Principles of Managerial Accounting - Essay Example

Finance and Accounting June 18, Answers to Questions Cash Flows Information What information does the cash flow statement provide that you cannot see in the other financial statements (income statement, balance sheet, owner’s equity)? What elements of the cash flow statement do you think are most important for company management to monitor and why? Is this different for investors? Information provided by cash flow provides the reader integrated information of cash activities not mentioned in the income sheet and balance sheet, since both are reported on accrual basis; it is possible cash mentioned are not yet collected or expended. As a rule, one should look at cash flow statement, as” if the cash obtained from operating activities is greater than the derived net income, company is in a healthy position, but if it is reported otherwise, something is wrong, and management should be concerned on this. (Accounting Coach) It is different for investors because for investors more cash coming in means increases in dividends, opportunities for expansions, and payment of debts, and would improve stockholders value. 2. Apple's Cash Flow Review the cash flow statement for Apple. How would you summarize Apple’s cash flow position and what does this statement tell you about where the money is coming from and where it’s going? What should Apple do to improve its cash position and why? A review of the yearly cash flow statement of AAPL from 2010 to 2012 shows that the cash used for operating have been larger than the reported income so it is assumed that some strategies of the company are not attuned with the operations and investing activities. (Yahoo Finance, 2013) For instance, a lot of cash are tied up in accounts receivables and in heavy investments. AAPL cash flow states Investors are happy since dividends are paid regularly and obligations are met as they fell due. What should Apple due to improve its cash position? Since cash position has been low for the past 3 years of operation, a review of company’s strategies should be done, more so in operational strategies. For instance, heavy accounts receivables means creditors are enjoying too much liberal credit facilities, or management needs to slow down on investments. 3. Stock Features What is "callable preferred stock"? Why do corporations issue such stock? Given the different features that are associated with stock (callable, cumulative, preferred, etc.), what type of stock would you want to buy personally and why? A callable preferred stocks are stocks issued by a company wherein it has the right but not an obligation to repurchase the stock at a specific price after a certain date (Investing Answers). For instance, issuer Company ”Star” issued preferred stock in 2000, paying a rate of 10% and would mature in 2020 , callable at 2010 . In 2010, “Star” gains the right to call the stock. Star would most probably exercise its right to call the option if the interest rates in 2010 is lower than 10%. The usual procedure is that issuer pay investor a little over the par value in order to call the stock, a call known as call premium. Call premium decreases as the preferred stocks comes near to it maturity. In this case Star offers 102% of face value if the call is done in 2010, but it is reduced to 101% as it goes to 2015 or nearer. It is advantageous to issuer since it can offer the flexibility of offering lower interest rates thus gain in the transaction. A callable preferred stock becomes disadvantageous to investors because of prospects of reinvesting at a lower rate of interest. Cumulative refers to the variation in the preferred stock. This provision settles any unpaid dividends in the past to the investor before paying new obligations to investors. It is cumulative because company owes investors a collective amount (Damon, S.). Preferred Stock is a financial instrument that gives the investor a higher claim on the assets and earnings of the company than the holders of common stock. Dividends must be paid out to them first before the holders of common stocks (Investopedia). Common stock represents a proportional equity ownership of an investor. As a common stock holder, he has a voting right in the company, and in case of loss, investor’s liability is limited to his shares of stocks. Stocks are liquid so it can easily be sold and bought quickly at a fair price. According to some comments, common stock has been more profitable than other types of investments because as the company becomes more profitable, profits of its share rises too. Based on the above precedents, I would prefer to cash in on common stocks since it requires shorter time of investment, easier terms of investment and more prospects for growth. 4. Role of Management Accounting Review the roles of management accounting within a company. What is the most important role of management accounting? How is that different than financial accounting? Both economics and accounting talk about scarcity of resources. But accounting differs in that it discusses scarce allocation differently in the branches of financial accounting and management accounting. Caplan, D. (n.d.) Accordingly, Caplan, defines financial accounting as giving out information on how to allocate resources within the company. Notably, this information is given to investors, to analysts and as a mandatory requirement of the Securities and Exchange Commission, Management accounting differs in that information is used by management to control activities within and is used to make management decisions i.e. the number of employees to be hired during seasonal activity, pricing decisions and investment priorities. It is also used to monitor activities to gain insight of competition activities. It does not discuss to investor product costing, unit sales, and those sort of reporting. 