv
xvi
Contents
Activity-Based Costing Method 160
Activity Rates 162
Allocating Costs 163
Distortion in Product Costs 165
Dangers of Product Cost Distortion 165
Activity-Based Costing for
Selling and Administrative Expenses 167
Activity-Based Costing in Service
Businesses 168
Analysis for Decision Making 173
Using ABC Product Cost Information to Reduce Costs 173
Make a Decision 199
Take It Further 201
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 202
6
Cost-Volume-Profit
Analysis 248
Cost Behavior 250
Variable Costs 251
Fixed Costs 252
Mixed Costs 254
Summary of Cost Behavior Concepts 256
Cost-Volume-Profit Relationships 258
Contribution Margin 258
Contribution Margin Ratio 258
Unit Contribution Margin 259
Mathematical Approach to Cost-Volume-Profit
Analysis 261
Break-Even Point 261
Target Profit 265
Pathways Challenge 171, 203
Graphic Approach to Cost-Volume-Profit Analysis 266
5
Special Cost-Volume-Profit Relationships 272
 Support Department and Joint
Cost Allocation 204
Support Departments 206
Support Department Cost Allocation 207
Single Plantwide Rate 208
Multiple Production Department Rates 208
Activity-Based Costing 209
Allocating Support Department Costs
to Production Departments 210
Direct Method 211
The Sequential Method 213
The Reciprocal Services Method 217
Comparison of Support Department Cost
Allocation Methods 221
Joint Costs 222
Joint Cost Allocation 222
The Physical Units Method 222
The Weighted Average Method 223
The Market Value at Split-Off Method 223
The Net Realizable Value Method 224
Comparison of Joint Cost Allocation Methods 225
By-Products 227
Analysis for Decision Making 227
Using Support Department and Joint Cost
Allocations for Performance Evaluation 227
Make a Decision 243
Take It Further 245
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 246
Pathways Challenge 221, 247
Cost-Volume-Profit (Break-Even) Chart 266
Profit-Volume Chart 268
Use of Spreadsheets in Cost-Volume-Profit Analysis 269
Assumptions of Cost-Volume-Profit Analysis 270
Sales Mix Considerations 272
Operating Leverage 274
Margin of Safety 275
Analysis for Decision Making 277
Cost-Volume-Profit Analysis for Service Companies 277
Make a Decision 297
Take It Further 298
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 300
Pathways Challenge 256, 301
7
 Variable Costing for
­Management Analysis 302
Operating Income: Absorption and Variable Costing 304
Absorption Costing 304
Variable Costing 305
Effects of Inventory 307
Analyzing Operating Income Using
Absorption and ­Variable Costing 310
Using Absorption and Variable Costing 315
Controlling Costs 315
Pricing Products 315
Planning Production 316
Analyzing Market Segments 316
Analyzing Market Segments 316
Sales Territory Profitability Analysis 318
Product Profitability Analysis 319
Salesperson Profitability Analysis 319
Contents
Variable Costing for Service Businesses 321
Reporting Income 321
Analyzing Segments 322
Analysis for Decision Making 324
Segment Analysis and EBITDA 324
Make a Decision 346
Take It Further 348
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 349
Pathways Challenge 314, 350
8
Budgeting 352
Nature and Objectives of Budgeting 354
Objectives of Budgeting 354
Human Behavior and Budgeting 355
Budgeting Systems 356
Static Budget 357
Flexible Budget 358
Master Budget 360
Operating Budgets 361
Sales Budget 361
Production Budget 362
Direct Materials Purchases Budget 363
Direct Labor Cost Budget 364
Factory Overhead Cost Budget 366
Cost of Goods Sold Budget 366
Selling and Administrative Expenses Budget 368
Budgeted Income Statement 369
Financial Budgets 370
Cash Budget 370
Capital Expenditures Budget 375
Budgeted Balance Sheet 375
Analysis for Decision Making 376
Nonmanufacturing Staffing Budgets 376
Make a Decision 404
Take It Further 405
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 407
Pathways Challenge 370, 408
9
 Evaluating Variances
from Standard Costs 410
Standards 412
Setting Standards 412
