SIMS

Question 1

Which source of funds should the company should use to raise additional capital?

Answer 1

long-term debt financing is likely to be chosen over equity financing

Question 2

What is the issuance of convertible debt?

Answer 2

Convertible debt (i.e., bonds) functions as part bond and part stock option.

Question 3

What does convertible debt pay?

Answer 3

Like a conventional fixed income security, pays interest periodically. However, like a stock option, a convertible may be exchanged for equity shares of the issuer

Question 4

What type of yield does convertible bonds offer?

What type of return does the convertible bond offer?

Answer 4

lower yields than conventional bonds, but may

offer higher return potential over time due to their exchange features.

Question 5

When does preferred shares give owners a priority claim?

Tip: assets and dividends

Answer 5

whenever a company pays dividends
or
distributes assets to shareholders.

Question 6

What do redeemable preferred shares contain?

Answer 6

a call option that allows the issuer to redeem the shares on or after a specified call date; shares are canceled and the holder of the shares is paid a predetermined price plus any dividends due.

Question 7

Redeemable preferred stock will generally raise _____ money than without the call option? i.e. lower or higher

Answer 7

Issuers are able to replace preferred shares with lower-yielding ones if interest rates fall. Because this type of equity can work to the detriment of the owner, redeemable preferred stock will generally raise less money than will equivalent shares without the call option.

Question 8

What are some of the advantages to debt financing over equity financing?

Answer 8

1. include nondilution of ownership interest;
2. lenders have no direct claim on future profits of the business;
3. interest expense on the debt is deductible for income tax purposes, thereby reducing the cost of the debt; and
4. raising debt capital is less complicated because the company is not required to comply with security laws and regulations.

Question 9

What are some disadvantages to debt financing to consider?

Answer 9

1. need cash for principal/interest payments
2. debt must be repaid at some point
3. interest is a fixed cost which raises breakeven point
4. the larger debt-to-equity ratio, the more risky
5. often contain restrictions on the company’s activities such as may be required to pledge company assets as collateral
6. debt may be less accessible to investors than equity, as bonds tend to have minimum face values of $1,000.

Question 10

Convertible bonds typically offer _____ yields than conventional bonds of similar duration.

Answer 10

lower yields than conventional bonds of similar duration.

Question 11

Equity financing (versus debt financing) is likely to be used when?

Answer 11

control (through voting privileges) is not important

Question 12

What are characteristic of redeemable preferred shares?

Answer 12

1. They give owners a priority claim whenever a company pays dividends.
2. The shares contain a call option that allows the issuer to redeem the shares.
3. If canceled, the holder of the shares is paid a predetermined price plus any dividends due.

Question 13

SIM #2- Write a memo to the CEO justifying the need to establish a formal budget.

Answer 13

to help plan, coordinate, implement, and control

enterprise activities

Question 14

The budget should be set at an efficient level of operations, but it should not be viewed as ____?

Answer 14

a cost reduction tool. (Cost reductions, however, are often achieved when a budgeting system is adopted because of the inefficiencies due to poor planning, coordination, and control prior to its adoption.)

Question 15

The two primary types of budgeting are ___ & ____?

Answer 15

traditional (incremental) budgeting and zero base budgeting.

Question 16

An intermediate budget identifies __?

Answer 16

specific steps to be accomplished in achieving the long-term goals

Question 17

What type of tool is the capital budget? And who uses it?

Answer 17

central planning tool that a management team uses to direct the activities of a corporation.

Question 18

What can a formal budget be used for?

Answer 18

1. segment reporting and responsibility accounting,
2. performance analysis,
3. gross margin (profit) analysis,
4. cost-volume-profit (breakeven) analysis,
5. product and service pricing,
6. transfer pricing, and
7. management decision making.

Question 19

traditional or incremental approach to budgeting starts with ____?

Answer 19

the activities and costs of the prior year and adds an incremental layer for growth and/or inflation

Question 20

zero base budgeting considers ___?

Answer 20

nothing sacrosanct about the current year as a base for next year’s estimates; each year the entity starts at zero and justifies the appropriateness of each budgetary item and its cost

Question 21

Name the lengths of the budgets?

Answer 21

Budgets may be classified in length as

• long term (approximately 5–6 years)
• intermediate (approximately 2–4 years)
• short term (1 year, annual budget).

Question 22

What is the master budget?

Answer 22

The master budget is the central planning tool that a management team uses to direct the activities of a corporation, as well as to judge the performance of its various responsibility centers.

Question 23

What is capital budgeting? What is it used for?

Answer 23

it is the analysis of investment (i.e., fixed or capital asset) decisions that have a useful life longer than one year. Management uses capital budgeting to allocate resources to investment opportunities in an attempt to obtain the maximum return to the firm.

Question 24

How to you calculate Equivalent Units (EU) for Ending Work-in-Process (Dec. 31)?

Total ending WIP units of 35,000
50% complete for material cost

Answer 24

35,000 x 50% = 17,500 units.

Question 25

How to you calculate Equivalent Units (EU) for Beginning Work-in-Process (Jan. 1)

Total beginning WIP units are 25,000
Materials percent of completion for beginning WIP is 10%

Answer 25

25,000 x 10% = (2,500) units

Beginning WIP units are deducted in determining total FIFO (first in, first out) EU;

Question 26

SIM #4 - Write a memo to the CEO supporting your recommendation to change to LIFO for inventory costing purposes. In your memo, explain the advantages and disadvantages of each method and identify conditions

Explain opening of memo

Answer 26

I am pleased to respond to your request for advice about changing our company’s inventory method from FIFO to LIFO. There are advantages and disadvantages of both methods, but I believe that xxxx best fits our company’s situation.

