Accounting Tools for Business Decision MakingSixth EditionK.docx

Accounting: Tools for Business Decision Making
Sixth Edition
Kimmel ● Weygandt ● Kieso
Chapter 13
Financial Analysis: The Big Picture
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Chapter Outline:
Learning Objectives
Apply the concepts of sustainable income and quality of
earnings.
Apply horizontal analysis and vertical analysis.
Analyze a company’s performance using ratio analysis.
2
Copyright ©2016 John Wiley & Sons, Inc.
L O 1: Apply the Concepts of Sustainable Income and Quality
of Earnings
Sustainable Income
The most likely level of income to be obtained by a company in
the future.
Unusual Items
Separately identified on the income statement.
Discontinued operations.
Other comprehensive income.
These “irregular” items are reported net of income tax.
3

Sustainable Income (1 of 4)
4
Discontinued Operations
(a) Disposal of a significant component of a business.
(b) Income statement should report a gain (or loss) from
discontinued operations, net of tax.
5
Discontinued Operations (1 of 2)
Illustration: Assume that during 2017 Acro Energy Inc. has
income before income taxes of $800,000. During 2017, Acro
discontinued and sold its unprofitable chemical division. The
loss in 2017 from chemical operations (net of $60,000 taxes)
was $140,000. The loss on disposal of the chemical division
(net of $30,000 taxes) was $70,000. Assuming a 30% tax rate on
income.
Prepare Acro’s statement of comprehensive income for the year
ended December 31, 2017.
6
Discontinued Operations (2 of 2)

7
Investor Insight (1 of 3)
What Does “Non-Recurring” Really Mean
Many companies incur restructuring charges as they attempt to
reduce costs. They often label these items in the income
statement as “non-recurring” charges, to suggest that they are
isolated events, unlikely to occur in future periods. The
question for analysts is, are these costs really one-time,
“nonrecurring events” or do they reflect problems that the
company will be facing for many periods in the future? If they
are one-time events, then they can be largely ignored when
trying to predict future earnings. But, some companies report
“one-time” restructuring charges over and over again. For
example, Procter & Gamble reported a restructuring charge in
12 consecutive quarters, and Motorola had “special” charges in
14 consecutive quarters. On the other hand, other companies
have a restructuring charge only once in a 5- or 10-year period.
There appears to be no substitute for careful analysis of the
numbers that comprise net income.
8
Comprehensive Income
All changes in stockholders’ equity except those resulting from
investments by stockholders and
distributions to stockholders.
Certain gains and losses bypass net income and instead are
reported as direct adjustments to stockholders’ equity.

Example – Unrealized gain or loss on Available-for-sale
securities.
9
Comprehensive Income (1 of 5)
Illustration of Comprehensive Income
Accounting standards require companies to adjust most
investments in stocks and bonds up or down to their market
value at the end of each accounting period.
Illustration: During 2017 Stassi Company purchased IBM stock
for $10,000 as an investment. At the end of 2017 Stassi was still
holding the investment, but the stock’s market value was now
$8,000.
How should Stassi account for the $2,000 unrealized loss?
10
Illustration of Comprehensive Income
How should Stassi account for the $2,000 unrealized loss?
Answer: Depends on whether Stassi classifies the IBM stock as
a
Trading security or an → Unrealized gains and losses (Income
Statement)
Available for-sale security. → Unrealized gains and losses
(Comprehensive Income - Stockholders’ Equity)
11

Format One
Combined statement of income and comprehensive income.
12
Format Two
Separate component of Stockholders’ Equity.
13
14
Changes in Accounting Principle
Principle used in the current year is different from one used in
the preceding year.
Example - change from F I F O to average cost.
Permissible when management can show new principle is
preferable.
Most changes are reported retroactively.
15

Investor Insight: United Parcel Service (U P S)
More Frequent Ups and Downs
In the past, U.S. companies used a method to account for their
pension plans that smoothed out the gains and losses on their
pension portfolios by spreading gains and losses over multiple
years. Many felt that this approach was beneficial because it
reduced the volatility of reported net income. However, recently
some companies have opted to adopt a method that comes closer
to recognizing gains and losses in the period in which they
occur. Some of the companies that have adopted this approach
are United Parcel Service (U P S), Honeywell International,
IBM, AT&T, and Verizon Communications. The C F O at U P S
said he favored the new approach because “events that occurred
in prior years will no longer distort current-year results. It will
result in better transparency by eliminating the noise of past
plan performance.” When U P S switched, it resulted in a charge
of $827 million from the change in accounting principle.
Source: Bob Sechler and Doug Cameron, “U P S Alters Pension-
Plan Accounting,” Wall Street Journal (January 30, 2012).
16
Quality of Earnings (1 of 3)
A company that has a high quality of earnings provides full and
transparent information that will not confuse or mislead users of
the financial statements.
Recent accounting scandals suggest that some companies are
spending too much time managing their income and not enough
time managing their business.
17

Alternative Accounting Methods
Variations among companies in the application of G A A P may
hamper comparability and reduce quality of earnings (F I F O
vs. L I F O).
Pro Forma Income
Usually excludes items that are unusual or nonrecurring.
Some companies have abused the flexibility that pro forma
numbers allow to put their companies in a more favorable light.
18
Improper Recognition
Some managers have felt pressure to continually increase
earnings.
Abuses include:
Improper recognition of revenue (channel stuffing).
Improper capitalization of operating expenses (WorldCom).
Failure to report all liabilities (Enron).
19
Do It! 1: Unusual Items (1 of 2)
In its proposed 2017 income statement, AIR Corporation reports
income before income taxes $400,000, unrealized gain on
available-for-sale securities $100,000, income taxes $120,000
(not including unusual items), loss from operation of
discontinued flower division $50,000, and loss on disposal of
discontinued flower division $90,000. The income tax rate is

30%.
Prepare a correct statement of comprehensive income, beginning
with “Income before income taxes.”
20
Do It! 1: Unusual Items (2 of 2)
21
L O 2: Apply Horizontal Analysis and Vertical Analysis
Analyzing financial statements involves:
Comparison Bases
Intracompany
Intercompany
Industry averages
Basic Tools
Horizontal analysis
Vertical analysis
Ratio Analysis
22
Horizontal Analysis (1 of 3)
Also called trend analysis, is a technique for evaluating a series
of financial statement data over a period of time.
Purpose is to determine increase or decrease that has taken
place.
Commonly applied to the balance sheet and income statement.

