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1: What is accounting? Discuss its Advantages and Disadvantages in a detailed manner?

2.Yankee Hotel Foxtrot initiated operations on July 1, 2014. To manage the company officers and managers have requested monthly financial statements starting July 31, 2014. The adjusted trial balance amounts at July 31 are shown below.

Debit

Credit

Cash

$ 7,680

Accumulated Depreciation-

Equipment

$ 840

Accounts Receivable

810

Notes Payable

6,000

Prepaid Rent

1,965

Accounts Payable

2,140

Supplies

1,160

Salaries and Wages Payable

360

Equipment

11,400

Interest Payable

40

Owner's Drawings

800

Unearned Service Revenue

580

Salaries and Wages Expense

7,145

Owner's Capital

10,640

Rent Expense

2,740

Service Revenue

14,390

Depreciation Expense

665

Supplies Expense

580

Interest Expense

45

Total debits

$ 34990

Total Credits

$34990

  • Determine the net income for the month ofJuly
  • Determine the amount for Owner’s, Capital at July 31,2014
  • Determine the Balance Sheet at July 31, 2014for
3.Polk Company developed the following information for its product:

Per unit

Sales price

$90

Variable cost

63

Contribution margin

$27

Total fixed costs

$1,080,000


Answer   the    following    independent    questions    and   show    computations    using    the contribution margin technique to support youranswers.

  1. How many units must be sold to breakeven?

  2. What is  the  total  sales  that  must  be  generated  for  the  company to  earn  a  profitof $60,000?

  3. If the company is presently selling 45,000 units, but plans to spend an additional $108,000 on an advertising program, how many additional units must the company sell to earn the same net income it is nowmaking?
  4. Using the original data in the problem, compute a new break-even point in units if the unit sales price is increased 20%, unit variable cost is increased by 10%, and total fixed costs are increased by$210,000.
4.Rodie Company has budgeted sales revenues as follows:

Particulars

June

July

August

Credit sales

$135,000

$145,000

$ 90,000

Cash sales

90,000

255,000

195,000

Total sales

$225,000

$400,000

$285,000

Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month. Purchases of inventory are all on credit and 50% is paid in the month of purchase and 50% in the month following purchase.

Budgeted inventory purchases are:

June

$300,000

July

250,000

August

105,000

Other cash disbursements budgeted: (a) selling and administrative expenses of $48,000 each month, (b) dividends of $103,000 will be paid in July, and (c) purchase of equipment in August for $30,000 cash.

The company wishes to maintain a minimum cash balance of $50,000 at the end of each month. The company borrows money from the bank at 8% interest if necessary to maintain the minimum cash balance. Borrowed money is repaid in months when there is an excess cash balance. The beginning cash balance on July 1 was $50,000. Assume that borrowed money in this case is for onemonth.

Prepare a cash budget for the months of July and August. Prepare separate schedules for expected collections from customers and expected payments for purchases of inventory.

5.“Business decision making requires identification of decision alternatives, logging relevant costs/benefits of each choice, evaluating qualitative issues, and selecting the most desirable option based on judgmental balancing of quantitative and qualitative factors.” Explain the analytics for managerial decision making.

Adjusted Trial Balance at July 31, 2014

Accounting is the comprehensive process of systematically recording all the transactions and events that takes place during the course of business, in a particular period. These transactions are recorded in the financial terms in the books of accounts so as to prepare the financial statements of the company using the accounting data and information. The process of accounting covers various activities like collecting, recording, summarizing, analyzing and reporting of financial information relating to business (Rahman & Rahim, 2010).  The financial statements that are prepared under the accounting process are aimed at disseminating the information relating to financial performance of a business in the given period of time. Accounting information is useful for various parties who are commonly called as stakeholders of the company. These stakeholders are: shareholders, lenders of finance, governmental agencies or regulators, business communities and so on. These parties use financial information regarding the company to make informed economic decisions. Therefore, accounting serves as the fundamental language of every business to communicate relevant and necessary information relating to the business, to the parties that are connected to the business directly or indirectly (Riahi-Belkaoui, 2004). Though the system of accounting has various advantages but at the same time it has to suffer from various limitations that are discussed further.

Business records maintenance:

Accounting process allows the recording and maintenance of all economic data related to the business in the systematic manner at one place i.e. the books of accounts. Since a business involves numerous transactions and events, it is not possible for its managers to memorize all the information without keeping the proper record of such information.

