PTB3 Flashcards
- Voltoco entered into a debt obligation for $100,000, which requires repayment in full at the end of 10 years. To ensure its ability to repay when due, Voltoco wishes to make equal annual payments at the end of each year into a sinking fund that will earn 8% per year compounded. What amount should Voltoco contribute to the sinking fund each year?
Future Value Tables Figure 1: Future Value of a Single Sum ($1) Years 2% 4% 6% 8% 10% 1 1.020 1.040 1.060 1.080 1.100 2 1.040 1.082 1.124 1.166 1.210 3 1.061 1.125 1.191 1.260 1.331 4 1.082 1.170 1.262 1.360 1.464 5 1.104 1.217 1.338 1.469 1.611 6 1.126 1.265 1.419 1.587 1.772 7 1.149 1.316 1.504 1.714 1.949 8 1.172 1.369 1.594 1.851 2.144 9 1.195 1.423 1.689 1.999 2.358 10 1.218 1.480 1.791 2.159 2.594 Figure 2: Future Value of Ordinary Annuity Years 2% 4% 6% 8% 10% 1 1.000 1.000 1.000 1.000 1.000 2 2.020 2.040 2.060 2.080 2.100 3 3.060 3.122 3.184 3.246 3.310 4 4.122 4.246 4.375 4.506 4.641 5 5.204 5.416 5.637 5.867 6.105 6 6.308 6.633 6.975 7.336 7.716 7 7.434 7.898 8.394 8.923 9.487 8 8.583 9.241 9.897 10.637 11.436 9 9.755 10.583 11.491 12.488 13.579 10 10.950 12.006 13.181 14.487 15.937 Figure 3: Future Value of Annuity Due Years 2% 4% 6% 8% 10% 1 1.020 1.040 1.060 1.080 1.100 2 2.060 2.122 2.184 2.246 2.310 3 3.122 3.247 3.375 3.506 3.641 4 4.204 4.416 4.637 4.867 5.105 5 5.308 5.633 5.975 6.336 6.716 6 6.434 6.898 7.394 7.923 8.487 7 7.583 8.214 8.898 9.637 10.436 8 8.755 9.583 10.491 11.488 12.580 9 9.950 11.006 12.181 13.487 14.437 10 11.169 12.486 13.972 15.646 17.531
6,903. The annual contribution to the sinking fund can be determined using the basic time value of money equation. That equation for determining future value shows: FV = Amount × TableFactor ( TF )
In this question, we want to determine the amount of each deposit to get a future value of $100,000. Therefore, rearranged:
Amount = FV/TF
Amount
=
$ 100 , 000 / TF ( n =
10
;
I
=
8
%
)
From a FV table, at the intersection of 10 years and 8%, we get the factor 14.487. Amount = $ 100 , 000 / 14.487 = $ 6 , 903
So, $6,903 deposited at the end of each of the 10 years compounded at 8% annually will accumulate to $100,000 at the end of the 10th year.
Voltoco acquired new production equipment that it expects will save $5,000 per year in production-related cash expenditures at the end of each of the next eight (8) years. At the end of the eight (8) years, it expects to sell the used equipment for $5,000. What is the present value of Voltoco’s expected cash inflow from this equipment?
Figure 1: Present Value of a Single Sum ($1) Years 2% 4% 6% 8% 10% 1 0.980 0.962 0.843 0.926 0.909 2 0.961 0.925 0.890 0.857 0.826 3 0.942 0.889 0.840 0.794 0.751 4 0.924 0.855 0.792 0.735 0.683 5 0.906 0.822 0.747 0.681 0.621 6 0.888 0.790 0.705 0.630 0.564 7 0.871 0.760 0.665 0.583 0.513 8 0.853 0.731 0.627 0.540 0.467 9 0.837 0.703 0.592 0.500 0.424 10 0.820 0.676 0.558 0.463 0.386 Figure 2: Present Value of Ordinary Annuity Years 2% 4% 6% 8% 10% 1 0.980 0.962 0.943 0.926 0.909 2 1.942 1.885 1.833 1.783 1.736 3 2.884 2.775 2.673 2.577 2.487 4 3.808 3.630 3.465 3.312 3.170 5 4.713 4.452 4.212 3.993 3.791 6 5.601 5.242 4.917 4.623 4.355 7 6.472 6.002 5.582 5.206 4.968 8 7.325 6.733 6.210 5.747 5.335 9 8.162 7.435 6.802 6.247 6.759 10 8.963 8.111 7,360 6.710 6.145 Figure 3: Present Value of Annuity Due Years 2% 4% 6% 8% 10% 1 1.000 1.000 1.000 1.000 1.000 2 1.980 1.862 1.943 1.926 1.909 3 2.942 2.886 2.833 7.783 2.736 4 3.884 3.775 3.6732 3.577 3.487 5 4.808 4.630 4.465 4.312 4.170 6 5.713 5.452 5.212 4.993 4.791 7 6.601 6.242 5.917 5.623 5.355 8 7.472 7.002 6.582 6.206 5.868 9 8.325 7.733 7.210 6.747 6.335 10 9.162 8.435 7.802 7.247 6.759
31,435. Since the amount to be saved each year for 8 years is the same $5,000, it is an 8-year annuity, and its present value would be computed using the present value of an ordinary annuity table. The amount to be realized at the end of the 8 years from the sale of the used equipment is not an annuity; its present value would be computed using the Present Value of $1 table. The sum of the two computed present values would the amount of the present value of Voltoco’s expected cash inflow from the equipment.
