process may be irrevocable; the cost of installing wall-to-wall carpeting is committed, while a piece of
CHAPTER 1 furniture might be exchanged. Furniture and pictures can be moved once they are obtained, but a new
INTRODUCTION
1-1 Everyday Planning and Control
(a) Plans for taking a course in college include the amount of time to devote to it and to other courses. These
plans follow the lines indicated in the chapter. Students formulate objectives for grades, for the knowledge to
be gained for its own sake, for future courses, and so on. They evaluate their personal strengths and
weaknesses to determine how much work to do.
Examinations provide feedback on the sufficiency of work being done; test results might indicate that
more, less, or the same amount of work should be devoted to the course. Such evaluations can be made
whether the major objective is to gain knowledge or just to obtain a particular grade.
(b) Planning for a long automobile trip involves such matters as the amount of time to be spent on the road,
the desired time of arrival, the cost of various services along the way (gas and oil, lodging, food, tolls, etc.),
the value of taking various routes, and so on. Each of these factors can be affected by the objectives of the
trip. A trip home from college is usually made because the student would rather be at home than at school,
so time in route is more critical than if one were simply touring the country between school and home. The
costs involved in various alternative routes and schedules are important whatever the purpose of the trip, and
influence decisions regarding route, lodgings, and food.
During a long trip, you would examine results to see if you were meeting your objectives. If the trip were
taking too long, some actions might be indicated, such as taking a shorter but less scenic route, or more costly
but faster toll roads. Again, evaluations of strengths and weaknesses are important; financial resources, the
quality of the car, one's ability to drive under different conditions, and the possibility of emergencies
developing are a few concerns that you need to consider in selecting a route.
(c) Decorating one's own apartment is very much goal-directed; the apartment or room must satisfy several
demands. It must be pleasant to live and entertain in, yet it must be within one's means. Once the tenant
has set objectives, the remaining steps include formulating plans to meet them, such as examining colors,
types of furniture, lighting, floor covering, pictures and other wall decorations to see if they fit the objectives.
Provided that the selected elements meet price requirements, the work can proceed; but as it does,
evaluations will be made regarding the effects being created. A picture or rug that looked perfect in the store
might look terrible in the room and modifications will be needed. Some decisions made during the planning
1­1
doorway broken through a wall cannot easily be shifted a few feet to the left.
(d) The lines of reasoning are about the same as with the other items. The coach must evaluate the available
resources (players), plan how to gain the best results from them, ensure that the players follow the plans,
evaluate the results of using particular plans, and modify plans. For example, a coach of a football team may
stress a running game or a passing game, depending on the talents of the players. If the players tend to be
fast but small, one defensive arrangement may be better than others.
It is also necessary to examine the environment—in this case, the other teams that will be played. The
plan for a particular game will depend largely on the team being played and on weather conditions. If the
opponent rarely passes, the coach might bring defenders closer to the line of scrimmage to stop the runners.
As play progresses (interim evaluations), the coach might see weaknesses in the other team and develop a
different strategy.
Note to the Instructor: When studying a new subject, students benefit from seeing that they already have
a basic framework from which to proceed. Though this question is not about businesses or other organized
economic entities, it focuses attention on the universality of processes described in the chapter. Each activity
has objectives and goals, requires formulating plans, entails the evaluation of available resources and
consideration of alternatives, goes on over time during which interim results will become known, can be
evaluated in reference to plans, and may require modifications of planned actions. You might want to
interject questions or comments relating more specifically to organized economic activities. Several parts of
the question deal specifically with economic problems, at least to the extent that financial considerations are
important.
1-2 Ethics
(a) Wright has violated both the confidentiality and integrity standards. He has disclosed confidential
information and has used it to profit, or at least as a repayment for his sister's favors. He has also acted in a
way that discredits the profession and has accepted gifts (tips from his sister) that influenced his actions.
(b) Roberts has violated the competence, integrity, and objectivity standards. He failed the competence
standard by not preparing a report that used all relevant information. He failed to communicate unfavorable
information, actively subverted the organization's objectives by trying to influence it to accept a project it
should reject, and probably did so in the hope of a quid pro quo from his superior. These acts violate the
integrity standard. He did not disclose all relevant information, nor communicate it fairly and objectively. The
objectivity and competence standards appear to overlap in the area of reporting and disclosure, but Roberts
seems to have hit a trifecta.
 (f) Warehousing costs should be lower because a WCM will produce as needed and so will not require
1-3 Who Needs Financial Accounting? storage space for materials or finished product.