23
24
25
Vertical Analysis (1 of 4)
Also called common-size analysis, is a technique that expresses
each financial statement item as a percent of a base amount.
Vertical analysis is commonly applied to the balance sheet and
the income statement.
26
27

28
29
Anatomy of a Fraud (1 of 2)
This final Anatomy of a Fraud box demonstrates that sometimes
relationships between numbers can be used to detect fraud.
Financial ratios that appear abnormal or statistical abnormalities
in the numbers themselves can reveal fraud. For example, the
fact that WorldCom’s line costs, as a percentage of either total
expenses or revenues, differed very significantly from its
competitors should have alerted people to the possibility of
fraud. Or, consider the case of a bank manager, who cooperated
with a group of his friends to defraud the bank’s credit card
department. The manager’s friends would apply for credit cards
and then run up balances of slightly less than $5,000. The bank
had a policy of allowing bank personnel to write-off balances of
less than $5,000 without seeking supervisor approval. The fraud
was detected by applying statistical analysis based on Benford’s
Law. Benford’s Law states that in a random collection of
numbers, the frequency of lower digits (e.g., 1, 2, or 3) should
be much higher than higher digits (e.g., 7, 8, or 9). In this case,
bank auditors analyzed the first two digits of amounts written
off. There was a spike at 48 and 49, which was not consistent
with what would be expected if the numbers were random.
Total take: Thousands of dollars

30
Anatomy of a Fraud (2 of 2)
Total take: Thousands of dollars
The Missing Control
Independent internal verification. While it might be efficient to
allow employees to write off accounts below a certain level, it
is important that these write-offs be reviewed and verified
periodically. Such a review would likely call attention to an
employee with large amounts of write-offs, or in this case,
write-offs that were frequently very close to the approval
threshold.
Source: Mark J. Nigrini, “I’ve Got Your Number,” Journal of
Accountancy Online (May 1999).
31
Do It! 2: Horizontal Analysis
Summary financial information for Rosepatch Company is as
follows.BlankDecember 31, 2017December 31, 2016Current
assets$234,000$180,000Plain assets (net) 756,000
420,000Total assets$990,000 $600,000
Compute the amount and percentage changes in 2017 using
horizontal analysis, assuming 2016 is the base year.
32

L O 3: Analyze a Company’s Performance Using Ratio Analysis
Price-earnings Ratio
Reflects investors’ assessment of a company’s future earnings.
Will be higher if investors think that earnings will increase
substantially in the future.
Will be lower when there is the belief that a company has poor-
quality earnings.
33
Price-Earnings Ratio
CompanyEarnings per SharePrice-Earnings RatioSouthwest
Airlines$ 1.6519.5Google 29.8027.0Apple 6.4915.6Skechers
USA 2.7434.0Nike 3.0528.7
34
Liquidity Ratios (1 of 2)
Liquidity Ratios
Working capital
Current ratio
Inventory turnover

Days in inventory
Accounts receivable turnover
Average collection period
35
Solvency Ratios (1 of 2)
Solvency Ratios
Debt to assets ratio
Times interest earned
Free cash flow
36
Profitability Ratios (1 of 2)
Profitability Ratios
Earnings per share

Price-earnings ratio
Gross profit rate
Profit margin
37
Profitability Ratios (2 of 2)
Return on assets
Asset turnover
Payout ratio
Return on common stockholders' equity
38
Investor Insight (3 of 3)
High Ratings Can Bring Low Returns
Moody’s, Standard & Poor’s, and Fitch are three big firms that
perform financial analysis on publicly traded companies and
then publish ratings of the companies’ creditworthiness.

Investors and lenders rely heavily on these ratings in making
investment and lending decisions. Some people feel that the
collapse of the financial markets was worsened by inadequate
research reports and ratings provided by the financial rating
agencies. Critics contend that the rating agencies were reluctant
to give large companies low ratings because they feared that by
offending them they would lose out on business opportunities.
For example, the rating agencies gave many so-called mortgage-
backed securities ratings that suggested that they were low risk.
Later, many of these very securities became completely
worthless. Steps have been taken to reduce the conflicts of
interest that lead to these faulty ratings.
Source: Aaron Lucchetti and Judith Burns, “Moody’s CEO
Warned Profit Push Posed a Risk to Quality of Ratings,” Wall
Street Journal Online (October 23, 2008).
39
L O 4: Appendix 13A: Evaluate a Company Comprehensively
Using Ratio Analysis
Analyzing financial statements involves:
Characteristics
Liquidity
Profitability
Solvency
Comparison Bases
Intracompany
Industry averages
Intercompany
The financial information in Illustrations 13A-1 through 13A-4
will be used to calculate Chicago’s 2014 ratios.
40

Evaluate a Company Comprehensively Using Ratio Analysis (1
of 3)
41
of 3)
42
of 3)
43
Ratio Analysis
Ratio analysis expresses the relationship among selected items
of financial statement data.
Financial Ratio Classifications
Liquidity
Measures short-term ability of the company to pay its maturing
obligations and to meet unexpected needs for cash.
Solvency
Measures the ability of the company to survive over a long
period of time.

Profitability
Measures the income or operating success of a company for a
given period of time.
44
Liquidity Ratios (2 of 2)
Measure the short-term ability of the company to pay its
maturing obligations and to meet unexpected needs for cash.
Short-term creditors such as bankers and suppliers are
particularly interested in assessing liquidity.
Ratios include the current ratio, the current cash debt coverage,
the accounts receivables turnover, the average collection period,
the inventory turnover, and days in inventory.
45
Current Ratio
Expresses the relationship of current assets to current liabilities.
What do the measures tell us?
A current ratio of .67 means that for every dollar of current
liabilities, the company has $0.67 of current assets.
46
Accounts Receivable Turnover
Measures the number of times, on average, a company collects
receivables during the period.

How does Chicago’s turnover compare to General Mills’s?
The turnover of 11.9 times is higher than the industry average
of 11.2 times, and slightly lower than General Mills’ turnover
of 12.2 times.
47
Average Collection Period
Converts the receivable turnover ratio into days.
How effective is Chicago’s credit and collection policies?
General rule - collection period should not greatly exceed the
credit term period (i.e., the time allowed for payment).
48
Inventory Turnover
Measures the number of times average inventory was sold
during the period.
How does Chicago’s turnover compare to General Mills’s?
The ratio of 7.5 times is higher than the industry average of 6.7
times and similar to that of General Mills.
49
Days in Inventory
Measures the average number of days inventory is held.
How does Chicago’s days compare to General Mills’s?

