Given the following four cost behaviors and expected levels of cost-driver activity, predict total costs

3-35 Predicting Costs

Given the following four cost behaviors and expected levels of cost-driver activity, predict total costs:

1. Fuel costs of driving vehicles, $0.20 per mile, driven 17,000 miles per month
2. Equipment rental cost, $6,000 per piece of equipment per month for seven pieces for three
months
3. Ambulance and EMT personnel cost for a soccer tournament, $1,200 for each 250 tournament participants; the tournament is expecting 2,400 participants
4. Purchasing department cost, $7,500 per month plus $4 per material order processed at 4,000 orders in one month

Click here for the solution: Given the following four cost behaviors and expected levels of cost-driver activity, predict total costs

If a misstatement is immaterial to the financial statements of the entity for the current period, but is expected to have a material effect in future periods

AUDITING MULTIPLE CHOICE

1. (TCO 2) If a misstatement is immaterial to the financial statements of the entity for the current period, but is expected to have a material effect in future periods, it is appropriate to issue a(n): (Points: 2)

2. (TCO 2) When a client has not applied GAAP consistently from the prior year to the current year, the auditor does not concur with the appropriateness of the change, and the change in GAAP has a material effect on the financial statements, the auditor should issue a(n): (Points: 2)

3. (TCO 2) Which of the following is not an essential condition for issuing the standard unqualified audit opinion? (Points: 2)

4. (TCO 2) An adverse opinion is issued when the auditor believes: (Points: 2)

5. (TCO 11) A principal purpose of a letter of representation from management is to (Points: 2)

6. (TCO 11) A client representation letter is: (Points: 2)

7. (TCO 11) Inquiries of management regarding the possibility of unrecorded contingencies will not be useful in uncovering: (Points: 2)

8. (TCO 11) The audit step most likely to reveal the existence of contingent liabilities is (Points: 2)

9. (TCO 2) The standards which govern the CPA’s association with unaudited financial statements are: (Points: 2)

10. (TCO 2) A CPA firm can issue a compilation report: (Points: 2)

Click here for the solution: If a misstatement is immaterial to the financial statements of the entity for the current period, but is expected to have a material effect in future periods

A machine cost $500,000 on April 1, 2010. Its estimated salvage value is $50,000 and its expected life is eight years

A machine cost $500,000 on April 1, 2010. Its estimated salvage value is $50,000 and its expected life is eight years.

Instructions:
Calculate the depreciation expense (to the nearest dollar) by each of the following methods, showing the figures used
a) straight-line for 2010
b) Double-declining balance for 2011
c) Sum-of-the-years digits for 2011


Click here for the solution: A machine cost $500,000 on April 1, 2010

Georgia Lazenby believes a current liability is a debt that can be expected to be paid in one year

Georgia Lazenby believes a current liability is a debt that can be expected to be paid in one year. Is Georgia correct? Explain.


Click here for the solution: Georgia Lazenby believes a current liability is a debt that can be expected to be paid in one year

Data related to the expected sales of snowboards and skis for Winter Sports Inc. for the current year

PR 21-5A Data related to the expected sales of snowboards and skis for Winter Sports Inc. for the current year, which is typical of recent years, are as follows:

Snowboards $250.00 $170.00 40%
Skis 340.00 160.00 60%

The estimated fixed costs for the current year are $420,000.

INSTRUCTIONS:
1. Determine the estimated units of sales of the overall product necessary to reach the break even point for the current year.
2. Based on the break even sales (units) in part (1), determine the unit sales of both snowboards and skis for the current year.
3. Assume that the sales mix was 60% snowboards and 40% skis. Compare the break even point with that in part (1). Why is it so different?


Click here for the solution: Data related to the expected sales of snowboards and skis for Winter Sports Inc. for the current year

Jill Loomis believes a current liability is a debt that can be expected to be paid in one year

1. Jill Loomis believes a current liability is a debt that can be expected to be paid in one year. Is Jill correct? Explain.

2. Frederickson Company obtains $40,000 in cash by signing a 9%, 6-month, $40,000 note payable to First Bank on July 1. Frederickson’s fiscal year ends on September 30. What
information should be reported for the note payable in the annual financial statements?


