BU121 Midterm Exam-AID

1. BU121 Midterm Exam-AID

2. Agenda • Cost Volume Profit Explained • CVP Major Problem • Balance Sheet Explained • Income Statement Explained • Combined Problem

3. CVP Introduction • Break-Even Analysis is at the heart of every business decision • Revenues = Expenses! • You can include profit goals or work with sensitivity to find different outcomes when changing the price or volume.

4. Cost Volume Profit Relationship Revenues Break-Even Profit Variable Costs Loss Fixed Costs

5. CVP Methods Contribution Margin Approach - Used with Per Item Data Contribution Rate Approach - Normally used with “whole figure”. Algebraically - Can be used both with Per Item Data or Total Figure Data

6. #1 - C. Rate/Total Figure Data Solve for Breakeven Sales

7. #1 - C. Rate/Total Figure Data • B.E.P.(Sales)= (Fixed Costs)/1 - Contribution Rate = (FC)/[1 - (VC)/(Sales)] (100 + 75 + 25) 1 - (50 + 25 + 60 + 10) / (400)

8. #1 - C. Rate/Total Figure Data (100 + 75 + 25) 1 - (50 + 25 + 60 + 10) / (400) Equal to: $313,725 Therefore - After this point in sales = Profitable sjhsj

9. #1 - C. Rate/Algebraically Same Question Format: Except given a Break-Even Sales, Fixed Costs, and Revenue Variable Costs = ? (500,000) = $583,333 1 - (X) / (700,000)

10. #1 - C. Rate/Algebraically 500,000 = 1 - (X) / (700,000) 583,333 (X)/700,000 = 0.858 - 1 X = (0.142*700,000) Variable Costs = 100,000

11. #2 - C. Margin/Unit Data Problem Solve for Breakeven Sales

12. #2 - C. Margin/Per Unit Data Contribution Margin = Price - Variable Costs Break-Even (units) = FC PRICE - VC

13. #2 - C. Margin/Per Unit Data BEP(UNITS) = (100 + 75 + 25) 30 - (5+ 5 + 10) (X) = (200) = 20 UNITS TO BREAK EVEN 30 - (20)

14. #2 - C. Margin/Algebraically Sales = Fixed Costs + Varaible Costs Selling Price * X = Fixed Costs + Variable Costs *(X) SP * (X) = FC + VC * (X)

15. #2 - C. Margin/Algebraically 30 * (X) = (100 + 75 + 25) + (5 + 5 + 10) * (X) 30 * (X) = (200) + (20) * (X) 10*(X) = 200 X = 20 UNITS Both are the same approach! Just different ways of getting there. Important to recognize what type of question you are working with - Total or Unit

16. Sensitivity with Volume and Prices Lower Prices to Increase Volume ? Raise Prices but Lose Customers? EVALUATE CHANGE IN MARGIN versus CHANGE IN SALES

17. Sensitivity with Volume and Prices Selling Price Per Unit = $10 Variable Costs = $5 Current Sales = 100 units Increase selling price by $3 but lose 8 customers: Gain = $3 * 92 (Additional Margin for Existing Customers) Loss = $5 * 8 Customers (Former Cont. from Lost Customers) = $276 - $40 => $236 GAIN

18. Balance Sheet Equations • A = L + O/E - when one side increases the other also increases A = Current + Fixed + Other L = Current + Long Term O/E = Depends on ownership type

19. Current Assets • Current Assets are listed in order of declining liquidity • Cash, Marketable Securities, Accounts Receivable, Inventories, Supplies, Prepaid • Marketable Securities: temporary investments made with cash that would otherwise be idle • Prepaid: any asset you hold that is paid for but has not yet been used. • Ex. Prepaid Rent is rent for a future month that you’ve already paid

20. Current Assets Problems • You purchased a 12 month insurance plan for $12,000 on June 1st 2007. Your year end is on Dec 31. What is the value of your prepaid insurance at at Dec 31, 2008? • You’re A/R on Dec 31, 2007 is $20,000. Your Sales in 2008 was $150,000 and you collected $160,000. What is you’re A/R as at Dec 31, 2008?