Types of Standards 413
Reviewing and Revising Standards 413
Criticisms of Standard Costs 413
Budgetary Performance Evaluation 414
Budget Performance Report 414
Manufacturing Cost Variances 415
Direct Materials and
Direct Labor Variances 416
Direct Materials Variances 416
Direct Labor Variances 419
Factory Overhead Variances 422
The Factory Overhead Flexible Budget 423
Variable Factory Overhead Controllable Variance 424
Fixed Factory Overhead Volume Variance 424
Reporting Factory Overhead Variances 426
Factory Overhead Account 427
Recording and Reporting Variances
from Standards 430
Analysis for Decision Making 432
Service Staffing Variances 432
Appendix Revenue Variances 433
Comprehensive Problem 5 453
Make a Decision 455
Take It Further 456
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 458
Pathways Challenge 418, 459
10
 Evaluating Decentralized
Operations 460
Centralized and Decentralized Operations 462
Advantages of Decentralization 462
Disadvantages of Decentralization 463
Responsibility Accounting 464
Responsibility Accounting for Cost Centers 464
Responsibility Accounting for Profit Centers 468
Support Department Allocations 468
Profit Center Reporting 470
Responsibility Accounting
for Investment Centers 472
Return on Investment 472
Residual Income 476
Transfer Pricing 479
Market Price Approach 480
Negotiated Price Approach 480
Cost Price Approach 483
Analysis for Decision Making 483
Franchise Operations 483
Make a Decision 504
xvii
xviii
Contents
Take It Further 506
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 508
Pathways Challenge 463, 509
11
 Differential Analysis and
Product Pricing 510
Differential Analysis 512
Lease or Sell 514
Discontinue a Segment or Product 515
Make or Buy 516
Replace Equipment 518
Process or Sell 519
Accept Business at a Special Price 519
Setting Normal Product Selling Prices 522
Cost-Plus Methods 523
Product Cost Method 523
Illustration 524
Target Costing Method 525
Production Bottlenecks 527
Managing Bottlenecks 528
Pricing Bottleneck Products 528
Analysis for Decision Making 529
Yield Pricing in Service Businesses 529
Appendix Total and Variable Cost Methods to Setting
Normal Price 530
Total Cost Method 530
Variable Cost Method 533
Make a Decision 557
Take It Further 559
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 561
Pathways Challenge 517, 562
Factors That Complicate Capital
Investment Analysis 579
Income Tax 579
Unequal Proposal Lives 579
Lease Versus Capital Investment 581
Uncertainty 581
Changes in Price Levels 582
Qualitative Considerations 583
Capital Rationing 583
Analysis for Decision Making 584
Uncertainty: Sensitivity and Expected
Value Analyses 584
Make a Decision 605
Take It Further 607
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 609
Pathways Challenge 575, 610
13
 Lean Manufacturing and
Activity Analysis 612
Lean Principles 614
Reducing Inventory 615
Reducing Lead Times 615
Reducing Setup Time 617
Emphasizing Product-Oriented Layout 620
Emphasizing Employee Involvement 620
Emphasizing Pull Manufacturing 620
Emphasizing Zero Defects 621
Emphasizing Supply Chain
Management 621
Lean Accounting 623
Fewer Transactions 623
Combined Accounts 623
Nonfinancial Performance Measures 625
Direct Tracing of Overhead 625
12
Activity Analysis 626
Nature of Capital Investment Analysis 566
Analysis for Decision Making 632
 Capital Investment
Analysis 564
Methods Not Using Present Values 567
Average Rate of Return Method 567
Cash Payback Method 568
Methods Using Present Values 570
Present Value Concepts 571
Net Present Value Method and Index 573
Internal Rate of Return Method 576
Costs of Quality 626
Quality Activity Analysis 627
Value-Added Activity Analysis 629
Process Activity Analysis 630
Lean Performance for Nonmanufacturing 632
Make a Decision 649
Take It Further 651
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 652
Pathways Challenge 619, 653
14
 The Balanced Scorecard
and Corporate Social
Responsibility 654