5. Issues in Costing Describe three issues/problems that a company could encounter when trying to determine the actual cost of a good or service to be used in the cost of goods sold. For each of your issues, provide an example of a company or industry where these issues could be present. The most difficult decisions faced by a business owner in determining its cost structure are determining variables, fixed and break-even costs or actual cost of goods/service. In starting out, it is important that these issues are settled before the price of a product is set. Let us take a production of shoes for example. It is relevant to trace what is the cost of goods that is required in producing a unit pair of shoes. This constitutes the biggest bulk of the costs as this includes direct materials and direct labor in getting the shoes to come in shape. It is advised that owner should include himself as an employee also and assign a cost to services. Not doing this is like under-pricing a product. It will be hard to adjust pricing to pay owner’s salary once customer has accepted the pricing. (How to Accounting Guide” March 2013) Next, we have the overhead costs that like rent, repairs, maintenance, utilities, and insurance. We have also to consider items that fall under marketing and administrative. Marketing costs are the cost to promote the product because owner may have the best shoe ever, but if no one else knows it exists, no one will buy. Administrative are costs required to run the business but not related to production. Examples of these costs are accountant’s fees, secretarial work, office supplies and miscellaneous services. Another way to figure cost structure is through contribution margin. Contribution margin is the profit gained after subtracting variable costs from the sales price. Breakeven point is the point needed to produce to meet fixed expenses Let us break it down by example. Our shoe factory is going to produce a new type of shoe that would sell at $110 per pair. Fixed cost is set at $25,000 and variable cost is $34 per pair. Let us assume that 600 pairs are sold. We will now find its profit contribution by using the formula of (Profit = earnings –fixed cost – variable cost) Earnings = 600 *110 =66, 000 Fixed cost = 25,000 Variable cost = 600 * 34 = 21,000 Profit is 66,000- 25,000-21,000 Profit = 20,000 To find contribution margin per unit, we have to Subtract variable costs per unit from sales price per unit to find the contribution margin per unit. Contribution margin per unit = 110.00 -34.00 = 76.00 Then, we divide the contribution margin per unit by the sales price per unit to find the contribution margin ratio. Contribution margin ratio = 76/ 110 = 69.00% Finally, to determine the breakeven sales volume, we have to Divide fixed costs by the contribution margin ratio to find the breakeven sales volume (eHow). BREAK- EVEN SALES VOLUME = 25,000/ 69% = 362 pairs. This means shoe store has to sell 362 pairs of shoes to break even. 6. CVP and the Airline Industry We’ve all experienced (or heard about) the challenges that the airlines have been facing. Read the Zacks Investment Research article, “Airline Industry Stock Outlook – August 2012.” Identify three factors that are affecting airline company’s ability to break even. For each of your factors, discuss how these have an impact on the breakeven (contribution margin, fixed costs, variable costs, a combination, etc.), and what happens if these factors increase or decrease. Factors affecting the airline industry according to Zach’s outlook are: first, the weak growth of passengers and freight in 2012, fuel price increase and unprofitable routes and jets. Accordingly, estimate of growth is smaller than forecasted. Growth is expected from travelers from Asia, Latin America, and Middle East. Second, is the fluctuation of fuel prices. Airlines are dependent on oil prices and accounts for 33% of its variable costs. A weak growth means lesser passengers, and lesser cargo freights, and a decrease of sales volume. Every decrease in passenger volume and cargo freights means lesser revenues and profit. Fixed costs remain the same regardless of the number of passengers or freight loads, while variable costs decreases, making the breakeven number of customers goes higher. Same thing with Fuel price increase as it raises cost of sales that eventually decreases gross margin. Gross margin is the amount left to pay for overhead costs needed to operate. Since these factors are hard to predict, airlines had to either pass the increased costs to consumers or get engaged in “hedging” to avoid risks. 7. Issues in Standard Costs and Budgeting When evaluating performance, many organizations compare current results with the actual results of previous accounting periods. Is an organization that follows this approach likely to encounter any problems? Explain. A standard cost as defined is the practice of substituting actual cost from the expected cost in the accounting records. The difference is reckoned as a variance. The reason for this is it is time consuming and difficult to arrive at the actual costs, so standard costing is used to represent a close approximation of the actual costs. Accountants are likely to encounter problems in this approach during budgeting, since it is difficult to ascertain the actual cost at the time when budget is finalized. According to Accounting Tools, a website for CPAs, budgeting system uses standard costing system because it provides a system of review that of comparing actual results from previous period. Further, it is argued that standard costing is not appropriate to use for fast paced and short lived products wherein “continuous improvement is driving down costs, and standard cost may become outdated within a month or two”. Organizations might find this tool inefficient because the feedback information coming from accounting is slow, and might be irrelevant anymore. 