Systematic recording of transactions helps the accountants to prepare the necessary financial statements such as income statement (commonly known as profit and loss account), statement of financial position (commonly known as balance sheet) and the cash flow statements. These statements cover the basic financial information of the business. The information contained in these statements helps in conveying the state of financial affairs of the business.

When financial information is systematically and comprehensively prepared it allows the managers to undertaken comparative study of such information so as to understand the financial situation of the business in comparison to its previous year financial results or that of other competitive firms of the industry.

The preparation and presentation of financial information is the integral part of financial reporting function. Financial reporting is the requirement of various governmental bodies. Accounting enables a firm to comply with the rules and regulations. Hence, it serves as the evidence of compliance with various legal regulatory frameworks.

Answering Independent Questions using contribution margin technique

The providers of finance require assessing the financial position and creditworthiness of the business before approving any loans to the firm. Financial statements are used as the prime documents to get the loan sanctioned by the banks and financial institutions as it contains relevant financial information regarding the business of the firm seeking the funds.

The financial results that are derived through the analysis of accounting information of the business enable the firm to assess its worth in the market. The system of accounting suggests various methods of determining the value of the firm such as net asset value method, capitalization method etc.

The system of accounting helps in communication of necessary and material information to the managerial personnel of the entity so that they can undertake requisite actions that contribute to the growth and success of the business. The financial information allows the managers of business to formulate adequate policies and strategies for the sound performance of the business.

Accounting process helps in determining the net income of the business that is subject to tax under various taxation frameworks. It allows the managers to comply with the tax related laws applicable to the business.

As the process of accounting helps in maintaining proper records of all the key components of business such as its revenues, expenditures, assets and liabilities of the business so that proper and separate control over each business component can be maintained.

Recording of only monetary transactions:

The accounting process supports the processing of financial or economic matters of the business and hence it delivers the financial information to the stakeholders of the entity. However, to assess the overall information of any entity, it is necessary to study both financial and non-financial information related to the business. Accounting process does not provide the valuable non-monetary information of the business.

The system of accounting generally works on cost concept and therefore it does not take into account the changes in the levels of prices of various significant items of the business such as its assets. The values of assets keep on changing frequently due to change in the environmental conditions. In such situation accounting system proves to be inadequate.

As the information that is contained in the financial statements of the entity is processed and maintained on the basis of certain accounting conventions and assumptions which might not be suitable in every business situation hence accounting system fails to offer realistic financial information relating to the business (Garrison, 2010).

While preparation and presentation of accounting is the internal function of the management it becomes easy for the managers to manipulate the financial results to achieve the desired financial position with the intention of deceiving the shareholders of the business. It affects the true and fair view of financial affairs of the company (Account Study, 2018).

Since accounting process involves use of personal judgments at various levels of business such as selection of method of depreciation, treatment of expenditures incurred during the course of business. All such aspects affect the quality of financial statements of the company.

Calculation of Net Income for 31st July, 2014

 

Particulars

Amounts

 

Service Revenue

 $  14,390.00

 

Operating Expenses

 

Rent Expenses

 $    2,740.00

 

Salary and Wages Expenses

 $    7,145.00

 

Depreciation Expenses

 $        665.00

 

Supplies Expenses

 $        580.00

 

Interest Expenses

 $          45.00

 

Net Income

 $    3,215.00

 

Owner's Capital

   
     

Particulars

Amounts

 

Opening Balance

 $  10,640.00

 

Add: Net Income

 $    3,215.00

 

Less: Owner's Drawings

 $     (800.00)

 

Closing Balance

 $  13,055.00

 

Balance Sheet of Yankee Hotel Foxtrot

   

as at 31 st, July, 2014

   

