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BU121 Midterm Exam-AID . Agenda. Cost Volume Profit Explained CVP Major Problem Balance Sheet Explained Income Statement Explained Combined Problem. CVP Introduction. Break-Even Analysis is at the heart of every business decision Revenues = Expenses! - PowerPoint PPT Presentation
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BU121 Midterm Exam-AID
Agenda
• Cost Volume Profit Explained– CVP Major Problem
• Balance Sheet Explained• Income Statement Explained• Combined Problem
CVP Introduction
– Break-Even Analysis is at the heart of every business decision
• Revenues = Expenses!
– You can include profit goals or work with sensitivity to find different outcomes when changing the price or volume.
Cost Volume Profit Relationship
Fixed Costs
Variable Costs
Break-Even
Loss
Revenues
Profit
CVP Methods
1. Contribution Margin Approach - Used with Per Item Data
2. Contribution Rate Approach - Normally used with “whole figure”.
3. Algebraically - Can be used both with Per Item Data or Total Figure Data
#1 - C. Rate/Total Figure Data
1. Solve for Breakeven Sales
Physical Building Rent - $100,000
Commission on Sales - $25,000
Machinery and Equipment Cost - $75,000
Per-Item Piecework Wages - $50,0000
Fixtures - $25,000 Revenues - $400,000
Materials - Cloth - $10,000
Materials - Wood - $60,000
#1 - C. Rate/Total Figure Data
1. B.E.P.(Sales)= (Fixed Costs)/1 - Contribution Rate
= (FC)/[1 - (VC)/(Sales)]
(100 + 75 + 25)
1 - (50 + 25 + 60 + 10) / (400)
#1 - C. Rate/Total Figure Data
(100 + 75 + 25)
1 - (50 + 25 + 60 + 10) / (400)
Equal to: $313,725 Therefore - After this point in sales = Profitable
#1 - C. Rate/Algebraically
Same Question Format: Except given a Break-Even Sales, Fixed Costs, and Revenue Variable Costs = ?
(500,000)
1 - (X) / (700,000) = $583,333
#1 - C. Rate/Algebraically
500,000 = 1 - (X) / (700,000)
583,333(X)/700,000 = 0.858 - 1
X = (0.142*700,000)
Variable Costs = 100,000
#2 - C. Margin/Unit Data Problem
1. Solve for Breakeven Sales
Physical Building Rent - $100,000
Commission on Sales -$5/units
Machinery and Equipment Cost - $75,000
Materials - Wood - $10/unit
Fixtures - $25,000 Selling Price Per Unit - $30
Materials - Cloth - $5/unit
#2 - C. Margin/Per Unit Data
Contribution Margin = Price - Variable Costs
Break-Even (units) = FC
PRICE - VC
#2 - C. Margin/Per Unit Data
BEP(UNITS) = (100 + 75 + 25)
30 - (5+ 5 + 10)
(X) = (200)
30 - (20)= 20 UNITS TO BREAK EVEN
#2 - C. Margin/Algebraically
Sales = Fixed Costs + Varaible Costs
Selling Price * X = Fixed Costs + Variable Costs *(X)
SP * (X) = FC + VC * (X)
#2 - C. Margin/Algebraically
30 * (X) = (100 + 75 + 25) +
(5 + 5 + 10) * (X)
30 * (X) = (200) + (20) * (X)
10*(X) = 200
X = 20 UNITSBoth are the same approach! Just different ways of getting there. Important to recognize what type of question you are working with - Total or Unit
Sensitivity with Volume and Prices
Lower Prices to Increase Volume ?Raise Prices but Lose Customers?
EVALUATE CHANGE IN MARGIN
versus
CHANGE IN SALES
Sensitivity with Volume and Prices
Selling Price Per Unit = $10Variable Costs = $5Current Sales = 100 units
Increase selling price by $3 but lose 8 customers:
Gain = $3 * 92 (Additional Margin for Existing Customers)
Loss = $5 * 8 Customers (Former Cont. from Lost Customers)
= $276 - $40 => $236 GAIN
Balance Sheet Equations
• A = L + O/E- when one side increases the other
also increasesA = Current + Fixed + OtherL = Current + Long TermO/E = Depends on ownership type
Current Assets• Current Assets are listed in order of declining
liquidity– Cash, Marketable Securities, Accounts Receivable,
Inventories, Supplies, Prepaid• Marketable Securities: temporary investments made with
cash that would otherwise be idle • Prepaid: any asset you hold that is paid for but has not yet
been used.– Ex. Prepaid Rent is rent for a future month that you’ve
already paid
Current Assets Problems
1. You purchased a 12 month insurance plan for $12,000 on June 1st 2007. Your year end is on Dec 31. What is the value of your prepaid insurance at at Dec 31, 2008?