An average selling time of 49 days is faster than the industry
average and faster than that of General Mills.
50
Solvency Ratios (2 of 2)
Measure the ability of a company to survive over a long period
of time.
Debt-Paying Ability
Debt to total assets ratio
Times interest earned
Free cash flow
51
Debt to Assets Ratio
Indicates the degree of financial leveraging. Provides some
indication of the company’s ability to withstand losses.
Has Chicago’s solvency improved during the year?
Yes. The ratio of 78% says that Chicago would have to liquidate
78% of its assets at their book value in order to pay off all of its
debts.
52
Times Interest Earned
Also called interest coverage, indicates the company’s ability to
meet interest payments as they come due.

Is Chicago able to service its’ debt?
Yes, the ratio indicates that income before interest and taxes
was 5.8 times the amount needed for interest expense.
53
Free Cash Flow
Ability to pay dividends or expand operations.
Cash provided by operations was more than enough to allow
Chicago to acquire additional productive assets and maintain
dividend payments.
54
Profitability Ratios
Measure the income or operating success of a company for a
given period of time.
55
Return on Common Stockholders’ Equity
Shows how many dollars of net income the company earned for
each dollar invested by the owners.
Chicago’s 2014 rate of return on common stockholders’ equity
is unusually high at 48%, considering an industry average of
19% and General Mills’s return of 25%.
56

Return on Assets (1 of 2)
Measures the overall profitability of assets in terms of the
income earned on each dollar invested in assets.
Note that Chicago’s rate of return on common stockholders’
equity (48%) is substantially higher than its rate of return on
assets (10%). Chicago has made effective use of leverage.
57
Profit Margin
Or rate of return on sales, is a measure of the percentage of
each dollar of sales that results in net income.
High-volume (high inventory turnover) businesses such as
grocery stores and pharmacy chains generally have low profit
margins.
58
Asset Turnover
Measures how efficiently a company uses its assets to generate
sales.
The average asset turnover for utility companies is .45, for
example, while the grocery store industry has an average asset
turnover of 3.49.
59

Return on Assets (2 of 2)
You can analyze the combined effects of profit margin and asset
turnover on return on assets for Chicago as shown.
60
Gross Profit Rate
Indicates a company’s ability to maintain an adequate selling
price above its cost of goods sold.
As an industry becomes more competitive, this ratio declines.
61
Earnings Per Share (E P S)
A measure of the net income earned on each share of common
stock.
62
Price-Earnings (P-E) Ratio
Reflects investors’ assessments of a company’s future earnings.
A lower P-E ratio suggests that the market is less optimistic

about Chicago cereal than about General Mills. It might also
signal that its stock is underpriced.
63
Payout Ratio
Measures the percentage of earnings distributed in the form of
cash dividends.
This ratio should be calculated over a longer period of time to
evaluate any trends.
64
A Look at I F R S-L O-5: Compare Financial Statement
Analysis and Income Statement Presentation Under G A A P and
I F R S.
Relevant Facts
The tools of financial statement analysis covered in this chapter
are universal and therefore no significant differences exist in
the analysis methods used.
The accounting for changes in accounting principles and
changes in accounting estimates are the same for both G A A P
and I F R S.
Both G A A P and I F R S follow the same approach in
reporting comprehensive income.
65
A Look at I F R S (1 of 8)

Relevant Facts
The basic objectives of the income statement are the same under
both G A A P and I F R S. A very important objective is to
ensure that users of the income statement can evaluate the
sustainable income of the company. Thus, both the I A S B and
the F A S B are interested in distinguishing normal levels of
income from unusual items in order to better predict a
company’s future profitability.
The basic accounting for discontinued operations is the same
under I F R S and G A A P.
66
Looking to the Future
The F A S B and the I A S B are working on a project that
would rework the structure of financial statements. Recently,
the I A S B decided to require a statement of comprehensive
income, similar to what was required under G A A P. In
addition, another part of this project addresses the issue of how
to classify various items in the income statement. A main goal
of this new approach is to provide information that better
represents how businesses are run. In addition, the approach
draws attention away from one number—net income.
67
I F R S Practice
The basic tools of financial analysis are the same under both G
A A P and I F R S except that:
a) horizontal analysis cannot be done because the format of the

statements is sometimes different.
b) analysis is different because vertical analysis cannot be done
under I F R S.
c) the current ratio cannot be computed because current
liabilities are often reported before current assets in I F R S
statements of position.
d) None of the above.
68
I F R S Practice
The basic tools of financial analysis are the same under both G
A A P and I F R S except that:
a) horizontal analysis cannot be done because the format of the
statements is sometimes different.
b) analysis is different because vertical analysis cannot be done
under I F R S.
c) the current ratio cannot be computed because current
liabilities are often reported before current assets in I F R S
statements of position.
d) None of the above.
69
I F R S Practice
Presentation of comprehensive income must be reported under I
F R S in:
a) the statement of stockholders’ equity.
b) the income statement ending with net income.

c) the notes to the financial statements.
d) a statement of comprehensive income.
70
I F R S Practice
Presentation of comprehensive income must be reported under I
F R S in:
a) the statement of stockholders’ equity.
b) the income statement ending with net income.
c) the notes to the financial statements.
d) a statement of comprehensive income.
71
I F R S Practice
In preparing its income statement for 2017, Parmalane
assembles the following information.Sales revenue$500,000Cost
of goods sold 300,000Operating expenses 40,000Loss on
discontinued operations 20,000
Ignoring income taxes, what is Parmalane’s income from
continuing operations for 2017 under I F R S?
a) $260,000.
b) $250,000.
c) $240,000.
d) $160,000.
72

I F R S Practice
In preparing its income statement for 2017, Parmalane
assembles the following information.Sales revenue$500,000Cost
of goods sold 300,000Operating expenses 40,000Loss on
discontinued operations 20,000
Ignoring income taxes, what is Parmalane’s income from
continuing operations for 2017 under I F R S?
a) $260,000.
b) $250,000.
c) $240,000.
d) $160,000.
73
73
Copyright
Copyright © 2016 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work
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caused by the use of these programs or from the use of the
information contained herein.
74

