1) Fair Price, Inc. has two divisions, and their most recent financial statements are
shown below:
The Tiling Division has incurred losses for the past five years, and management
believes that the company will be better off maintaining and growing the Carpeting
Division.
Required:
Should Fair Price, Inc. eliminate the Tiling Division?
2) Indicate whether each of the following statements is true or false.
1>Some forms of financial statement analysis involve comparing results for different
companies in the same industry
2>Horizontal analysis refers to studying the behavior of individual financial statement
items over several periods
3>Horizontal analysis could be done using changes in the absolute dollar amount of an
item or trends in percentages
4>Some forms of financial statement analysis involve identifying changes in the same
item for a company over a period of time
5>Vertical analysis is also called trend analysis
3) Indicate whether each of the following statements is true or false:
1>A variable overhead cost should not be allocated to cost objects using a volume
measure as the allocation base
2>A causal relationship exists between a fixed overhead cost and the volume of
production
3>The best cost driver for a variable overhead cost is the one with the most convincing
relationship to the cost
4>Volume measures include number of labor hours, quantity of direct materials used,
and number of units sold
5>The allocation base used by a manufacturer to allocate overhead costs may affect the
apparent profitability of the various products the company makes
4) For 2012, the New Products Division of Tellis Company had operating income of
$7,000,000 and operating assets of $38,800,000. Tellis has set a target return on
investment (ROI) of 14% for each of its divisions.
The New Products Division has developed a potential new product that would require
$8,500,000 in operating assets and would be expected to provide $1,400,000 in
operating income each year. Assuming that the new product is put into production,
calculate the residual income for the division. Would the new product increase or
decrease the division’s residual income?
5) Davis Electronics expects to make 100,000 DVD players during 2012 . Direct
materials cost per unit are estimated at $18, and direct labor cost is expected to be $10
per unit. The total manufacturing overhead for the year is budgeted at $750,000.
Required
1) Calculate the amount of overhead that should be allocated to each DVD player
during the year.
2) Assume that, during the month of October, Davis made and sold 7,000 DVD players.
What would the cost of goods sold be for the month?
3) Assume that the company sells the DVD players at cost plus 25% of cost. What
would be the selling price for each DVD player?
6) The following transactions apply to Springfield Consulting Services in 2012:
1> issued stock to investors, $40,000
2> borrowed cash from bank, $10,000
3> purchased land for cash, $12,000
4> provided services to customers for cash, $60,000
5> paid $8,000 for rent
6> paid $35,000 for salaries
7> paid $2,000 for supplies used during the year
8> paid $5,000 dividends to owners
9> repaid $4,000 of loan described in item 2
Required:
Prepare a statement of cash flows for 2012 . The company started operations on January
1, 2012 .
7) Give an example of an intangible asset with an identifiable useful life.
8) Indicate how each event affects the elements of financial statements. Use the
following letters to record your answer in the box shown below each element. You do
not need to enter amounts.
Rembrandt Company purchased an asset on January 1, 2009 for $100,000. The asset
had a $20,000 salvage value and a 10 year life. The asset was sold on January 1, 2012
for $80,000. Show how the sale will affect Rembrandt’s financial statements, assuming
that Rembrandt uses straight-line depreciation.