Multiple Choice Question 1: Answer Problem 11 Drake Company

Multiple Choice 1questionanswerproblem 11drake Company2statement O

Cleaned assignment instructions: The document includes multiple questions related to various accounting topics, including journal entries, cost analysis, budget preparation, financial statement analysis, and decision-making scenarios. It encompasses multiple choice questions, problem-solving exercises, and journal entries for different companies, along with questions on ethics and stakeholder analysis. The key tasks involve preparing financial statements, journal entries, cost schedules, budget forecasts, incremental analyses, and ethical considerations based on provided data.

Paper For Above instruction

The comprehensive nature of these accounting exercises calls for a detailed exploration of core principles and practical applications. This paper aims to synthesize the various problems and questions presented, emphasizing critical accounting concepts such as journalizing investments, preparing cash budgets, analyzing cost behaviors, determining manufacturing costs, and evaluating potential buy-or-make decisions. Additionally, it will incorporate financial statement analysis, including the preparation of statements of cash flows and balance sheets, and ethical considerations in managerial decision-making.

Starting with investment accounting, Cody Industries’ ownership of 35% of Macarthy Company’s stock prompts the recognition of significant influences and the appropriate recording of dividends and share of net income. The journal entries should reflect the equity method, as they involve a substantial but not majority ownership (Gordon & Schmidt, 2020). For Macarthy’s net income of $250,000 and dividends of $60,000, Cody’s share, under the equity method, would recognize 35% of net income ($87,500) and dividend income at the proportionate amount ($21,000). The journal entries, therefore, should debit the investment account and credit revenue from stock investments accordingly, and record cash dividends received (Warren & Reeve, 2021). This underscores the importance of understanding ownership levels and their impact on financial recording.

When stock is issued for a noncash asset, accounting standards specify that the asset should be recorded at its fair value. This approach ensures the valuation reflects current market conditions, providing transparency and consistency in financial statements (Financial Accounting Standards Board, 2014). For example, if a company exchanges stock for equipment, the equipment’s fair value becomes the basis for recording the transaction, aligning with the principle of measuring assets at acquisition cost adjusted for fair value at the exchange date.

Vertical analysis of Saira, Inc.’s income statement reveals that net income as a percentage of sales is critical for assessing profitability margins. With net sales of $300 million and net income of $75 million, the net income margin is 25%, calculated by dividing net income by net sales (Brigham & Ehrhardt, 2017). Such analysis aids managers and investors in evaluating operational efficiency and profitability trends over time and across competitors.

The decision to accept a special order hinges on incremental analysis, particularly if sales are affected by the order. If additional sales cannibalize existing sales, then lost sales should be incorporated into the analysis. This ensures a comprehensive understanding of the true incremental benefit or cost, aligning with managerial accounting principles (Garrison, Noreen, & Brewer, 2018). In the context of capacity constraints, accepting a special order only makes sense if the incremental revenue exceeds the incremental costs, considering potential lost opportunity costs.

Manufacturing overhead budgeting involves estimating costs at various activity levels. Using a flexible budget approach, if the overhead costs are $600,000 at 190,000 machine hours, the cost per hour is approximately $3.16. For a planned activity of 200,000 hours, the budgeted overhead would be $632,000, based on the variable component, adjusted for expected activity levels (Hansen, Mowen, & Guan, 2014). This emphasizes the utility of flexible budgets in managing cost control under changing production volumes.

When calculating equivalent units of production (EUP), the method depends on the inspection point and cost flow assumptions. In the scenario where materials are added at the beginning and conversion costs incurred throughout, the EUP for materials equals units started plus units in ending inventory, adjusted for completeness. Given no beginning inventory, units started (90,000), and ending inventory at 40% complete, the EUP for materials is 98,000 units, calculated by summing units completed and equivalent units in ending inventory (Hilton & Platt, 2016).

Issuance of bonds at a premium involves recognizing the premium as an addition to bonds payable, and recording cash received at the issue date. Since bonds are issued at 102, representing 102% of face value, the cash received should be $5,100,000, with the premium of $100,000 recorded separately (Khan & Jain, 2019). The journal entry includes debiting cash, crediting bonds payable for the face amount, and crediting premium on bonds payable for the excess amount.

Production budgeting and inventory management require precise calculations to meet sales demands while maintaining safety stock levels. Based on the production schedule and desired inventory levels, the total units to be produced are determined by adding expected sales and desired ending inventory, then subtracting beginning inventory. For example, with 678,000 units in sales and a desire for 4,800 units to start the next quarter, the total units to produce would be around 681,000 units, accounting for beginning inventory and safety stock (Horngren et al., 2018).