74
$990,000
$600,000
Market Price per Share
Price-Earnings (P-E) Ratio =
Earnings per Share
Stock Price per Share
Price-Earnings (P-E) Ratio =
Earnings per Share
Current assets Current liabilities
-
Current assets
Current liabilities
Cost of goods sold
Average inventory
365days
Inventory turnover
Net credit sales
Average net accounts receivable
365days
Accounts receivable turnover
Total liabilities
Total assets
Net income + Interest expense + Income t
ax expense
Interest expense
Net cash providedCapitalCash
by operating activitiesexpendituresdivid
ends
--
Market price per share

Earnings per share
Net income
Net sales
Net incomePreferred dividendsWeighted-average common
Gross profitNet sales
Net income
Average total assets
Net sales
Average total assets
Cash dividends declared on common stock
Net income
Net incomePreferred dividends
Average common stockholders' equity
-
Criteria Ratings
Ability to create
a clear and
critical argument
20 pts
Exemplary
Clear and
concise thesis
statement and

each
paragraph
begins with a
topic sentence
that makes a
claim.
17 pts
Good
Mostly clear
and concise
thesis statement
and each
paragraph
begins with a
topic sentence
that makes a
claim.
15 pts

Proficient
Missing
some topic
sentences
and/or
somewhat
unclear thesis
statement.
8 pts
Ok
Somewhat
of an
argument,
but
missing
structure
or clarity
0 pts

Below
Expectation
No clear thesis
and no topic
sentences. Very
descriptive.
Ability use
evidence
effectively to
support the
argument
20 pts
Exemplary
Effective use
of evidence
from the text
that is

relevant to
the argument
17 pts
Good
Mostly effective
use of evidence
from the text that
is relevant to the
argument
15 pts
Proficient
Somewhat
effective
use of
evidence
8 pts
OK
Use of

evidence,
but not
always
clear
0 pts
Below
Expectation
Ineffective use of
evidence and/or
no evidence
Ability to
interpret evidence
and demonstrate
critical analysis
20 pts
Exemplary
The student
demonstrated

through
interpretation
how argument
was supported
by the
evidence.
17 pts
Good
The student
mostly
demonstrated
through
interpretation
how argument
was supported
by the
evidence.
15 pts

Proficient
The student
has
somewhat
interpreted
the evidence
to support
their
argument,
but mostly
assertion or
description
8 pts
OK
Some
interpretation
of evidence,
but largely

description
0 pts
No Marks
Summary or
description
of text rather
than
interpretation
and analysis
Criteria Ratings
Organization of
paper
10 pts
Exemplary
Content was
clearly thought-out

and presented in a
logical format.
Information
flowed well, with
clear links
between
paragraphs and
ideas.
7 pts
Good
Content was
mostly thought-
out and presented
in a logical
format.
Information
flowed well, with
clear links

between
paragraphs and
ideas.
5 pts
Proficient
Content was
mostly well
thought-out and
presented with
some linkages
provided
between
paragraphs and
ideas.
0 pts
No Marks
Content was not
well presented, and

format was illogical
and difficult to read.
Ideas are scattered
with no linkages
between content
provided.
Ability to
properly locate
and cite evidence
20 pts
Exemplary
Proper
citations of
ancient
sources and
all references
to the text
are cited.

17 pts
Good
Mostly
proper
citations of
ancient
sources and
all
references
to the text
are cited.
15 pts
Proficient
Citations are
mostly free of
errors and/or
most
references to

the text are
cited
8 pts
OK
Lots of
errors but
still
references.
0 pts
No Marks
Incomplete and/or
missing references
Mechanics of
writing
10 pts
Exemplary
Submission is
grammatically

correct with rare
misspellings.
Use of language
is appropriate
for the
recommended
audience.
Avoids personal
pronouns and
contractions.
7 pts
Good
Few errors in
spelling and
grammar. Use
of language is
sometimes
inappropriate

for the
recommended
audience.
3 pts
Proficient
Some errors in
spelling and
grammar. Use of
language is
sometimes
inappropriate for
the
recommended
audience.
0 pts
No Marks
Poor spelling and
grammar. Use of

language
inappropriate for
the recommended
audience.
Total Points: 100
1
HIST 100: Western Civilization - Pre-Modern
Dr. Kristin Heineman / Spring 2020
TEXT ANALYSIS ASSIGNMENT I
The following information should be used in preparing your
out-of-class writing assignment
for this course. Requirements and topics appear below, along
with some tips about writing
history papers.

Assignment Requirements and Deadlines
Students are required to write one (1) paper, called a text
analysis, based on assigned readings
for this course. As noted on the syllabus, this assignment is
worth 20% of your final grade in
the class. If you already submitted Text Analysis 1, then you are
not required to write Text
Analysis 2. If you did not submit Text analysis 1, then you must
submit Text analysis 2. If
you submit both Text Analysis 1 and 2, then the lower of the
two grades will be dropped.
As noted on the syllabus Course Schedule, Text Analysis 1 is
due on Friday March 6th. Text
Analysis 2 is due on April 17th. You may not submit Text
Analysis 1 after the deadline has
passed. The Text Analysis paper should be submitted online
through Canvas by 11:59pm on
the day it is due. If you would like detailed feedback and
editing, please submit a hard copy
in class the day it is due (this is not required). Students
requesting an extension on the due
date for the paper must present acceptable written documents of
illness, emergency or
University-sponsored events. You still have to provide this,

even if we discussed it via email
or verbally.
The topics for Text Analysis 1 appear below. The format,
grading criteria, lateness policy,
and other instruction will be the same for both assignments.
Format and Presentation Requirements:
Your Text Analysis should meet the following requirements:
4 pages of text (i.e. 1,200-1,500 words), typewritten or word
processed
Double spaced with standard font (Times New Roman, size 12)
Standard margins (1 inch top and bottom, left and right sides)
A separate title page should include the following information:
your name, HIST 100, Text
Analysis I (or II), some sort of fancy-schmancy title.
If you use sources other than those assigned for this class in
completing this assignment, you
will need to provide a list of those sources (Bibliography) on a
separate page at the end of
your paper. Additional research is, however, not required.