2. You’re A/R on Dec 31, 2007 is $20,000. Your Sales in 2008 was $150,000 and you collected $160,000. What is you’re A/R as at Dec 31, 2008?
Fixed Assets
• Any asset that you expect to hold for more than a year– i.e. Land, Buildings, Equipment
• Fixed Assets are listed in order of declining life expectancy
• Have to include Amortization when calculating the worth of a Fixed Asset
Amortization
• Amortization: How much an asset is worth on a per year basisAmort. = (Cost - Salvage Value)/Life Expectancy
• Accumulated Amortization: Amortization of an asset for given # of years# of Years x Amort. = A.A.
Asset Value = Purchase Price - A.A
Amortization Problem
• You just purchased a truck for $24,000. You figure it’ll last for 5 years and at the end of 5 years you’ll be able to sell it for $4,000. What is the value of the truck on the balance sheet after 4 years?
Other Assets
• These are any assets that don’t fall under Current or Capital.
• Investments: Securities of one company owned by another for reasons other than the temporary use of excess cash
• Goodwill: the difference b/w Purchase Price and the actual value of the assets – A subjective number
Other Assets Questions
1. You’ve just bought 50% of the shares in Company A with money that was earmarked to purchase new company trucks. Is this considered a marketable security or an investment on the balance sheet?
2. You’ve just purchased Company B for $140,000. The company’s total assets amount to $78,000. What is the goodwill for Company B valued at?
Liabilities
• No required format for listing liabilities• CL are those expected to be paid back within one
year– Accounts Payable, Wages Payable, Current Portion of Long-
Term Debt, Interest, Dividends Payable• LTL are any liabilities that will not be paid back in full
within a year– List Examples
Liabilities Problems1. You recently borrowed $120,000 @ 15% with the
principle to be paid back in equal installments over 8 years (interest based on remaining principle). What is the Current & Long-term liabilities associated with loan at the end of the the 3rd year?
2. You pay wages on the last day of each month but your year end is in the middle of a month. What would your wages payable be if you incurred $17,000 in wages per month?
Owners Equity
- Calculation of O/E is different for different types of ownership.
1. SP: Old Capital + Investments + Profits - Withdrawals
2. P: same as above, but do separately for each partner
3. C: separate Common Stock, Preferred Stock, and Retained Earnings- RE: Old RE + Net Profit - Dividends Paid
Owner’s Equity Problem1. Archie Andrews made $7,500 net profit in 2008. He
invested $5,000 for a new Flat Screen TV and took out $9,000 to help pay for student loans. His capital in the previous period was $6,000. What is his owners equity?
2. Company A made a net profit of $250,000 and paid dividends of $.50/share. What is there current retained earnings if their retained earnings were $70,000 the previous period? What would the owners equity section of the balance sheet look like if the company has 100,000 common shares @ $12/share.
Balance Sheet Wrap-Up
• Know The Basic Equation• Need to learn what falls under A, L, O/E• Proper Title: “at at Dec 31…”• Don’t forget to order Assets properly!• The day after you create a balance sheet
everything has changed.
Income Statement Basic Formula
Net Sales- Cost of Goods Sold= Gross Profit- Operating Expenses= Net Income from Operations+/- Other Revenue/(Expenses= Net Income Before Taxes
Gross vs. Net
• Gross = before subtracting the necessary expenses and allowances
• Net = after subtracting the necessary expenses and allowances
Ex. Net Sales = $25,000Sales Returns = $2,000Gross Sales = ?
Income Statement For Service
RevenueGross Sales xxxx Less: Sales Returns xxx Less: Sales Discounts xxx xxxNet Sales xxxxExpenses
Operating Expenses Selling & Distributive xxx General & Admin xxx Total Operating Expenses xxxx
Cost of Good Sold
• COGS goes under the revenue section in a merchandising business.
• Net Sales - COGS = Gross ProfitBeginning Inventory
+ Net Purchases*+ Freight In= Cost of Goods Available For Sale- Ending Inventory= Cost of Goods Sold
COGS Problem
Beginning Inventory = $15,000Ending Inventory = ?COGAS = ?COGS = $28,000Net Purchases = $20,000Freight in = 5% of Net Purchases
Income Statement Wrap-Up• Always Create 1st!
– So you have “taxes payable” & “net profit” for the Balance Sheet
• Remember the Income Statement looks at what’s earned/incurred in a period NOT what you’ve actually received or paid.
• Proper Title: “For the Year Ended…”• Simple Math! Ensure you know format and you’ll be
fine.