The present value factor for an 8-year ordinary annuity at 8% is 5.747. Therefore, the PV of a $5,000 annuity would be: $5,000 × 5.747 = $28,735
The present value of $1 for 8 years at 8% is .540. Therefore, the PV of the $5,000 terminal value would be: $5,000 × .540 = $2,700.
The sum of the two amounts is: $28,735 + $2,700 = $31,435, the present value of the expected cash inflow from the equipment.
BSBCO0124 Contribution Margin vs Gross Margin
The controller of the company has been using a contribution margin income statement for use in explaining the current period’s operating results to non-financial professionals in the company. One of these individuals asks him why this income statement is in a different format from the traditional (gross margin) costing formatted income statement used for external reporting. As his assistant, the controller asks you to write a memo to the group explaining why the contribution margin format is used to describe results from one accounting period to the next. Write a concise memo explaining this issue.
Type your communication below the line in the response area below.
REMINDER: Your response will be graded for both technical content and writing skills. Technical content will be evaluated for information that is helpful to the intended reader and clearly relevant to the issue. Writing skills will be evaluated for development, organization, and the appropriate expression of ideas in professional correspondence. Use a standard business memo or letter format with a clear beginning, middle, and end. Do not convey information in the form of a table, bullet point list, or other abbreviated presentation.
We are using the contribution margin (CM) approach to explain current operating results rather than the gross margin (GM) approach. This memo is intended to explain both approaches and the support for using the CM approach for internal purposes.
The definition of CM is sales minus variable costs, while the definition of GM is sales minus cost of goods sold. The difference between the two approaches is the way in which costs are classified. The CM format classifies costs by nature of cost behavior (i.e., as fixed and variable). The GM format classifies cost by whether it is a manufacturing (product) cost or a non-manufacturing (period) cost.
The CM format is often used in companies internally to more clearly explain changes in operating results from one period to the next. Given changes in sales and production volume, the CM format is often more intuitive than the GM format. This is because the user understands that variable costs change when volume changes, while fixed costs do not change when volume changes. This holds true over a relevant range of volume.
The CM format often presents a more effective format for the user for understanding changes from one accounting period to the next. We hope that this provides a clear explanation as to our preferred approach. Please let us know if you have any additional questions.
Thank you,
Future CPA
Issues related to corporate governance are of increasing concern in capital markets. Write a memorandum to a corporate Board of Directors that considers some of the events that transpired at WorldCom. WorldCom’s CEO (Bernard Ebbers) and CFO (Scott Sullivan), authorized, executed, and recorded falsified accounting transactions that inflated revenue by about $11 billion. WorldCom’s Board of Directors approved these transactions. This fraud earned Ebbers and Sullivan 25 year and 15 year prison terms, respectively. The specific topics that the board would like you to cover are a definition of internal control and how the events at WorldCom relate to the goal of an appropriate “tone at the top” in relation to an organization’s system of accounting control. The board would also like you to discuss what controls might have helped prevent the WorldCom fraud.
Type your communication below the line in the response area below.
Internal control is a set of processes that are designed to provide reasonable assurance regarding the achievement of objectives related to the effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations. Internal control is primarily the responsibility of management and the entity’s Board of Directors.
An organization desiring an effective internal control must have top management that is ethical and pro-active in establishing this tone and culture. It is fair to say that this tone was lacking at WorldCom, as is evidenced by the events described above. Positive strategies for creating an ethical culture include management emphasizing the critical role of ethics and integrity to organizational success, and, emphasizing the role of mission statements and codes of conduct in promoting integrity.
Controls that might have helped prevent the fraud that occurred at WorldCom include the segregation of duties between the accounting functions that authorized, executed, and recorded the falsified accounting transactions is one important (absent) control in this scenario. In addition, the WorldCom Board of Directors did not appear to be independent of management and did not effectively execute its oversight function. Hence a stronger, independent Board of Directors likely would’ve helped prevent the WorldCom fraud. Finally, a similarly strong, independent, professional WorldCom Audit Committee might also have lessened the likelihood or success of the WorldCom fraud.
Sincerely,
Accountant
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TBSBWB0144 Balanced Scorecard
The management of Hewitt Company is considering adopting a balanced scorecard to measure performance. Karen Wells, the chief financial officer for the company, has asked you to prepare a memorandum describing a balanced scorecard and the advantages of adopting such a system.
REMINDER: Your response will be graded for both technical content and writing skills. Technical content will be evaluated for information that is helpful to the intended reader and clearly relevant to the issue. Writing skills will be evaluated for development, organization, and the appropriate expression of ideas in professional correspondence. Use a standard business memo or letter format with a clear beginning, middle, and end. Do not convey information in the form of a table, bullet point list, or other abbreviated presentation.
I understand that you are considering implementing a balanced scorecard performance measurement system at Hewitt Company. This memorandum explains the nature and benefits of such a system.
The balanced scorecard is a performance measurement system that includes both financial and nonfinancial measures. It includes measures in the four perspectives of financial, customer, internal business processes, and learning and growth. By measuring performance with multiple measures across these four perspectives, a balanced scorecard is more strategic than other systems that rely primarily on financial measures. It aids in communicating the company’s strategy to all members of the organization and helps insure that they work to achieve the organization’s strategic goals.
I suggest that you continue with your plan to implement a balanced scorecard system because I believe that it is superior to other single-dimensional systems.
If you have any questions, please contact me.
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