Click here for the solution: Jill Loomis believes a current liability is a debt that can be expected to be paid in one year

Carter Corporation's sales are expected to increase from $5 million in 2005 to $6 million in 2006, or by 20 percent

AFN equation - Carter Corporation's sales are expected to increase from $5 million in 2005 to $6 million in 2006, or by 20 percent. Its assets totaled $3 million at the end of 2005. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2005, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. The after-tax profit margin is forecasted to be 5 percent, and the forecasted retention ratio is 30 percent. Use the AFN equation to forecast Carter's additional funds needed for the coming year.


Click here for the solution: Carter Corporation's sales are expected to increase from $5 million in 2005 to $6 million in 2006, or by 20 percent

Suppose the realized rate of return on the market portfolio is one percentage point greater than its expected return

Suppose the realized rate of return on the market portfolio is one percentage point greater than its expected return. How would the realized rate of return compare with the expected return of a security with a beta of +2?


Click here for the solution: Suppose the realized rate of return on the market portfolio is one percentage point greater than its expected return

Williams Glassware has estimated, at various debt ratios, the expected earnings per share

P12-21 (EPS and Optimal Debt Ratio) Williams Glassware has estimated, at various debt ratios, the expected earnings per share and the standard deviation of the earnings per share as shown in the following table.

Debt ratio Earnings per share (EPS) Standard deviation of EPS
0% $2.30 $1.15
20 3.00 1.80
40 3.50 2.80
60 3.95 3.95
80 3.80 5.53

a. Estimate the optimal debt ratio on the basis of the relationship between earnings per share and the debt ratio. You will probably find it helpful to graph the relationship.
b. Graph the relationship between the coefficient of variation and the debt ratio. Label the areas associated with business risk and financial risk.


Click here for the solution: Williams Glassware has estimated, at various debt ratios, the expected earnings per share

An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next four years

An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next four years. What is the investment's internal rate of return?

Click here for the solution: An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next four years

The expected annual returns are 15% for investment 1 and 12% for investment 2

E8–3 The expected annual returns are 15% for investment 1 and 12% for investment 2. The standard deviation of the first investment’s return is 10%; the second investment’s return has a standard deviation of 5%. Which investment is less risky based solely on standard deviation? Which investment is less risky based on coefficient of variation? Which is a better measure given that the expected returns of the two investments are not the same?

Click here for the solution: The expected annual returns are 15% for investment 1 and 12% for investment 2

Arrow Technology, Inc. (ATI) has total assets of $10 million and expected operating income (EBIT) of $2.5 million

Arrow Technology, Inc. (ATI) has total assets of $10 million and expected operating income (EBIT) of $2.5 million. If ATI uses debt in its capital structure, the cost of this debt will be 12 percent per annum.

a. Complete the following table:
Leverage ration (debt/total assets)
0% 25% 50%
Total assets
Debt (at 12% interest)
Equity
Total liabilities and equity
Expected operating income (EBIT)
Less: Interest (at 12%)
Earnings before tax
Less: Income tax at 40%
Earnings after tax
Return on equity
effect of 20% decrease In EBIT to $2,000,000
Expected operating income (EBIT)
Less: Interest (at 12%)
Earnings before tax
Less: Income tax at 40%
Earnings after tax
Return on equity
effect of a 20% increase in EBIT to $3,000,000
Expected operating income (EBIT)
Less: Interest (at 12%)
Earnings before tax
Less: Income tax at 40%
Earnings after tax
Return on equity

b. Determine the percentage change in return on equity of a 20 percent decrease in expected EBIT from a base level of $2.5 million with a debt-to-total-assets ratio of
i. 0%
ii. 25%
iii. 50%

c. Determine the percentage change in return on equity of a 20 percent increase expected EBIT from a base level of $2.5 million with a debt-to-total-assets ratio of
i. 0%
ii. 25%
iii. 50%

d. Which leverage ratio yields the highest expected return on equity?

e. Which leverage ratio yields the highest variability (risk) in expected return on equity?

f. What assumption was made about the cost of debt (i.e., interest rate) under the various capital structures (i.e., leverage ratios)? How realistic is this assumption?

Click here for the solution: Arrow Technology, Inc. (ATI) has total assets of $10 million and expected operating income (EBIT) of $2.5 million

IP Inc is expected to pay $1.70 dividends next year

IP Inc is expected to pay $1.70 dividends next year. The dividend growth rate is expected to be 7% forever. If the required rate of return for IP is 10% calculate the price of the stock using the constant growth model. If the stock is currently selling for $63, indicate whether the stock is underpriced or overpriced.

Click here for the solution: IP Inc is expected to pay $1.70 dividends next year