Which Of The Following Is An Advantage Of Corporations?

Which Of The Following Is An Advantage Of Corporations Relative To

Identify the advantages of corporations compared to partnerships and sole proprietorships, the roles of users of accounting information, the focus of different financial statements, and the analysis methods used in financial evaluation. Additionally, examine concepts related to manufacturing cost systems, cost behavior, budgeting, cost management, and decision-making processes in managerial accounting.

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Corporations present several advantages over partnerships and sole proprietorships, notably in the realm of legal liability and organizational structure. One of the primary benefits is reduced legal liability for investors. Unlike sole proprietorships or partnerships, where owners may be personally responsible for business debts, corporations provide a legal shield that limits liability to the amount invested (Brigham & Houston, 2019). This separation of personal and business assets makes corporations a more attractive option for investors concerned about personal financial exposure. Furthermore, corporations are often easier to transfer ownership interests due to their structured shares, facilitating investments and succession planning (Heising & Human, 2020). While corporations tend to face higher taxes compared to other organizational forms, their ability to raise capital through issuing stock, attract a broad base of investors, and sustain large-scale operations constitutes significant advantages (Gibson, 2021).

The group of users of accounting information with the primary goal of achieving business objectives includes managers. Managers utilize accounting data for planning, controlling, and evaluating operations, aligning resources with organizational goals (Weygandt et al., 2018). Unlike auditors, who primarily verify financial statements' accuracy, or investors and creditors, who focus on financial health for investment and lending decisions, managers are responsible for internal decision-making to steer the company towards its strategic objectives.

Financial statements serve different purposes and focus on various periods. The balance sheet, or statement of financial position, provides a snapshot of a company’s financial condition at a specific point in time, displaying assets, liabilities, and equity (Fox et al., 2020). In contrast, the income statement covers a period, illustrating the company's revenues, expenses, and net income, thus assessing performance over time (Gibson, 2021). The statement of cash flows details the cash generated and used during a period, highlighting liquidity and solvency (Weygandt et al., 2018).

An income statement is fundamentally a report of business activities over a defined period, capturing revenues and expenses that result in net income or loss (Brigham & Houston, 2019). It summarizes how well the company is performing financially by tracking income-generating activities and cost incurrences, which are essential for stakeholders’ decision-making.

The ability of a company to meet short-term obligations hinges on liquidity ratios, particularly the current ratio. This ratio compares current assets to current liabilities; if current assets exceed current liabilities, the firm has sufficient liquidity to cover its short-term debts (Heising & Human, 2020). This ratio is crucial for creditors and management to assess whether the company can maintain day-to-day operations without liquidity issues.

Liquidity ratios measure a company’s capacity to pay its maturing short-term obligations and meet unexpected cash needs. They reflect the short-term financial health of an enterprise and are vital indicators for creditors and investors (Gibson, 2021). The current ratio and quick ratio are common measures utilized for this purpose, emphasizing the importance of liquidity management in organizational sustainability.

The convention of consistency in accounting ensures that a company applies the same accounting principles across periods, facilitating comparability of financial information over time (Weygandt et al., 2018). This consistency provides reliability and analysis accuracy, aiding stakeholders in making informed decisions. It is applied within an organization and across comparable entities but is primarily concerned with uniformity over time within a single firm.

Horizontal analysis involves examining financial statement data across multiple periods to identify trends and evaluate performance changes. Also known as trend analysis, it assesses the amount and percentage increase or decrease of each item over periods, providing insights into growth patterns or potential issues (Fox et al., 2020). This technique helps stakeholders understand historical performance and forecast future trends.

Vertical analysis, on the other hand, expresses each item in a financial statement as a percentage of a base amount within the same period. For instance, on an income statement, each expense item is shown as a percentage of total sales (Gibson, 2021). This method aids in analyzing the proportional relationship among items, facilitating comparison across companies of different sizes.

In cost accounting, process costing is used in industries where production involves continuous processes, and the products are indistinguishable from each other. This method accumulates costs for large quantities of homogeneous products, summarizing costs on production cost reports (Heising & Human, 2020). It simplifies costing in manufacturing environments like chemicals, textiles, or food processing.

A job order cost system is characterized by assigning costs to specific jobs or orders that have unique characteristics. Each job is treated as a separate cost object, and costs are tracked individually through job cost sheets (Brigham & Houston, 2019). This approach is necessary when products are dissimilar, and accurate cost tracing is essential for pricing and profitability analysis.

Within process costing, product costs are summarized on production cost reports after manufacturing processes are completed (Weygandt et al., 2018). These reports compile accumulated costs across departments or processes, providing a comprehensive view of the total cost per unit for inventory valuation and cost control.