Your paper will include an Introduction in which you will
outline your argument in a thesis
statement. Be sure to mention the author and the text you plan
to analyze. Your thesis
statement should NOT be in the form of a question – turn your
questions into assertions. A
thesis statement is generally the last sentence of your first
paragraph.
Each body paragraph (you will probably have at least 3-4)
should start with a topic sentence
(the main point of the paragraph) and be supported with direct
evidence from the text either
2
in “quotations” or summarized. Either way, the evidence must
be cited (as noted below). Be
sure to have AT LEAST ONE piece of evidence for each claim.
Finish your paper with a conclusion. Don’t add new information
here, just summarize your
main points.

Sources for the Text Analysis:
This writing assignment requires you to analyze the primary
source documents assigned for
the course, as found under the “Primary Resource” tab in the
on-line textbook. It does NOT
require additional research or the use of readings other than
those assigned for the class. If
you decide to consult readings or sources other than those
assigned for the class, please be
sure to cite them fully and accurately, according to the citation
requirements indicated below.
Citation Requirements
You will be expected to use parenthetical citation in your Text
Analysis. The purpose of these
citations is to indicate to your readers where you found specific
information that you have
included in your paper, whether from the assigned readings or
textbook. As long as you are
using those sources, your citation need only include the author's
name and the section number
of text on which the information appears. For example:
According to Plato, Socrates told the jury that he knew he had
no wisdom, small

or great, (Plato, 4.1).
The Epic of Gilgamesh “depicts a world ruled by polytheistic
gods and their
demands of humanity,” (Margolf and Heineman, Early Near
East and Egypt).
If you use material from sources other than these, including
sources on the Internet, you will
need to provide additional information about those sources. A
style sheet with examples of
citation will be posted on Canvas. If the style sheet does not
indicate how to cite a particular
type of source that you used, you are expected to consult the
writing guides listed below
and/or ask me or the TA.
Academic Dishonesty and Plagiarism
As noted on the syllabus, academic dishonesty or plagiarism of
any kind for this assignment
may result in a grade of 'F' for the course or other penalties
deemed appropriate by me. For
further information about the definition of plagiarism, see the
General Catalog, pp. 8-9, found

here:
http://www.catalog.colostate.edu/Content/files/2012/FrontPDF/
1.6POLICIES.pdf
Grading Criteria
Please see the Rubric posted on Canvas for details. The major
areas of assessment include:
the clarity and degree of critical analysis of your argument, the
use of evidence, ability to
interpret and analyze the evidence, organization of ideas,
correct and complete references,
and writing style.
Questions?
We are both happy to answer any questions you may have about
this assignment prior to the
due date, so please come see us or email us!!!
http://www.catalog.colostate.edu/Content/files/2012/FrontPDF/
1.6POLICIES.pdf
3
Additional Resources for Help in Writing Your Paper:
Hacker, Diana. A Pocket Style Manual (Shelf Reserve Morgan
Library)
-see also the related website at www.dianahacker.com/pocket

-contains chapters on grammar, punctuation, and clarity in
writing
Strunk, William and White, E.B. The Elements of Style (Shelf
Reserve Morgan Library)
-contains chapters on usage and composition, as well as
examples of many common
writing errors - and how to avoid them!
CSU Writing Center: Room 6, Eddy Hall; website at
http://writing.colostate.edu/wcenter/
-if you seek help at the Writing Center, be sure to bring this
handout with you!
Topics for Text Analysis 1 - Choose ONE OF THE
FOLLOWING:
1. What glimpses do we get from Homer’s Iliad of the
respective roles of men in society?
How do those differ from the roles of women in Greek society?
What values would these
poems have taught young children? Use Homer’s Iliad in
Primary Resources, Chapter
3.

2. According to Plato’s Socrates in The Apology of Socrates,
what accusations have been
levied against him, and why? In refuting these accusations,
what does Socrates reveal
about his fundamental intellectual belief and methods? Why do
you think many of
Socrates’ contemporaries found his views so threatening? Use
Plato’s Apology in
Primary Resources, Chapter 3.
3. What does Caesar’s description, in The Gallic War, reveal
about the technology of war at
the time? How did Caesar use this technology to his advantage?
What does Caesar’s
portrait of Vercingetorix suggest about Roman attitudes toward
non-Romans? Although
Caesar wrote The Gallic War to describe his own deeds, he uses
“he” (the third person)
instead of “I” (the first person) in telling his story. Why do you
think he made this
choice? Does his use of the third person give you more
confidence, or less, in the truth of

his account? In writing this account, how do you think Caesar
intended to shape his
public image and why? Use Caesar, Gallic War in Primary
Resources, Chapter 5.
4. According to Tacitus, why do the Germans fight with their
families close by? What does
this reveal about Germanic society? What does the excerpt tell
us about German and
Roman society? How does Rome view the “other”? What are
the most important
features of Germanic society and what aspects does Tacitus
admire and why? Use
Tacitus On Germanic Tribes in Primary Resources, Chapter 6.
http://www.dianahacker.com/pocket
http://writing.colostate.edu/wcenter/
4

Some Rules for Successful Writing Assignments:
1. Spell out time references: "seventh century" instead of "7th
century."
2. Hyphenate time references correctly, according to their use in
the sentence: "The Trojan
War is thought to have occurred in the twelfth-century BC."
(adjective). "In the twelfth
century, war was a constant threat to society." (noun).
3. When using brief quotations, remember to use quotation
marks to indicate clearly when
you are reproducing someone else's words verbatim:
As Spielvogel notes, "Women were citizens who could
participate in most religious
cults and festivals," (Spielvogel, 84).
4. Remember to cite specific material that you paraphrase - the
ideas came from someone
else, even if you expressed or summarized in your own words!
5. Avoid slang, jargon and contractions (can't, don't, haven't)
6. Remember to make the subjects and verbs agree in number,
as well as nouns and
pronouns: "Scholars could circulate their ideas in print" rather

than "A scholar could
circulate their ideas in print."
7. Avoid run-on sentences, comma splices, and paragraphs that
go on for 2-3 pages! (In
other words, think carefully about sentence structure,
punctuation and paragraph
organization).
8. Avoid overuse of the passive voice (The cat was chased by
the dog) in favor of the active
voice (the dog chased the cat). Active voice is more direct,
more vivid and allows you to
use more verbs.
9. Remember to use the past tense where appropriate in writing
about the past (which is
often!)
10. PLEASE PROOFREAD!!!!!!! ALREADY DID IT? DO IT
AGAIN!!!!!!!!!!!