8. Flexible Budgets Flexible budgets provide different information than static budgets. Discuss some of these differences. Is a flexible budget always better? Are there times when you’d recommend using a static budget over a flexible budget? Flexible budgets and static budgets have differences in usages. First static budget is used as an estimating tool for business expenses in a specific period of time. As it is an estimated cost, there would be variances between the estimated and actual costs. At the close of reporting period, variances are recorded accordingly as to increases or decreases to come up with actual cost. Flexible budget is a tool used for performance evaluation in accord with the static budget. However, data on flexible budget cannot be compiled before the end of the accounting period. Static and flexible budgeting should go hand in hand since static is more of estimating while flexible is measuring, so both are not recommended to stand alone. 9. Long-Term Decision Making List a few of the issues and considerations businesses should have when it comes to the selection of long-term investments and how those issues impact the various financial statements.. Long term investments are Instruments Company tends to hold for more than a year. These can be bonds, stocks, real estate, or cash set aside for a specific purpose. The US Securities and Exchange Commission discussed important tips in long term investments. First is to take a look of one’s financial situation such as focusing on goals and measuring one’s risk tolerance. This is so because there is no guarantee of returns. Second, investor should be prepared to consider risk or to “evaluate one’s comfort zone in taking risks” because investing in securities is not federally insured unlike savings in banks” (US SEC). However, if the investor has a long term goal, the reward of investment is more or greater return. Short or long term investments are carried on the Balance Sheets and stated at cost or market value, this means that the stocks the company own are worth more than what appears on the balance sheet. For example, if the company owns 500,000 shares of stock, and the company paid $10 per share, the value reported in the balance sheet is $500,000. But if the share of stock rises to $25 per share, the holding would be 1,250,000. Yet it is still stated at the original price and not included in the book value of the company (Kennon. J., 2013) 10. Responsibilities in Management Accounting What are some of the ethical responsibilities and obligations that management accountants have within an organization? Provide some examples. Are these responsibilities different than the obligations for financial accountants. Ethical standards for management accountants and financial accountants are the same. The Code of Conduct for management accountants and financial accountants are fairly the same, as stated: Practitioners of management accounting and financial management have an obligation to the public, their profession, the organization they serve, and themselves, to maintain the highest standards of ethical conduct. In recognition of this obligation, the Institute of management Accountants has promulgated the following standards of ethical conduct for practitioners of management accounting and financial management. Adherence to these standards internationally is integral to achieving objective of management accounting (Accounting for Management) . Accordingly, both practitioners are obliged to maintain competence in order to maintain professional level ongoing skills and knowledge; to be able to prepare complete report and recommendations; and to be able to perform their professional duties in accordance with the laws. They are also obliged to maintain integrity, confidentiality and objectivity in the practice of their profession. By confidentiality means they should not disclose confidential information unless otherwise authorized. The Code specifies ethical standards to preserve integrity such as avoiding conflict of interests, avoidance of receiving gifts or favor that would influence decisions; communicate favorable or unfavorable judgment or opinion, and refrain from engaging in any subvert activities that will discredit the company or the profession. List of references Accounting Coach. Cash Flow Statements. Retrieved from http://www.accountingcoach.com/online-accounting-course/06Xpg01.html#statement-of-cash-flows-intro Accounting for Management. Code of Conduct for Management Accountants. Retrieved fromhttp://www.accounting4management.com/code_of_conduct_for_management_a.htm Accounting for Management.(n.d.) Standard costing and variance analysis. Retrieved from http://www.accounting4management.com/standard_costing_variance_analysis.htm Caplan, Dennis. Management Accounting: Concepts and Techniques Retrieved from Damon, S. What is Cumulative Preferred Stock? Retrieved from http://www.ehow.com/about_6597110_cumulative-preferred-stock_.html (What is Cumulative Preferred Stock) eHow. 2013. How to calculate Break-even. Retrieved from http://www.ehow.com/how_2172380_calculate-breakeven.html eHow. 2013. Static budget vs. flexible budget. Retrieved from http://www.ehow.com/info_7784641_static-budget-vs-flexible-budget.html How to Accounting Guide (2013). How to determine your cost structure. Retrieved from http://howtoaccounting.com/2013/03/14/how-to-determine-your-cost-structure/ Investing Answers. Callable Preferred Stock Definition Retrieved from Read More