Question 27

advantages and disadvantages of FIFO

Answer 27

most recent prices, but higher tax expense

Question 28

advantages and disadvantages of LIFO

Answer 28

higher COGS
lower income & income tax expense,

inventory on B/S will be measured older prices so understated

Question 29

Which LIFO or FIFO method for tax and F/S purposes

Answer 29

It would be nice if we could use FIFO for our financial statements while using LIFO for tax purposes, but the tax regulations do not allow that.

If we elect LIFO for taxes, we must also use that method for our financial statement reporting.

Question 30

Which method LIFO or FIFO is a better reflection of the product physical flow and might be more relevant to financial statement users

Answer 30

Another consideration that we should think about in adopting a method is that, theoretically, our cost of goods sold should reflect the actual flow of goods in the market. Our experience indicates that consumers select the newest version of our products by looking at the published “use by” dates that we print on the cartons. Thus, LIFO is a better reflection of the product physical flow and might be more relevant to financial statement users.

Question 31

SIM #5- In a memo to the CEO, explain at least two advantages of using technology to facilitate these monitoring activities.

Answer 31

1. automated reports can be generated that highlight outliers or unusual (negative) trends which should then be investigated.
2. Tasking software can aid in standardizing the monitoring of some controls, such as account reconciliations and variance analysis, by documenting the completion and approval of the task.
3. Electronic time clocks assist in the prevention of employees recording fictitious hours worked.

Question 32

In a memo to the CEO, contrast ongoing and separate evaluations as described in COSO

Answer 32

COSO’s internal control framework, which was designed to aid firms in assessing individual controls and control systems, includes five components, one of which is monitoring. Monitoring involves assessing the design and operation of internal controls by conducting both ongoing and separate evaluations. Ongoing evaluations are embedded into business processes and information systems, providing continuous and timely information. Separate evaluations, including internal audit reviews, are periodically conducted and vary in scope depending on prior risk assessments. Identified deficiencies from both forms of evaluation are then communicated to management and those charged with governance so that necessary corrective actions can be made on a timely basis.

Question 33

What are the advantages of FIFO

Answer 33

First goods purchased are also the first goods sold.
Good for measurement of existing inventory on B/S
Goods still in inventory are measured at the most recent prices and current assets are shown as good reflections of current reality.

Question 34

What are the disadvantages of FIFO

Answer 34

income tax expense will be higher
since we are in an industry where prices are increasing each period, causing our cost of goods sold to be lower due to expensing the older, less-expensive goods.

Question 35

What are the advantages of LIFO

Answer 35

The LIFO method assumes that the most recent goods purchased are the first goods sold. Since we are experiencing rising costs each period, this method will result in higher cost of goods sold and, consequently, lower income and income tax expense.

Question 36

What are the disadvantages of LIFO

Answer 36

inventory on our balance sheet will be measured at the older prices paid for earlier units purchased.

Thus, our inventory and current asset amounts on the balance sheet will be understated in terms of today’s prices.

Question 37

SIM #6
Cost-Volume-Profit Analysis

What’s the formula for CM %?

Answer 37

Revenue 
less variable costs 
less fixed costs 
= Operating Income (Loss) / Revenue 
= Contribution Margin %

Question 38

SIM #7

A disadvantage to an employer of a defined contribution pension plan is:

Answer 38

A defined CONTRIBUTION plan is more portable than a defined benefit plan, so highly valued employees may be less motivated to stay with the employer than with a more generous defined benefit plan.

Question 39

SIM #7

With the same annual pension benefit to employees, which of the following will result in the lowest pension cost to an employer over several years?

Answer 39

A defined BENEFIT plan with increasing rates of return on plan assets

As the rate of return on plan assets increases in a defined benefit, the annual pension cost to the employer decreases because the plan is able to cover more of the benefits from its earnings.

Question 40

SIM #7

If a defined BENEFIT pension plan is based on average earnings for the highest 10 years:

Answer 40

a decreasing rate of return on plan assets will raise pension cost to the employer.

Question 41

SIM #7

Which of the following is not associated with defined BENEFIT pension plans?

Answer 41

Financial risks assumed by the employee

Defined BENEFIT pension plans:

• Complex actuarial computations
• Significant financial uncertainties to the employer
• An obligation of the employer to pay an agreed pension benefit
• will result in the lowest pension cost to an employer over several years

Question 42

SIM #7

What is a defined benefit pension plan?

Answer 42

an obligation of the employer to pay to an employee an agreed pension benefit each period after retirement. The employer is obligated to contribute sufficient amounts to a trust to fund future payments.

Advantages:
- less portable when an employee changes employers, possibly encouraging highly valued employees to stay with this employer.
-These plans usually pay an annuity, so retirees do not bear the risk of low returns or of outliving their retirement income. Because of that, employees may be motivated to work harder.
-if the trust investment returns exceed the actuarial estimate, the eventual cost to the employer is reduced since the extra earnings help fund the future benefits.
Risks:
-It costs more to fund a defined benefit pension for older employees than for younger ones because there are fewer years until retirement over which to fund the plan.
-Defined benefit plans may encourage some less-valued employees to stay with the employer.

Question 43

SIM #7

What is a defined contribution plan?

Answer 43

generally obligates the employer to pay a set amount or percentage of salary into a separate trust that is owned by the employee. The employer faces risks of market changes in a defined benefit plan while the employee assumes the financial risk associated with a defined contribution plan.
transfers the risk of lower investment earnings to the employees. Thus, highly valued employees might be less likely to remain with this employer.