Because bankers, suppliers, stockholders, and other external parties use financial accounting information
to help make decisions that affect the company, the company's managers should understand what that 1-5 Value Chain
information is, how it is used, and how management decisions will affect it. That understanding is particularly
important to the topmost managers, whose responsibilities encompass the entire entity. But lower-level (a) Acme Motors’ quality costs should decrease. Acme will need to spend less on inspecting incoming
managers also need such an understanding, not only because they may aspire to the higher-level positions, goods for quality. There should be less waste on the production line due to poor quality parts.
but also because the decisions made by managers at all levels are the source of the economic events that are
reported in the typical financial accounting statements made available to outsiders. (b) Quality costs for the suppliers will increase. Eventually the prices being charged Acme will increase as
well to cover the increased costs by the suppliers. The net result to Acme Motors is decreased internal quality
Note to the Instructor: You might wish to use this question to review the types of external parties whose costs somewhat offset by the increased prices charged by the suppliers.
decisions affect the future of the entity and how those decisions relate to decisions made by management.
For example, you might discuss, in general terms of course, how a decision to bring out a new product might
require not only additional funding (a decision of a banker or potential stockholder) but also dealing with new 1-6 Review of Financial Statement Preparation (40 minutes)
suppliers (who are concerned with the company's credit rating and liquidity) and new customers (who are
concerned about the company's stability). It may not be too early to point out that many large companies 1. Freeport Company Income Statement
operate sub-units as near- independent entities, and that the managers of those sub-entities might report to for the Year 20X2
the larger entity as if it were "the outside world." Finally, some instructors might wish to point out that since,
as the chapter states, some of the reports used in managerial accounting (income statement, balance sheet, Sales $225,000
cash flow statement) are similar to reports studied in financial accounting, a manager must learn the basic Cost of goods sold 145,000
elements of such reports during the study of one subject or another. Gross margin $ 80,000
Operating expenses:
Depreciation $ 20,000
1-4 Conventional versus World-Class Manufacturing Interest 3,500
Other 35,000
(a) Product warranty costs should be lower because a WCM will make fewer defective products. Total operating expenses 58,500
Income before taxes $ 21,500
(b) Salaries of quality control inspectors should be lower because a WCM will have its workers inspect as Income taxes (@ 40%) 8,600
they go, rather than having separate inspections. Nor will a WCM inspect incoming materials and Net income $ 12,900
components because it will deal only with vendors whose quality has been demonstrated.
2. Freeport Company Balance Sheet
(c) Amounts paid to vendors for parts and components should be higher because a WCM will not search as of December 31, 20X2
out the lowest prices, but will seek high-quality components delivered when needed.
Assets
(d) Wage rates for direct laborers should be higher because a WCM's workers will be multiskilled and Current assets:
should therefore command premium wages. Cash (a) $ 13,500
Accounts receivable (b) 30,000
(e) Total supervisory salaries should be lower because a WCM's workers will not need as much Inventory (c) 30,000
supervision. Total current assets $ 73,500
Property, plant, and equipment: (d)
1­2
 Cost 290,000 Balance, end of year $ 30,000
Less accumulated depreciation 124,000
Net property, plant, and equipment 166,000 (c) Computation of inventory
Total assets $239,500
Beginning inventory $ 35,000
Equities Purchases 140,000
Current liabilities: Cost of goods available 175,000
Accounts payable (e) $ 18,000 Cost of goods sold (145,000)
Taxes payable 8,600 Ending inventory $ 30,000
Total current liabilities 26,600
Long-term debt: (d) Computation of property, plant, and equipment
Bonds payable, 7%, due 20X5 50,000 Accumulated
Total liabilities $ 76,600 Cost Depreciation
Stockholders' equity:
Common stock, no par value, 5,000 shares Balance, beginning of year $260,000 $104,000
authorized, issued, and outstanding 100,000 New equipment 30,000
Retained earnings 62,900 20X2 depreciation 20,000
Total stockholders' equity 162,900 Balance, end of year $290,000 $124,000
Total liabilities and stockholders’ equity $239,500
(e) Computation of accounts payable
(a) Computation of cash
Balance, beginning of year $ 10,000
Balance, beginning of year $ 10,000 Purchases 140,000
Collections on account 220,000 150,000
Total available 230,000 Payments to suppliers (132,000)
Disbursements: Balance, end of year $ 18,000
For accounts payable $132,000
Expenses 35,000 (f) Computation of retained earnings
Taxes 11,000
Fixed assets 30,000 Balance, beginning of year $ 55,000
Interest ($50,000 x .07) 3,500 Net income 12,900
Dividends 5,000 Dividends declared (5,000)
(216,500) Balance, end of year $ 62,900
Balance, end of year $ 13,500
Note to the Instructor: The time spent to cover this assignment might be used in the following ways.
(b) Computation of accounts receivable
1. Reviewing basic material on financial reporting, such as the following:
Balance, beginning of year $ 25,000
Sales 225,000 (a) The single-step and multiple-step income statement formats.
250,000
Collections (220,000) (b) The combined statement of income and retained earnings that reports activity on a single statement,
1­3
leaving the balance sheet for "positions." operations was considerable ($38,500), but that purchases of plant and equipment and the payment of
dividends were the principal reasons for the lesser increase in cash.
(c) Disclosure details, such as classes of fixed assets, depreciation, and inventory methods, etc.

