Acc 212 DL04 Spring 2017 Exam 1 Page 1 Of 21 The Following I

Acc 212 Dl04 Spring 2017exam 1page 1 Of 21 The Following Informat

Prepare Mergenthaler's statement of cash flows for the year ended December 31, 2017, using the indirect method.

Prepare a schedule showing a horizontal analysis for 2017 using 2016 as the base year.

Determine the total amount of (a) delivery service (product) costs and (b) period costs.

Compute the break-even sales in dollars, the break-even sales using the contribution margin ratio, the margin of safety ratio assuming actual sales are $937,500, and the sales required to earn a net income of $150,000 for Erickson, Inc.

Paper For Above instruction

Introduction

The provided financial data span multiple companies and require detailed analysis to comprehend their financial health and operational efficiency. Specifically, the tasks involve preparing a statement of cash flows using the indirect method, performing a horizontal analysis for comparative financial statement data, classifying costs as either product or period costs, and calculating sales targets and safety margins for a manufacturing company. This comprehensive approach allows stakeholders to make informed decisions based on liquidity, profitability, cost management, and sales performance.

Mergenthaler's Statement of Cash Flows (Indirect Method)

The first task involves preparing Mergenthaler's statement of cash flows for the fiscal year ending December 31, 2017, employing the indirect method. The indirect method starts with net income and adjusts for changes in working capital, non-cash expenses, and investing and financing activities. Given the data, net income is identified, and changes in current asset and liability accounts are computed to determine cash flows from operating activities.

Net income for 2017 equals $30,000. Adjustments include depreciation expense of $25,000, which is added back because it's a non-cash expense. The increase in accounts receivable ($25,000 - $15,000 = $10,000) is deducted from net income as it indicates cash outflow (more credit sales not yet collected). Prepaid insurance increases by $6,000, which is also deducted. Accounts payable increased by $11,000 ($30,000 - $19,000), representing a source of cash (less paid to suppliers), so it's added. Salaries payable decreased by $1,000 (-$7,000 to $6,000), indicating cash outflow, thus deducted.

Investing activities include the collection of principal on long-term loans ($16,000), sale of long-term investments ($22,000), and purchase of land by issuing bonds payable ($40,000, a non-cash financing activity, not directly reflected in cash flows, but important to note). Financing activities involve issuing common stock ($20,000), repayment of bonds payable ($34,000), and payment of cash dividends ($6,000).

Calculating the net cash provided by or used in operating activities involves adjusting net income by non-cash expenses and working capital changes, leading to an accurate depiction of operational cash flow. The net cash flows from investing and financing activities are added to derive the overall change in cash for the year, aligning with the change in cash balances reported in the balance sheet.

Horizontal Analysis of 2017 vs. 2016

The second task is to perform a horizontal analysis comparing 2017 to 2016 for Valdez Express Inc. Using 2016 as the base year, each item’s percentage change is calculated: ((2017 amount – 2016 amount) / 2016 amount) x 100. For current assets, an increase from $80,000 to $114,000 results in a growth of 42.5%. Plant assets rose from $414,000 to an unspecified amount, but if the depreciation or acquisition is considered, an analysis can indicate asset growth or decline. Similarly, current liabilities increased from $65,000 to $91,000, a 40% increase, which could imply increased short-term obligations or growth in operational scale. Retained earnings and common stock show changes reflective of earnings retention and equity financing. These percentage comparisons help analyze trends, operational efficiency, and financial stability over the period.

Cost Classification in Delivery Service

The third task involves classifying June 2016 costs into product (delivery service) and period costs. Delivery service costs include direct costs associated with delivering products, such as driver’s salaries ($17,000), gas and oil for delivery trucks ($3,200), and repairs on delivery equipment ($300). Indirect materials ($8,400), depreciation on delivery equipment ($11,200), and dispatcher's salary ($5,000) also relate directly to delivery service operations and are classified as product costs. Period costs include office utilities ($2,490), office supplies ($650), office building property taxes ($870), and the CEO's salary ($12,000), as they are not directly tied to delivery activities but support overall administrative functions. Repairs on office property and other administrative expenses are considered period costs because they are unrelated to production or delivery activities.

Financial Analysis for Erickson, Inc.

(a) Break-even Sales (Mathematical Equation)

Fixed costs are $225,000, and variable costs are $14 per unit. The selling price per unit is $20. The contribution margin per unit is $6 ($20 - $14). The break-even point in units is calculated as:

Break-even units = Fixed costs / Contribution margin per unit = $225,000 / $6 = 37,500 units.

The break-even sales in dollars:

Sales = Break-even units × Price per unit = 37,500 × $20 = $750,000.

(b) Break-even Sales Using Contribution Margin Ratio

Contribution margin ratio = Contribution margin per unit / Selling price = $6 / $20 = 0.3.

Break-even sales in dollars = Fixed costs / Contribution margin ratio = $225,000 / 0.3 = $750,000.

(c) Margin of Safety Ratio

Actual sales are $937,500. The break-even sales are $750,000. The margin of safety in dollars is:

Margin of safety = Actual sales – Break-even sales = $937,500 – $750,000 = $187,500.

Margin of safety ratio = Margin of safety / Actual sales = $187,500 / $937,500 ≈ 0.20 or 20%.

(d) Sales Required for Net Income of $150,000

The target profit unit sales is:

Units = (Fixed costs + Desired net income) / Contribution margin per unit = ($225,000 + $150,000) / $6 = 62,500 units.

Sales in dollars = 62,500 units × $20 = $1,250,000.

Thus, to earn a net income of $150,000, Erickson, Inc. must generate sales of $1,250,000.

Conclusion

These analyses provide comprehensive insights into the operational cash flows, financial health, cost management, and sales targets of the involved companies. The statement of cash flows reveals liquidity movements, while horizontal analysis highlights growth trends. Cost classification aids in understanding expense structures, and sales calculations facilitate strategic planning. Combined, these assessments support effective decision-making for managerial and stakeholder purposes, reinforcing the importance of detailed financial analysis in business management.

References

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