 Assets

 Amounts

 Cash 

 $    7,680.00

 Accounts Receivables

 $        810.00

 Supplies

 $    1,160.00

 Prepaid Rent

 $    1,965.00

 Equipment

 $  11,400.00

 Less: Accumulated Depreciation

 $        840.00

 $  10,560.00

 Total Assets

 $  22,175.00

 Liabilities

 Notes Payable

 $    6,000.00

 Accounts Payable

 $    2,140.00

 Salaries and Wages Payable

 $        360.00

 Interest Payable

 $          40.00

 Unearned Revenue

 $        580.00

 Owner's Capital

 $  13,055.00

 Total Liabilities and Capital

 $  22,175.00

Per unit

Sales price

$90

Variable cost

63

Contribution margin

$27

Total fixed costs

$1,080,000

Breakeven Units

Total Fixed Costs

Contribution Margin

$1,080,000

$27

Breakeven Units

40000

Sales Units

Total Fixed Cost  +  Desired Profit

Contribution Margin

$1,140,000

$27

42222

Per unit

At 42222 Units

Sales price

 $                              90.00

 $              3,800,000.00

Variable cost

 $                              63.00

 $              2,660,000.00

Contribution margin

 $                              27.00

 $              1,140,000.00

Total fixed costs

 $                 1,080,000.00

 $              1,080,000.00

Profits

 $                    60,000.00

Present Situation

Per unit

45000

Sales price

 $                              90.00

 $              4,050,000.00

Variable cost

 $                              63.00

 $              2,835,000.00

Contribution margin

 $                              27.00

 $              1,215,000.00

Total fixed costs

 $                 1,080,000.00

 $              1,080,000.00

Profits

 $                  135,000.00

Proposed Situation

Per unit

49000

Sales price

 $                              90.00

 $              4,410,000.00

Variable cost

 $                              63.00

 $              3,087,000.00

Contribution margin

 $                              27.00

 $              1,323,000.00

Total fixed costs

 $                 1,080,000.00

 $              1,080,000.00

 $                  108,000.00

Profits

 $                  135,000.00

Number of units

Total Revised Contribution

 $              1,323,000.00

49000

Contribution per unit

 $                             27.00

Per unit

Sales price

 $                              90.00

 $                          108.00

Variable cost

 $                              63.00

 $                             56.70

Contribution margin

 $                              27.00

 $                             51.30

Total fixed costs

 $                 1,080,000.00

 $              1,290,000.00

Profits

New Break Even Point (Units)

Total Fixed Costs

Contribution Margin

 $                           1,290,000.00

 $                                         51.30

Breakeven Units

25146

Cash Budget

   

Particulars

 July

 August

 Opening Balance

 $    50,000.00

 $     50,000.00

 Total Collections

 $  396,000.00

 $   307,000.00

 Total Cash

 $  446,000.00

 $   357,000.00

 Payments

 Purchase Payments

 $  275,000.00

 $   177,500.00

 Selling and administrative expenses

 $    48,000.00

 $     48,000.00

 Interest on borrowings

 $       2,400.00

 Dividend

 $  103,000.00

 Purchase of Equipment

 $     30,000.00

 Total Payment

 $  426,000.00

 $   257,900.00

 Remaining Cash Balance

 $    20,000.00

 $     99,100.00

 Amount Borrowed

 $    30,000.00

 Amount Repaid

 $     49,100.00

 Minimum Closing Balance Requirement

 $    50,000.00

 $     50,000.00

Particulars

June

July

August

Credit sales

$135,000

$145,000

$90,000

Cash sales

90,000

255,000

195,000

Total sales

$225,000

$400,000

$285,000

Sales

     

Particulars

June

July

August

Credit sales

$135,000

$145,000

$90,000

Collection from Credit Sales (60%)

$81,000

$87,000

$54,000

Collection from Credit Sales (40%)

$54,000

$58,000

 

Collection from Credit Sales

$81,000

$141,000

$112,000

Particulars

June

July

August

Cash Sales

 $    90,000.00

 $   255,000.00

 $         195,000.00

Collection from Credit Sales

$81,000

$141,000

$112,000

Total Collections

$171,000

$396,000

$307,000

Purchases

     

Particulars

June

July

August

Credit Purchases

 $  300,000.00

 $   250,000.00

 $         105,000.00

Payments made for purchases

 $  150,000.00

 $   125,000.00

 $           52,500.00

 $   150,000.00

 $         125,000.00

Total Payment made

 $  150,000.00

 $   275,000.00

 $         177,500.00

Particulars

June

July

August

Credit sales

$135,000

$145,000

$90,000

Cash sales

90,000

255,000

195,000

Total sales

$225,000

$400,000

$285,000

Sales

     

Particulars

June

July

August

Credit sales

$135,000

$145,000

$90,000

Collection from Credit Sales (60%)