(d) The distinction between the accrual and cash bases of accounting. 1-8 Review of Financial Statement Preparation (40 minutes)

2. Leading the students into questions of managerial accounting, such as: 1. St. Francis Company
Income Statement
(a) Does the income statement you have prepared help you determine what income would be in 20X2 if sales For the Year 20X2
had been higher (lower) than expected? Sales $960,000
Cost of goods sold 480,000
(b) Was there a need for short-term borrowing during 20X2? Gross margin 480,000
Operating expenses:
(c) Were the purchases of fixed assets wise? Depreciation $80,000
Interest 24,000
Salaries and wages (f) 180,000
1-7 Review of the Statement of Cash Flows (25 minutes) Other (g) 146,000 430,000
Income before taxes 50,000
Freeport Company Income taxes (40%) 20,000
Statement of Cash Flows for the Year 20X2 Net income $ 30,000

Net cash flow from operating activities: 2. St. Francis Company Balance Sheet
Net income $12,900 As of December 31, 20X2
Adjustments for noncash items included in income:
Depreciation 20,000 Assets
Increase in accounts receivable (5,000) Current assets:
Decrease in inventory 5,000 Cash (a) $ 84,000
Increase in accounts payable 8,000 Accounts receivable (b) 260,000
Decrease in taxes payable ( 2,400) Inventory (c) 200,000
Net cash provided by operations 38,500 Prepaid expenses 12,000
Total current assets $556,000
Cash flow for investing activities Property, plant, and equipment:
- purchase of new plant and equipment (30,000) Cost (d) $760,000
Cash flow for financing activities Less accumulated depreciation (d) 340,000 420,000
- payment of dividends (5,000) Total assets $976,000
Net increase in cash $ 3,500 Equities
Beginning cash balance 10,000 Current liabilities:
Ending cash balance $13,500 Accounts payable (e) $100,000
Taxes payable 20,000
One profitable area for class discussion is the relationship of profit and cash flow. The company Accrued expenses 14,000
earned $12,900, but its cash increased by only $3,500. You might point out that the company's cash flow from Total current liabilities 134,000
1­4
Long-term liabilities:
Bonds payable, 6%, due 20X4 400,000 (c) Computation of inventory
Total liabilities $534,000
Stockholders' equity: Beginning inventory $240,000
Common stock, $10 par value, 24,000 shares Purchases 440,000
authorized, issued and outstanding $240,000 Cost of goods available 680,000
Retained earnings: Cost of goods sold (480,000)
Balance at beginning of year $182,000 Ending inventory $200,000
Net income 30,000
212,000 (d) Computation of property, plant, and equipment
Dividends 10,000 Accumulated
Balance at end of year 202,000 Cost Depreciation
Total stockholders' equity 442,000
Total liabilities and stockholders’ equity $976,000 Balance, beginning of year $700,000 $260,000
New equipment 60,000
(a) Computation of cash Depreciation expense 80,000
Balance, end of year $760,000 $340,000
Balance, beginning of year $ 40,000
Collections on account $860,000 (e) Computation of accounts payable
Issuance of common stock 80,000
$940,000 Balance, beginning of year $ 80,000
Total available 980,000 Purchases 440,000
Disbursements: 520,000
Accounts payable $420,000 Payments to suppliers (420,000)
Other expenses 130,000 Balance, end of year $100,000
Prepaid expenses 12,000
Salaries and wages 190,000 (f) Computation of salaries and wages