Activity-based costing (ABC) is a costing method that allocates overheads to products or services through activity cost pools based on cost drivers. It recognizes that overhead costs are caused by various activities and assigns costs more accurately than traditional methods (Gibson, 2021). This technique improves decision-making related to product pricing, process improvements, and cost reduction strategies.

A cost that remains constant per unit at different activity levels is called a variable cost. Unlike fixed costs, which stay constant in total regardless of activity volume, variable costs change proportionally with production levels (Heising & Human, 2020). Examples include direct materials and direct labor costs.

The break-even point is where total revenues equal total fixed and variable costs, resulting in neither profit nor loss (Brigham & Houston, 2019). It is a critical metric for evaluating the minimum sales volume required to avoid losses and is calculated by dividing fixed costs by the contribution margin per unit.

Given fixed costs of $600,000 and a contribution margin of $150 per unit, the break-even point in units is calculated as $600,000 / $150 = 4,000 units (Fox et al., 2020). This indicates that selling 4,000 units will cover all fixed and variable costs, resulting in zero profit.

In product costing, assigning direct materials, direct labor, and both variable and fixed manufacturing overhead to products follows absorption costing principles. This method absorbs all manufacturing costs into product costs, complying with generally accepted accounting principles (Gibson, 2021).

When a division manager's compensation depends on net income, there is an incentive to manipulate production levels to meet targets. Under absorption costing, managers might increase production to allocate fixed costs over more units, thereby reducing per-unit costs and artificially inflating net income (Brigham & Houston, 2019). Conversely, under variable costing, net income reflects only variable costs, so production increases do not impact net income as significantly.

An unrealistic budget often arises when it is developed in a top-down manner without input from those responsible for operations. Such budgets may set unattainable targets, leading to unrealistic expectations and diminished motivation (Weygandt et al., 2018). Bottom-up approaches tend to produce more achievable and realistic budgets by incorporating input from frontline managers.

A key element in budgetary control is the comparison of actual results to budgeted objectives. This process enables managers to identify variances, analyze causes, and implement corrective actions, ensuring better financial oversight and goal attainment (Gibson, 2021).

The sales budget serves as the foundation for overall financial planning. Its purpose is to project future sales revenue, enabling firms to coordinate production, inventory, and resource allocation. It also provides benchmarks to evaluate whether sales objectives are being achieved (Heising & Human, 2020).

Responsibility accounting involves accumulating financial data by organizational units or managers who have decision-making authority. This approach enhances accountability and provides relevant information for evaluating performance at various levels within the organization (Weygandt et al., 2018).

Variance reports are internal management tools that compare actual results with budgeted figures, highlighting deviations and supporting managerial decision-making. They scrutinize areas such as sales, costs, and expenses to ensure operational efficiency (Gibson, 2021).

Management accountants prepare internal reports that examine the actual impact of decisions, facilitating ongoing performance evaluation and operational adjustments. Unlike external financial reports, these internal documents are tailored to internal decision-making needs (Brigham & Houston, 2019).

Incremental analysis involves evaluating additional or alternative courses of action by comparing the incremental costs and benefits associated with each. This aids managers in making decisions such as accepting special orders, discontinuing products, or outsourcing activities (Weygandt et al., 2018).

Considering a special order from Seasons Manufacturing, additional contribution margin is calculated by subtracting incremental costs from the sale price. Given the data, accepting the order would increase net income by $8,000, as fixed costs are unaffected, and variable costs are covered (Gibson, 2021). Therefore, the effect is an increase in income.

For Carter, Inc., the decision to buy or make a component depends on the total costs. Making the component costs $120,000 (materials) + $20,000 (labor) + $60,000 (variable overhead) + $40,000 (fixed overhead), totaling $240,000, but only $10,000 of fixed costs are avoidable, so the relevant cost is $200,000. Buying externally costs $220,000. Since making the component costs less after considering avoidable costs, the manufacturer should produce internally and save $10,000 (Gibson, 2021).

Deciding whether to sell Product A now or process further involves calculating the incremental profit. Selling now yields $16 per pound for 15,000 pounds, totaling $240,000. Processing further costs $200,000 but yields a higher selling price of $28 per pound, or $420,000 total. The additional revenue surpasses additional processing costs by $180,000, making processing further the better choice, with a net benefit of $180,000 (Brigham & Houston, 2019).

In summary, these financial evaluations and cost considerations are essential for effective managerial decision-making. By analyzing costs, estimating profits, and understanding the implications of various strategic choices, managers can optimize operational efficiency and financial performance, aligning with organizational objectives and ensuring sustainability in competitive markets.

References

• Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management. Cengage Learning.
• Fox, J., Jenkins, J., & Nyhus, W. (2020). Financial Accounting (10th ed.). Pearson.
• Gibson, C. H. (2021). Financial Reporting & Analysis (14th ed.). Cengage.
• Heising, D., & Human, D. (2020). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.
• Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2018). Financial & Managerial Accounting. Wiley.