$81,000

$87,000

$54,000

Collection from Credit Sales (40%)

$54,000

$58,000

Collection from Credit Sales

$81,000

$141,000

$112,000

Particulars

June

July

August

Cash Sales

 $    90,000.00

 $   255,000.00

 $         195,000.00

Collection from Credit Sales

$81,000

$141,000

$112,000

Total Collections

$171,000

$396,000

$307,000

Purchases

     

Particulars

June

July

August

Credit Purchases

 $  300,000.00

 $   250,000.00

 $         105,000.00

Payments made for purchases

 $  150,000.00

 $   125,000.00

 $           52,500.00

 $   150,000.00

 $         125,000.00

Total Payment made

 $  150,000.00

 $   275,000.00

 $         177,500.00

The managers of the business have to face various situations in the normal course of business where they have to undertake decision making regarding the selection of most appropriate alternative from among all the options that are available to them. In such cases it becomes necessary for the managers to critically analyze each and every option so as to reach at the decision that gives maximum benefit to the business (Hansen, Mowen & Guan, 2007). For the purpose of carrying the critical analysis of all the possible alternatives, it is important to determine the individual cost and benefit of such alternatives separately.  However, it is not enough to take into account merely the financial considerations of all the potential options (Balakrishnan, 2007). Rather, the managers must also consider the non-financial benefits and costs of the alternative options in order to select the most desirable option.

There are different analytics available to the manager to use for the purpose of evaluating the most appropriate course of action. For the long term capital investment projects, there are various capital budgeting techniques such as Net Present Value, Discounted or normal Payback Period, Internal Rate of Return, Profitability Index or Accounting Rate of Return, After Tax Cash Flows and so on. These techniques helps to understand the worth of the project, the business proposes to take. Further, while estimating the cost involved in all the potential options under consideration, it is also necessary to understand the concepts of relevant and non-relevant cost of the business (Zimmerman & Yahya-Zadeh, 2011). The risk or uncertainty involved in any business decision also becomes the part of its cost and the returns that such alternative decision is potential to offer can be termed as the benefits of such alternative option. The cost benefit analysis facilitates a firm to select the most appropriate option of action by considering all the possible costs and benefits of such option (Horngren, 2013). It is necessary for the managers to understand the difference between the sunk costs and the relevant costs of business option before making judgment about the cost involved in the project (Otley & Emmanuel, 2013). While undertaking the decision making, the managers have to ignore the sunk costs as they are irrelevant for the business because of their irrevocable nature. Relevant items are such items under which the future costs and returns are anticipated to be differing for the concerned alternative decisions. The objective of such analytics is the identification of the decision that yields the best and most suitable outcome as these analytics are related to the relevant costs and benefits (Walther & Skousen, 2010).

References:

Account Study, 2018. Advantages & Limitations of Accounting. Available at: https://www.accountstudy.com/advantages-limitations-accounting/ Accessed on: 26.07.2018.

Balakrishnan, N., Render, B., Stair, R.M. and Munson, C., 2007. Managerial decision modeling. New Jersey: Pearson.

Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial accounting. Issues in Accounting Education, 25(4), pp.792-793.

Hansen, D., Mowen, M. and Guan, L., 2007. Cost management: accounting and control. Cengage Learning.

Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.

Horngren, C.T., Sundem, G.L., Stratton, W.O., Burgstahler, D. and Schatzberg, J., 2002. Introduction to Management Accounting: Chapters 1-19. Prentice Hall.

Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control. Springer.

Porwal, L.S., 2001. Accounting Theory, 3E. Tata McGraw-Hill Education.

Rahman, A. and Rahim, A., 2010. An introduction to Islamic accounting theory and practice. CERT Publications Sdn. Bhd.

Riahi-Belkaoui, A., 2004. Accounting theory. Cengage Learning EMEA.

Schick, A., 2007. Performance Budgeting and Accrual Budgeting. OECD Journal on Budgeting, 7(2), pp.109-138.

Walther, L.M. & Skousen, C.J., 2010. Analytics of Managerial Decision Making. Available at: < https://eclass.teicrete.gr/modules/document/file.php/DS107/Books/Analytics%20for%20Managerial%20Decision%20Making%20%28Walther%20-%20Skousen%29.pdf> Accessed on: 26.07.2018.

Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258-259.

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