Income Statement: Potentially Tricky Problems
1. You sold 100 items @ $20/each. You’ve only collected half the money; what are sales for this period?
2. Wages paid during the month of Oct. were $2,000. On Sept. 30 the Wages Payable account on the B.S. was $1,000; on Oct. 31 it was $500. What was the wage expense in October?
Balance vs. Income Statement• Balance Sheet as “snap-shot”.
– The accounts in the following period depends on the preceding period.
– Accounts “change”, they don’t “happen”• Ex. A/R in 2009 is determined by calculating if A/R in 2008 rose or
fell. NOT how many A/R occurred in 2009.– You care about what was actually spent or collected, not
what happened in totality• Ex. You might have received $12,000 in inventory, but you might
have only paid $10,000. Accounts Payable = +$2,000; Cash = -$10,000; Inventory = +12,000
Balance Sheet vs. Income Statement
• Income Statement as “overview of a period”.– Revenues and Expenses “happen” they don’t “change”
• Ex. 2009 Sales is how much you sold in 2009, not how much more you sold vs. 2008.
– You care about what was incurred, not what was spent or collected
• Ex. Wage Expense depends on the # of hours worked, not how much money you’ve given to employees
Combined Problems
Remember…
• Don’t forget headings on Income Statement and Balance Sheet (easy marks)
• You can prepare an Income Statement and Balance Sheet at the same time but you MUST finish your Income Statement first because you require the Net Income in order to calculate your Retained Earnings
Combined Problem
Serbello Sweet Treats• You have recently been employed by the Serbello sisters, co-
owners of Serbello Sweet Treats Inc. (a chocolate and candy manufacturer) to act as an accountant for their operations. Your first task is to draw up financial statements: Income Statement and Balance Sheet for the fiscal year ended September 30, 2008.
• As a start, the sisters have provided you with the following closing account balances and some additional information listed on the next slide
Account Balances
Gross Sales 855,000 Inventory, Sept. 30 2008 (market)4,000 Supplies 600 Retained Earnings, Oct. 1, 2007 14,500 Advertising Expense 22,000 Sales Returns and Allowances 2,100 Cash 135,025 Gross Purchases 235,000 Inventory, Sept. 30 2008 (cost) 3,500 Freight-In 1,500Inventory, Oct.1 2007(market) 6,300 Common Stock 15,000 Inventory, Oct.1, 2007 (cost) 5,000 Accounts Receivable 112,790Wage Expense – Selling 70% 150,000 Purchase Discounts 4,000 Admin. 30% Office Supplies Expense 2,200
* Note: Assume all amounts given are in $CDN
Set up Statements
• Fill in an Income Statement and Balance Sheet with the information that you are given
• Remember to leave space in order to add in additional accounts and expenses
• Suggest writing this section in pencil in case you make a mistake!
Additional Information
1. Serbello Sweet Treats has a fiscal year end date of Sept. 30, 2008.
What does this mean? - This is the date that you will use to label both
your balance sheet and your income statement. All calculations relating to time passed will extend backwards from this date.
Additional Information
2. A warehouse was purchased on Oct. 1, 2006 to store goods for resale. Price of the warehouse was $214,000. It is assumed to have a useful life of 12 years, and it is assumed that at the end of its useful life the warehouse can be sold for $48,000.
What does this mean?- Cost of the warehouse will appear on the Balance Sheet under Capital Assets, Building $214,000- Calculate depreciation expense:= $214,000-$48,000/12 = $13,833 DEPRECIATION EXPENSE (this will appear on the INCOME STATEMENT) = $13,833 x 2 years (time sisters have had the warehouse)= $27,66 ACCUMULATED DEPRECIATION (this will appear on the BALANCE SHEET and be subtracted from the original cost of the warehouse) Building: $214,000Less: Accumulated Amortization: $27,666
Additional Information
3. On Oct. 1, 2006 an insurance policy was taken out on the warehouse at a premium of $2,700/year. It has since been renewed at the same rate on Oct.1 of each year.
What does this mean?- It is now Sept. 30, 2008 meaning that they “used up” an
insurance policy from Oct. 1, 2007 – Sept. 30, 2008. This will appear as INSURANCE EXPENSE on the INCOME STATEMENT
- As of Oct. 1, 2008 (tomorrow) the sisters will have a new policy covering the warehouse until Oct. 1, 2009. This will appear as PREPAID INSURANCE under the Current Assets section of the BALANCE SHEET
Additional Information
4. Serbello Sweet Treats rents its store and office space and pays $4,000 each month in rent. 35% of the space is used as office space, and the remainder for selling purposes
What does this mean? - Total rent each month is $4,000- Total rent each year is $4,000 x 12 months = $48,000 - 35% of the total amount ($48,000x 35% = $16,800) will be
allocated to Office Space and appear as RENT EXPENSE under the General &Admin. section of the INCOME STATEMENT
- 65% of the total amount ($48,000 x 65% = $31,200) will be allocated to Selling Space and appear as RENT EXPENSE under the Selling & Distribution section of the INCOME STATEMENT
5. A cotton candy machine was purchased on Oct. 1, 2006 for $2,000. This machine has a useful life of 5 years but will have no residual value remaining at the end of its life.