Accounting: Tools for Business Decision Making
Sixth Edition
Kimmel ● Weygandt ● Kieso
Chapter 14
Managerial Accounting
This slide deck contains animations. Please disable animations
if they cause issues with your device.
Chapter Outline:
Learning Objectives
Identify the features of managerial accounting and the functions
of management.
Describe the classes of manufacturing costs and the differences
between product and period costs.
Demonstrate how to compute cost of goods manufactured and
prepare financial statements for a manufacturer.
Discuss trends in managerial accounting.
2
L O 1: Identify the Features of Managerial Accounting and the
Functions of Management
Managerial accounting provides economic and financial
information for managers and other internal users.
3
Comparing Managerial and Financial Accounting (1 of

2)FeatureFinancial AccountingManagerial AccountingPrimary
Users of ReportsExternal users: stockholders,
creditors, and regulators.Internal users: officers and
managers..Types and Frequency of ReportsFinancial statements.
Quarterly and annually.Internal reports.
As frequently as needed.Purpose of ReportsGeneral-
purpose.Special-purpose for
specific decisions.
4
Comparing Managerial and Financial Accounting (2 of
2)FeatureFinancial AccountingManagerial AccountingContent
of ReportsPertains to business as a whole. Highly aggregated
(condensed).
Limited to double-entry accounting and cost data.
Generally accepted accounting principles.Pertains to subunits of
the business.
Very detailed.
Extends beyond double-entry accounting to any relevant data.
Standard is relevance to decisions.Verification ProcessAudited
by CPA.No independent audits.
5
Management FunctionsPlanningDirectingControllingMaximize
short-term profit and market share.
Commit to environmental protection and social programs.
Add value to the business.Coordinate diverse activities and
human resources.
Implement planned objectives.
Provide incentives to motivate employees

Hire and train employees.
Produce a smooth-running operation.Keeping activities on track.
Determine whether goals are met.
Decide changes needed to get back on track.
May use an informal or formal system of evaluations.
6
6
Management Insight: Louis Vuitton (1 of 2)
Even the Best Have to Get Better
Luxury-goods manufacturers used to consider stockouts to be a
good thing. But recently, Louis Vuitton, a French manufacturer
of high-end handbags, wallets, and suitcases, changed its
attitude. The company adopted “lean” processes used by car
manufacturers and electronics companies to speed up production
of “hot” products. Work is done by flexible teams, with jobs
organized based on how long a task takes. By reducing wasted
time and eliminating bottlenecks, what used to take 20 to 30
workers eight days to do now takes only 6 to 12 workers one
day.
Other efforts included organizing 10-person factory teams into
U-shaped clusters. This arrangement freed up floor space,
allowing Louis Vuitton to hire 300 additional employees. The
company also selectively employs robots to bring items to
human workers, saving valuable time. In addition, computer
programs are now used to identify flaws in leather skins,
enabling the company to identify the best way to cut pieces
from the leather to increase quality and minimize waste.
7

Management Insight: Louis Vuitton (2 of 2)
Finally, Louis Vuitton stores around the world feed sales
information to the company’s headquarters in France.
Production is then adjusted accordingly to ensure that would-be
buyers aren’t left empty-handed. With these new production
processes, Louis Vuitton is already seeing improved results—
returns of some products are down by two-thirds.
Sources: Christina Passariello, “Louis Vuitton Tries Modern
Methods on Factory Lines,” Wall Street Journal (October 9,
2006); and Christina Passariello, “At Vuitton, Growth in Small
Batches,” Wall Street Journal (June 27, 2011).
What are some of the steps that this company has taken in order
to ensure that production meets demand? (Go to WileyPLUS for
this answer and additional questions.)
© Camilia Wisbauer/iStockphoto
8
Organizational Structure
Organization charts show the interrelationships of activities and
the delegation of authority and responsibility within the
company.
9
Do It! 1: Managerial Accounting Overview (1 of 2)
Indicate whether each of the following statements is true or
false.

Managerial accountants have a single role within an
organization, collecting and reporting costs to management.
False
Financial accounting reports are general-purpose and intended
for external users.
True
Managerial accounting reports are special-purpose and issued as
frequently as needed.
True
10
Do It! 1: Managerial Accounting Overview (2 of 2)
Indicate whether each of the following statements is true or
false.
Managers’ activities and responsibilities can be classified into
three broad functions: cost accounting, budgeting, and internal
control.
False
Managerial accounting reports must now comply with generally
accepted accounting principles (G A A P).
False
11
L O 2: Describe the Classes of Manufacturing Costs and the
Differences Between Product and Period Costs
Managers should ask questions such as the following.
What costs are involved in making a product or providing a
service?
If we decrease production volume, will costs decrease?
What impact will automation have on total costs?

How can we best control costs?
12
Manufacturing Costs (1 of 5)
Manufacturing consists of activities and processes that convert
raw materials into finished goods.
13
Direct Materials
Raw Materials
Basic materials and parts used in manufacturing process.
Direct Materials
Raw materials that can be physically and directly associated
with the finished product during the manufacturing process.
14
Direct Materials
Indirect Materials
Not physically part of the finished product or
they are an impractical to trace to the finished product because
their physical association with the finished product is too small

in terms of cost.
Considered part of manufacturing overhead.
15
Direct Labor
Work of factory employees that can be physically and directly
associated with converting raw materials into finished goods.
Indirect Labor
Work of factory employees that has no physical association with
the finished product or for which it is impractical to trace costs
to the goods produced.
16
Manufacturing Overhead
Costs that are indirectly associated with manufacturing the
finished product.
Includes all manufacturing costs except direct materials and
direct labor.
Also called factory overhead, indirect manufacturing costs, or
burden.
17
Management Insight: Whirlpool (1 of 2)

Why Manufacturing Matters for U.S. Workers
Prior to 2010, U.S. manufacturing employment fell at an
average rate of 0.1% per year for 60 years. At the same time,
U.S. factory output increased by an average rate of 3.4%. As
manufacturers relied more heavily on automation, the number of
people they needed declined. However, factory jobs are
important because the average hourly wage of a factory worker
is $22, twice the average wage of employees in the service
sector. Fortunately, manufacturing jobs in the United States
increased by 1.2% in 2010, and they were forecast to continue
to increase through at least 2015. Why? Because companies like
Whirlpool, Caterpillar, and Dow are building huge new plants in
the United States to replace old, inefficient U.S. facilities. For
many products that are ultimately sold in the United States, it
makes more sense to produce them domestically and save on the
shipping costs. In addition, these efficient new plants, combined
with an experienced workforce, will make it possible to compete
with manufacturers in other countries, thereby increasing export
potential.
Sources: Bob Tita, “Whirlpool to Invest in Tennessee Plant,”
Wall Street Journal Online (September 1, 2010); and James R.
Hagerty, “U.S. Factories Buck Decline,” Wall Street Journal
Online (January 19, 2011).
18
Management Insight: Whirlpool (2 of 2)
In what ways does the shift to automated factories change the
amount and composition of product costs? (Go to WileyPLUS
for this answer and additional questions.)
bikeriderlondon/Shutterstock
19