21. Fixed Assets • Any asset that you expect to hold for more than a year • i.e. Land, Buildings, Equipment • Fixed Assets are listed in order of declining life expectancy • Have to include Amortization when calculating the worth of a Fixed Asset

22. Amortization • Amortization: How much an asset is worth on a per year basis Amort. = (Cost - Salvage Value)/Life Expectancy • Accumulated Amortization: Amortization of an asset for given # of years # of Years x Amort. = A.A. Asset Value = Purchase Price - A.A

23. Amortization Problem • You just purchased a truck for $24,000. You figure it’ll last for 5 years and at the end of 5 years you’ll be able to sell it for $4,000. What is the value of the truck on the balance sheet after 4 years?

24. Other Assets • These are any assets that don’t fall under Current or Capital. • Investments: Securities of one company owned by another for reasons other than the temporary use of excess cash • Goodwill: the difference b/w Purchase Price and the actual value of the assets • A subjective number

25. Other Assets Questions • You’ve just bought 50% of the shares in Company A with money that was earmarked to purchase new company trucks. Is this considered a marketable security or an investment on the balance sheet? • You’ve just purchased Company B for $140,000. The company’s total assets amount to $78,000. What is the goodwill for Company B valued at?

26. Liabilities • No required format for listing liabilities • CL are those expected to be paid back within one year • Accounts Payable, Wages Payable, Current Portion of Long-Term Debt, Interest, Dividends Payable • LTL are any liabilities that will not be paid back in full within a year • List Examples

27. Liabilities Problems • You recently borrowed $120,000 @ 15% with the principle to be paid back in equal installments over 8 years (interest based on remaining principle). What is the Current & Long-term liabilities associated with loan at the end of the the 3rd year? • You pay wages on the last day of each month but your year end is in the middle of a month. What would your wages payable be if you incurred $17,000 in wages per month?

28. Owners Equity - Calculation of O/E is different for different types of ownership. • SP: Old Capital + Investments + Profits - Withdrawals • P: same as above, but do separately for each partner • C: separate Common Stock, Preferred Stock, and Retained Earnings • RE: Old RE + Net Profit - Dividends Paid

29. Owner’s Equity Problem • Archie Andrews made $7,500 net profit in 2008. He invested $5,000 for a new Flat Screen TV and took out $9,000 to help pay for student loans. His capital in the previous period was $6,000. What is his owners equity? • Company A made a net profit of $250,000 and paid dividends of $.50/share. What is there current retained earnings if their retained earnings were $70,000 the previous period? What would the owners equity section of the balance sheet look like if the company has 100,000 common shares @ $12/share.

30. Balance Sheet Wrap-Up • Know The Basic Equation • Need to learn what falls under A, L, O/E • Proper Title: “at at Dec 31…” • Don’t forget to order Assets properly! • The day after you create a balance sheet everything has changed.

31. Income Statement Basic Formula Net Sales • Cost of Goods Sold = Gross Profit • Operating Expenses = Net Income from Operations +/- Other Revenue/(Expenses = Net Income Before Taxes

32. Gross vs. Net • Gross = before subtracting the necessary expenses and allowances • Net = after subtracting the necessary expenses and allowances Ex. Net Sales = $25,000 Sales Returns = $2,000 Gross Sales = ?

33. Income Statement For Service Revenue Gross Sales xxxx Less: Sales Returns xxx Less: Sales Discounts xxx xxx Net Sales xxxx Expenses Operating Expenses Selling & Distributive xxx General & Admin xxx Total Operating Expenses xxxx

34. Cost of Good Sold • COGS goes under the revenue section in a merchandising business. • Net Sales - COGS = Gross Profit Beginning Inventory + Net Purchases* + Freight In = Cost of Goods Available For Sale • Ending Inventory = Cost of Goods Sold

35. COGS Problem Beginning Inventory = $15,000 Ending Inventory = ? COGAS = ? COGS = $28,000 Net Purchases = $20,000 Freight in = 5% of Net Purchases

36. Income Statement Wrap-Up • Always Create 1st! • So you have “taxes payable” & “net profit” for the Balance Sheet • Remember the Income Statement looks at what’s earned/incurred in a period NOT what you’ve actually received or paid. • Proper Title: “For the Year Ended…” • Simple Math! Ensure you know format and you’ll be fine.

37. Income Statement: Potentially Tricky Problems • You sold 100 items @ $20/each. You’ve only collected half the money; what are sales for this period? • Wages paid during the month of Oct. were $2,000. On Sept. 30 the Wages Payable account on the B.S. was $1,000; on Oct. 31 it was $500. What was the wage expense in October?