Labor variances provide insights into workforce efficiency and cost control. To determine the actual rate of pay, given the favorable labor rate variance, the total labor hours and standard rate are used. If the standard hours are 6,000 and actual hours are 6,300, with a favorable variance of $3,150, the actual rate per hour is calculated by dividing total actual wages by actual hours. This yields an actual rate of approximately $8.50 per hour, emphasizing the importance of variance analysis in managing labor costs (Higgins, 2015).

Cost per job in manufacturing is computed by summing direct materials, direct labor, and applied overhead. For Job No. 987, with direct materials of $11,450, 360 labor hours at $15 per hour, and overhead at $22 per machine hour for 300 machine hours, the total cost amounts to $26,750, illustrating the application of job costing systems in determining product costs (Drury, 2018).

Constructing a statement of cash flows using the indirect method involves adjusting net income for changes in non-cash working capital and non-operating gains or losses. The sale of old plant assets at book value or gain/loss must be reflected to reconcile net income to net cash provided by operating activities. For Drake Company, cash flows from investing activities include proceeds from asset sales and purchases, while financing activities encompass issuance of stock, issuance or repayment of debt, dividends paid, and treasury stock transactions (White, Sondhi, & Fried, 2016).

Financial analysis of Drake Inc.’s comparative balance sheets indicates changes in assets and liabilities, impacting cash flow. The acquisition of new plant assets, investments, sale of old assets, debt conversion into stock, stock issuance, and dividend payments collectively influence the cash position. The preparation of a complete statement of cash flows entails categorizing these activities into operating, investing, and financing sections, facilitating a comprehensive view of cash management over the period (Fraser & Ormiston, 2019).

From a financial statement perspective, analyzing Drake Inc.’s income statement reveals a profit margin of approximately 7.11% ($32,000 / $450,000). Understanding margins and ratios informs managerial decisions and investor perceptions. Similarly, budgeted sales, collection patterns, and inventory purchase policies, as seen in Redding Company’s scenario, emphasize the importance of cash flow management, especially in maintaining minimum cash balances and planning for upcoming expenditures (Penman, 2013).

The manufacturing costs, including materials, labor, and overhead, are critical in computing the cost of goods manufactured and cost of goods sold. Using beginning and ending inventories, along with direct costs, comprehensive schedules provide insights into operational efficiency and profit margins. Meanwhile, buy-or-make decisions involve incremental analysis considering manufacturing costs versus purchase prices, and potential use of idle capacity to maximize contributions (Garrison et al., 2018).

In ethical decision-making contexts, such as revising cost estimates to improve project viability, stakeholders include managers, shareholders, and external auditors. Ethical considerations revolve around honesty, transparency, and the responsibility to provide accurate financial information for informed decision-making. Managers must balance strategic judgment with ethical standards, ensuring that alterations to estimates do not mislead stakeholders (Boatright, 2019).

In conclusion, the array of exercises and questions presented covers fundamental accounting principles, managerial decision-making tools, financial statement analysis, and ethical considerations. Applying these concepts accurately enhances managerial effectiveness, financial transparency, and ethical standards within organizations, ultimately supporting sound business decision-making and stakeholder trust.

References

• Brigham, E. F., & Ehrhardt, M. C. (2017). Financial Management: Theory & Practice. Cengage Learning.
• Boatright, J. R. (2019). Ethics and the Conduct of Business. Pearson.
• Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
• Financial Accounting Standards Board (FASB). (2014). Accounting for Noncash Asset Exchanges: A Guidance Summary. FASB.
• Fraser, L., & Ormiston, A. (2019). Understanding Financial Statements. Pearson.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
• Hansen, D. R., Mowen, M. M., & Guan, L. (2014). Cost Management: A Strategic Emphasis. Cengage Learning.
• Higgins, R. C. (2015). Analysis for Financial Management. McGraw-Hill Education.
• Hilton, R. W., & Platt, D. E. (2016). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.
• Khan, M. Y., & Jain, P. K. (2019). Financial Management: Text, Problems, and Cases. McGraw-Hill Education.
• Gordon, K. & Schmidt, K. (2020). Principles of Accounting. Routledge.
• Penman, S. H. (2013). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.
• Warren, C. S., & Reeve, J. M. (2021). Financial Accounting. Cengage Learning.
• White, G. I., Sondhi, A. C., & Fried, D. (2016). The Analysis and Use of Financial Statements. Wiley.