Product Versus Period Costs (1 of 6)
Product Costs
Components:
Direct materials
Direct labor
Manufacturing overhead
Costs that are an integral part of producing the product.
Recorded in “inventory” account.
Not an expense (C O G S) until the goods are sold.
20
Period Costs
Charged to expense as incurred.
Non-manufacturing costs.
Includes all selling and administrative expenses.
21
22
Illustration: Suppose you started your own snowboard factory,

KRT Boards. Here are some of the costs that your snowboard
factory would incur. Assign the following costs:
Product CostsCost ItemDirect MaterialsDirect
LaborManufacturing OverheadPeriod CostsMaterial cost ($30)
per boardXBlankBlankBlankLabor costs ($40) per
boardBlankXBlankBlankDepreciation on factory equipment
($25,000 per year)BlankBlankXBlank
23
Product Versus Period Costs (5 of 6)Cost ItemDirect
MaterialsDirect LaborManufacturing OverheadPeriod
CostsProperty taxes on factory building ($6,000 per
year)BlankBlankXBlankAdvertising costs ($60,000 per
year)BlankBlankBlankXSales commissions ($20 per
board)BlankBlankBlankXMaintenance salaries (factory
facilities, $45,000 per year)BlankBlankXBlankSalary of plant
manager ($70,000 per year)BlankBlankXBlankCost of shipping
boards ($8 per board)BlankBlankBlankX
24
If K R T Boards produces 10,000 snowboards the first year,
what would be the total manufacturing costs?Cost Number and
ItemManufacturing CostMaterial cost ($30 ×
10,000)$300,000Labor cost ($40 × 10,000)400,000Depreciation
on factory equipment25,000Property taxes on factory
building6,000Maintenance salaries (factory
facilities)45,000Salary of plant manager70,000Total
manufacturing costs$846,000

25
Do It! 2: Managerial Cost Concepts
A bicycle company has these costs: tires, salaries of employees
who put tires on the wheels, factory depreciation, advertising
expenditures, lubricants, spokes, salary of factory manager,
salary of accountant, handlebars, and salaries of factory
maintenance employees. Classify each cost as direct materials,
direct labor, overhead, or a period cost.Direct MaterialsDirect
LaborOverheadTires.
Spokes.
Handlebars.Salaries of employees who put tires on the
wheels.Factory depreciation.
Lubricants
Factory manager salary.
Factory maintenance employees salary.
Advertising expenditures and salary of accountant are period
costs.
26
L O 3: Demonstrate How to Compute Cost of Goods
Manufactured and Prepare Financial Statements for a
Manufacturer
Income Statement
Under a periodic inventory system, the income statements of a
merchandiser and a manufacturer differ in the cost of goods
sold section.
“C O G S”
27

Income Statement (1 of 2)
▼ Helpful hint
Assume a periodic inventory system in this illustration.
28
Income Statement (2 of 2)
Cost of goods sold sections of merchandising and manufacturing
income statements
29
Cost of Goods Manufactured (1 of 2)
Total Manufacturing Costs – sum of direct material costs, direct
labor costs, and manufacturing overhead in the current year.
Total Work in Process – (1) cost of beginning work in process
and (2) total manufacturing costs for the current period.
30
Cost of Goods Manufactured (2 of 2)
31

Balance Sheet (1 of 2)
Inventory accounts for a manufacturer
The balance sheet for a merchandising company shows just one
category of inventory.
32
Balance Sheet (2 of 2)
Current assets sections of merchandising and manufacturing
balance sheets
33
Do It! 3: Cost of Goods Manufactured (1 of 2)
The following information is available for Keystone
Company.BlankBlankMarch 1March 31Raw materials
inventoryBlank$12,000$10,000Work in process
inventoryBlank2,5004,000Materials purchased in March$
90,000BlankBlankDirect labor in
March75,000BlankBlankManufacturing overhead in
March220,000BlankBlank
Prepare the cost of goods manufactured schedule for the month
of March 2017.
34

Do It! 3: Cost of Goods Manufactured (2 of 2)
35
L O 4: Discuss Trends in Managerial Accounting
Service Industries
Much of the U.S. economy has shifted toward an emphasis on
providing services rather than goods.
Over 50% of U.S. workers are now employed by service
companies.
Most of the techniques learned for manufacturing firms are
applicable to service companies.
36
Service Company Insight: Allegiant Airlines (1 of 2)
Low Fares but Decent Profits
When other airlines were cutting flight service due to recession,
Allegiant Airlines increased capacity by 21%. Sounds crazy,
doesn’t it? But it must know something because while the other
airlines were losing money, it was generating profits. In fact, it
often has the industry’s highest profit margins. Consider also
that its average one-way fare is only $83. So how does it make
money? As a low-budget airline, it focuses on controlling costs.
Allegiant purchases used planes for $3 million each rather than
new planes for $40 million. It flies out of small towns, so wages
are low and competition is nonexistent. It minimizes hotel costs
by having its flight crews finish their day in their home cities.
The company also only flies a route if its 150-passenger planes

are nearly full (it averages about 90% of capacity). The bottom
line is that Allegiant knows its costs to the penny. Knowing
what your costs are might not be glamorous, but it sure beats
losing money.
Sources: Susan Carey, “For Allegiant, Getaways Mean Profits,”
Wall Street Journal Online (February 18, 2009); and Scott
Mayerowitz, “Tiny Allegiant Air Thrives on Low Costs, High
Fees,” bigstory.ap.org (June 28, 2013).
37
Service Company Insight: Allegiant Airlines (2 of 2)
What are some of the line items that would appear in the cost of
services performed schedule of an airline? (Go to WileyPLUS
for this answer and additional questions.)
© Stephen Strathdee/iStockphoto
38
Focus On the Value Chain (1 of 4)
Refers to all business processes associated with providing a
product or service.
For a manufacturing firm these include the following:
39
Just-In-Time (J I T) Inventory Methods

Inventory system in which goods are manufactured or purchased
just in time for sale.
Total Quality Management (T Q M)
Reduce defects in finished products, with the goal of zero
defects.
40
Theory of Constraints
Constraints (“bottlenecks” ) limit the company’s potential
profitability.
A specific approach to identify and manage these constraints in
order to achieve company goals.
Enterprise Resource Planning (E R P)
Software programs designed to manage all major business
processes.
41
Activity-Based Costing (A B C)
Allocates overhead based on use of activities.
Results in more accurate product costing and scrutiny of all
activities in the value chain.
42
Balanced Scorecard
Evaluates operations in an integrated fashion.