38. Balance vs. Income Statement • Balance Sheet as “snap-shot”. • The accounts in the following period depends on the preceding period. • Accounts “change”, they don’t “happen” • Ex. A/R in 2009 is determined by calculating if A/R in 2008 rose or fell. NOT how many A/R occurred in 2009. • You care about what was actually spent or collected, not what happened in totality • Ex. You might have received $12,000 in inventory, but you might have only paid $10,000. Accounts Payable = +$2,000; Cash = -$10,000; Inventory = +12,000

39. Balance Sheet vs. Income Statement • Income Statement as “overview of a period”. • Revenues and Expenses “happen” they don’t “change” • Ex. 2009 Sales is how much you sold in 2009, not how much more you sold vs. 2008. • You care about what was incurred, not what was spent or collected • Ex. Wage Expense depends on the # of hours worked, not how much money you’ve given to employees

40. Combined Problems Remember… • Don’t forget headings on Income Statement and Balance Sheet (easy marks) • You can prepare an Income Statement and Balance Sheet at the same time but you MUST finish your Income Statement first because you require the Net Income in order to calculate your Retained Earnings

41. Combined Problem Serbello Sweet Treats • You have recently been employed by the Serbello sisters, co-owners of Serbello Sweet Treats Inc. (a chocolate and candy manufacturer) to act as an accountant for their operations. Your first task is to draw up financial statements: Income Statement and Balance Sheet for the fiscal year ended September 30, 2008. • As a start, the sisters have provided you with the following closing account balances and some additional information listed on the next slide

42. Account Balances Gross Sales 855,000Inventory, Sept. 30 2008 (market) 4,000 Supplies 600 Retained Earnings, Oct. 1, 2007 14,500 Advertising Expense 22,000Sales Returns and Allowances 2,100 Cash 97,893Gross Purchases 235,000 Inventory, Sept. 30 2008 (cost) 3,500 Freight-In 1,500 Inventory, Oct.1 2007(market) 6,300 Common Stock 15,000 Inventory, Oct.1, 2007 (cost) 5,000Accounts Receivable 112,790 Wage Expense – Selling 70% 150,000 Purchase Discounts 4,000 Admin. 30% Office Supplies Expense 2,200

43. Set up Statements • Fill in an Income Statement and Balance Sheet with the information that you are given • Remember to leave space in order to add in additional accounts and expenses • Suggest writing this section in pencil in case you make a mistake!

44. Additional Information • SerbelloSweet Treats has a fiscal year end date of Sept. 30, 2008.

45. What does this mean? - This is the date that you will use to label both your balance sheet and your income statement. All calculations relating to time passed will extend backwards from this date.

46. Additional Information 2. A warehouse was purchased on Oct. 1, 2006 to store goods for resale. Price of the warehouse was $214,000. It is assumed to have a useful life of 12 years, and it is assumed that at the end of its useful life the warehouse can be sold for $48,000.

47. What does this mean? • - Cost of the warehouse will appear on the Balance Sheet under Capital Assets, Building $214,000 • Calculate depreciation expense: = $214,000-$48,000/12 = $13,833 DEPRECIATION EXPENSE (this will appear on the INCOME STATEMENT) = $13,833 x 2 years (time sisters have had the warehouse) = $27,66 ACCUMULATED DEPRECIATION (this will appear on the BALANCE SHEET and be subtracted from the original cost of the warehouse) Building: $214,000 Less: Accumulated Amortization: $27,666

48. Additional Information 3. On Oct. 1, 2006 an insurance policy was taken out on the warehouse at a premium of $2,700/year. It has since been renewed at the same rate on August 31 of each year.

49. What does this mean? • It is now Sept. 30, 2008 meaning that the insurance policy applies from Oct. 1, 2007 – Sept. 30, 2008. This will appear as INSURANCE EXPENSE on the INCOME STATEMENT • This transaction will also appear as PREPAID INSURANCE under the Current Assets section of the BALANCE SHEET. The policy was renewed on August 31 for 12 months, with 1 month used at year end. • $2,700 INSURANCE EXPENSE  Income Statement • $2,475 PREPAD EXPENSE  Balance Sheet

50. Additional Information 4. Serbello Sweet Treats rents its store and office space and pays $4,000/month in rent; 35% of the space is used as office space, and the remainder for selling purposes.