What does this mean?- The machine was purchased 2 years ago *Remember to pay attention to the
dates given*- Cost of the machine will appear on the Balance Sheet under Capital Assets,
Cotton Candy Machine $2,000- Calculate depreciation expense:= $2,000-$0/5 years= $400 DEPRECIATION EXPENSE (this will appear on the INCOME STATEMENT) = $400 x 2 years (time sisters have had the machine)= $800 ACCUMULATED DEPRECIATION (this will appear on the BALANCE SHEET and
be subtracted from the original cost of the cotton candy machine) Equipment: Cotton Candy Machine: $2,000Less: Accumulated Amortization: $800
Additional Information
6. To pay for the cotton candy machine, a note was obtained bearing 5% interest per year. The terms of the note are: the principal is to be paid in 4 equal instalments, with the first payment being made on Sept. 30, 2007. The 5% interest is charged on the value of the loan at the time of each principal instalment payment.
What does this mean? (Balance Sheet Accounts) - Principal = $2,000 - 4 Equal Installments = $2,000/4 = $500/year- Made one payment of $500 in 2007 - One payment of $500 was made today. That means that
$1000 is still owing - $500 is due within one year, this will appear as a CURRENT
LIABILITY on the BALANCE SHEET - $500 is due within two years, this will appear as a LONG TERM
LIABILITY on the BALANCE SHEET
What does this mean? (Interest Payments)- Interest expense incurred in 2008 was on a principal balance
of $1,500 (made one $500 in 2007). The interest expense is 5% of $1,500 = $75 (this will appear as INTEREST EXPENSE under your OTHER EXPENSES/REVENUE on INCOME STATEMENT)
- In 2009 (one year from now) you will have to pay interest on a principal balance of $1000 (made two payments of $500). The 5% interest on the $1000 balance is $50 (this will appear as INTEREST PAYABLE on your INCOME STATEMENT)
Additional Information
7. In order to attract investors Serbello Sweet Treats maintains a dividend rate of 14% on net income after tax. Dividends are declared at year end.
What does this mean? - Since dividends are a function of Net Income
this value will be calculated after we finish the Income Statement.
Additional Information
8.On June 1, 2008 Serbello Sweet Treats purchased 200 shares of Hahn Hot Chocolate Inc. to make use of otherwise idle cash. On the date purchased the stock was selling for $32/share, however on Sept. 30, 2008 the stocks’ price had risen to $45/share
What does this mean?- Use the lower value (cost/market) x number of shares that
you hold in Hahn’s Hot Chocolate = $32/share x 200 shares = $6,400 - This will appear under MARKETABLE SECURITIES (Current
Assets) on your BALANCE SHEET
Additional Information
9.On August 1, 2008, a dividend of $5/share was declared and paid on Hahn’s Hot Chocolate.
What does this mean? - Based on the previous information we know that Serbello
Sweet Treats owns 200 shares of Hahn’s Hot Chocolate - $5 dividend x 200 shares = $1,000 received in dividends - This will appear under OTHER EXPENESES/REVENUE on your
INCOME STATEMENT
Additional Information
10. Serbello Sweet Treats Inc. tax rate is 30%. Taxes have not yet been paid at year end.
What does this mean? - Using the additional information and the account balances
that the Serbello Sisters provided, you have enough information to complete the Income Statement
- Once you calculate you Net Income before tax you multiply that value by 30%. This will be your TAX EXPENSE on the INCOME STATEMENT. Subtracting the tax expense from Net Operating Income will result in NET INCOME/LOSS.
- Now that we have an income statement we can complete our balance sheet and pay dividends (Pt. 7)
Back to Part 7
7. In order to attract investors Serbello Sweet Treats maintains a dividend rate of 14% on net income after tax. Dividends are declared at year end.
* Remember we needed NET INCOME in order to complete this calculation…
What does this mean?- This amount can be calculated by multiplying your net income
(taken from your Income Statement) by 14%- Since dividends will be declared at year end this amount is a
CURRENT LIABILITY (will be paid within the year) and will appear on your BALANCE SHEET
Check Your Work
• If you have done everything correctly, your Income Statement and Balance Sheet should look like this…
Note: Income Statement should appear in one column