Uses both financial and non-financial measures.
Links performance to overall company objectives.
43
Business Ethics (1 of 3)
All employees are expected to act ethically.
Many organizations have codes of business ethics.
Past financial frauds:
Enron,
Global Crossing,
WorldCom
44
Creating Proper Incentives
Systems and controls sometimes create incentives for managers
to take unethical actions.
Controls need to be effective and realistic.
45
Code of Ethical Standards
Sarbanes-Oxley Act (S O X)
Clarifies management’s responsibilities.

Requires certifications by C E O and C F O.
Selection criteria for Board of Directors and Audit Committee.
Substantially increased penalties for misconduct.
46
Corporate Social Responsibility
Considers a company’s efforts to employ sustainable business
practices with regard to its employees, society, and the
environment.
Is sometimes referred to as the triple bottom line because it
evaluates a company’s performance with regard to people,
planet, and profit.
Recent reports indicate that over 50% of the 500 largest U.S.
companies provide sustainability reports.
47
People, Planet, and Profit Insight: Phantom Tac (1 of 2)
People Matter
Many clothing factories in developing countries are known for
unsafe buildings, poor working conditions, and wage and labor
violations. One of the owners of Phantom Tac, a clothing
manufacturer in Bangladesh, did make efforts to develop
sustainable business practices. This owner, David Mayor,
provided funding for a training program for female workers. He
also developed a website to educate customers about the
workers’ conditions. But Phantom Tac also had to make a profit.
Things got tight when one of its customers canceled orders
because Phantom Tac failed a social compliance audit. The
company had to quit funding the training program and the
website. Recently, Bangladesh’s textile industry has seen some

significant improvements in working conditions and safety
standards. As Brad Adams, Asia director of Human Rights
Watch, notes, “The (Dhaka) government has belatedly begun to
register unions, which is an important first step, but it now
needs to ensure that factory owners stop persecuting their
leaders and actually allow them to function.”
48
People, Planet, and Profit Insight: Phantom Tac (2 of 2)
Sources: Jim Yardley, “Clothing Brands Sidestep Blame for
Safety Lapses,” The New York Times Online (December 30,
2013); and Palash Ghosh, “Despite Low Pay, Poor Work
Conditions, Garment Factories Empowering Millions of
Bangladeshi Women,” International Business Times (March 25,
2014).
What are some of the common problems for many clothing
factories in developing countries? (Go to WileyPLUS for this
answer and additional questions.)
Geanina Bechea/Shutterstock
49
Do It! 4: Trends in Managerial Accounting (1 of 6)
Match the descriptions that follow with the corresponding
terms.
______ All activities associated with providing a product or
performing service.
______ A method of allocating overhead based on each
product’s use of activities in making the product.
______ Systems implemented to reduce defects in finished

products with the goal of achieving zero defects.
Terms:
a. Activity-based costing
b. Balanced scorecard
c. Corporate social responsibility
d. Just-in-time (J I T) inventory
e. Total quality management (T Q M)
f. Statement of Ethical Professional Practice
g. Value chain
50
terms.
g All activities associated with providing a product or
performing service.
a A method of allocating overhead based on each
product’s use of activities in making the product.
e Systems implemented to reduce defects in finished
products with the goal of achieving zero defects.
Terms:
g. Value chain
51

terms.
______ A performance-measurement approach that uses both
financial and nonfinancial measures, tied to company
objectives, to evaluate a company’s operations in an integrated
fashion.
______ Inventory system in which goods are manufactured or
purchased just as they are needed for use.
Terms:
g. Value chain
52
terms.
b A performance-measurement approach that uses both
financial and nonfinancial measures, tied to company
objectives, to evaluate a company’s operations in an integrated
fashion.
d Inventory system in which goods are manufactured or
Terms:

g. Value chain
53
terms.
______ A company’s efforts to employ sustainable business
practices with regards to its employees, society, and the
environment.
______ Inventory system in which goods are manufactured or
Terms:
g. Value chain
54
terms.
c A company’s efforts to employ sustainable business
practices with regards to its employees, society, and the
environment.
f Inventory system in which goods are manufactured or

Terms:
g. Value chain
55
Copyright
Copyright © 2016 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work
beyond that permitted in Section 117 of the 1976 United States
Act without the express written permission of the copyright
owner is unlawful. Request for further information should be
addressed to the Permissions Department, John Wiley & Sons,
Inc. The purchaser may make back-up copies for his/her own
use only and not for distribution or resale. The Publisher
assumes no responsibility for errors, omissions, or damages,
caused by the use of these programs or from the use of the
information contained herein.
56
56
$846,000

Title
ABC/123 Version X
1
Scenario – Week 3 Individual Assignment
ACC/561 Version 7
1
University of Phoenix Material
Scenario:
You are a loan officer for White Sands Bank of Taos. Paul
Jason, president of P. Jason Corporation, has just left your
office. He is interested in an 8-year loan to expand the
company's operations. The borrowed funds would be used to
purchase new equipment. As evidence of the company's debt-
worthiness, Jason provided you with the following facts:
2017
2016
Current Ratio
3.1
2.1
Asset Turnover
2.8
2.2
Net Income
Up 32%
Down 8%
Earnings per Share
$3.30
$2.50
Jason is a very insistent (some would say pushy) man. When
you told him you would need additional information before
making your decision, he acted offended and said, "What more

could you possibly want to know?" You responded you would,
at minimum, need complete, audited financial statements.
Copyright © XXXX by University of Phoenix. All rights
reserved.
Copyright © 2017 by University of Phoenix. All rights reserved.

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