Performance Measurement Systems 656
The Balanced Scorecard 657
Performance Perspectives 657
Strategic Objectives 659
Performance Metrics 659
Strategic Initiatives 660
Performance Targets 661
Using the Balanced Scorecard 661
Strategy Maps 661
Measure Maps 663
Strategic Learning 665
Scorecard Cascading 667
Cognitive Biases 667
Corporate Social Responsibility 670
CSR Reporting 671
Corporate Social Responsibility and the Balanced Scorecard 672
Encouraging Corporate Social Responsibility 674
Analysis for Decision Making 674
Capital Investment in CSR 674
Contents
Cash Flows from Financing
Activities 712
Bonds Payable 712
Common Stock 712
Dividends and Dividends Payable 713
Preparing the Statement of Cash Flows 714
Analysis for Decision Making 716
Free Cash Flow 716
Appendix 1 Spreadsheet (Work Sheet)
for Statement of Cash Flows—The Indirect
Method 717
Analyzing Accounts 718
Retained Earnings 719
Other Accounts 719
Preparing the Statement of Cash Flows 720
Appendix 2 Preparing the Statement of Cash
Flows—The Direct Method 720
Cash Received from Customers 721
Cash Payments for Merchandise 721
Cash Payments for Operating Expenses 722
Gain on Sale of Land 722
Interest Expense 723
Cash Payments for Income Taxes 723
Reporting Cash Flows from Operating
Activities—Direct Method 723
Make a Decision 692
Make a Decision 752
Take It Further 693
Take It Further 755
Certified Management Accountant (CMA®)
Examination Questions (Adapted) 695
Pathways Challenge 714, 756
Pathways Challenge 669, 696
16
15
 Statement of Cash
Flows 698
Reporting Cash Flows 700
Cash Flows from Operating Activities 701
Cash Flows from Investing Activities 703
Cash Flows from Financing Activities 703
Noncash Investing and Financing
Activities 704
Format of the Statement of Cash
Flows 704
No Cash Flow per Share 705
Cash Flows from Operating
Activities—The Indirect Method 705
Net Income 707
Adjustments to Net Income 707
Cash Flows from Investing Activities 710
Land 710
Building and Accumulated
Depreciation—Building 711
 Financial Statement
Analysis 758
Analyzing and Interpreting Financial Statements 760
The Value of Financial Statement Information 760
Techniques for Analyzing Financial Statements 761
Analytical Methods 761
Horizontal Analysis 761
Vertical Analysis 763
Common-Sized Statements 765
Analyzing Liquidity 766
Current Position Analysis 767
Accounts Receivable Analysis 768
Inventory Analysis 769
Analyzing Solvency 772
Ratio of Fixed Assets to Long-Term Liabilities 772
Ratio of Liabilities to Stockholders’ Equity 772
Times Interest Earned 773
Analyzing Profitability 774
Asset Turnover 775
Return on Total Assets 775
Return on Stockholders’ Equity 776
xix
xx
Contents
Return on Common Stockholders’ Equity 777
Earnings per Share on Common Stock 778
Price-Earnings Ratio 779
Dividends per Share 780
Dividend Yield 780
Summary of Analytical Measures 782
Corporate Annual Reports 783
Management Discussion and Analysis 783
Report on Internal Control 784
Report on Fairness of the Financial Statements 784
Appendix 1 Unusual Items on the Income Statement 785
Unusual Items Affecting the Current Period’s
Income Statement 785
Unusual Items Affecting the Prior Period’s
Income Statement 786
Appendix 2 Fair Value and Comprehensive Income 786
Fair Value 787
Comprehensive Income 787
Make a Decision 815
Take It Further 816
Pathways Challenge 779, 818
Appendix A: Interest Tables A-1
Appendix B: Nike Inc., Form 10-K for the Fiscal Year
Ended May 31, 2017 Selected Excerpts B-1
Glossary G-1
Index I-1
Managerial
Accounting
15e
Chapter
1
Introduction to
Managerial Accounting
Chapter 1
Principles
Introduction to Managerial Accounting
Developing Information
COST SYSTEMS
COST ALLOCATIONS
Chapter 2   Job Order Costing
Chapter 3   Process Costing
Chapter 4   Activity-Based Costing
Chapter 5   Support Departments
Chapter 5   Joint Costs
Decision Making
PLANNING AND EVALUATING TOOLS
Chapter 6  Cost-Volume-Profit Analysis
Chapter 7   Variable Costing
Chapter 8   Budgetin…