Taxes 50,000
Plant and equipment 60,000 Balance, beginning of year $ 24,000
Interest ($50,000 x .07) 24,000 Payments (190,000)
Dividends 10,000 (166,000)
(896,000) Balance, end of year ( 14,000)
Balance, end of year $ 84,000 Salaries and wages expense for the year $180,000

(b) Computation of accounts receivable (g) Computation of other expense

Balance, beginning of year $160,000 Prepaid expenses, beginning of year $ 16,000

Sales 960,000 Other expenses, paid in cash 130,000
1,120,000 Total, other expenses $146,000
Collections (860,000)
Balance, end of year $260,000
1­5
1-9 Review of the Cash Flow Statement (20 minutes)

St. Francis Company 1-11 JIT (15 minutes)

Statement of Cash Flows for the Year 20X2
Net cash flow from operating activities:
Net income
Adjustments for noncash expenses and
revenues included in income:
Depreciation
Increase in accounts receivable
Decrease in inventory
Decrease in prepaid expenses
Increase in accounts payable
Decrease in taxes payable
Decrease in accrued payables
Net cash provided by operations
Cash flow for investing activities:
Purchase of new plant and equipment
Cash flow from financing activities:
Issuance of common stock
Payment of dividends
Net cash inflow from financing activities
Net increase in cash
Beginning cash balance
Ending cash balance
Manager A said that the company could not time production just right, so buffer stocks are needed to
prevent workers from falling idle.
$30,000
JIT principles do not permit extra inventory because it hides defects and is wasteful. The company now
pushes goods through, rather than pulling them through. Eliminating inventories at work stations will force
80,000 the company to maintain high quality and "do it right the first time."
(100,000)
40,000 Manager B said that some current problems were caused by poor product design.
4,000
20,000 JIT requires close cooperation between design and manufacturing, so that products will be relatively easy to
(30,000) make and will not fail because of design or manufacturing flaws. Customers might be persuaded to buy
(10,000) standard products if they can benefit. JIT does not permit any one area (design, production) to impose its
34,000 perceived requirements on another area.
(60,000) The quality control manager discussed the sophistication of the company's inspections.
$80,000 JIT manufacturers do not use vendors whose shipments include defects, eliminating the non-value-adding
(10,000) activity of inspecting incoming shipments. Workers inspect products as they proceed through the factory, so
70,000 that no defectives go from one station to another. This practice eliminates the need for final inspections. The
$44,000 company now finds 10%-15% defectives at the end of the process, which greatly increases its costs.
40,000
$84,000 The production manager spoke about the functional arrangement of machinery.

JIT manufacturers use cells that perform all of the work on a product. This reduces the need to move
1-10 Different Costs for Different Purposes (15 minutes) product from one station to another, allows workers more flexibility in job assignments, and saves space.
Workers should do better under the JIT system because they learn more skills and become more valuable to
1. Virtually zero; to be precise, the cost of gas to go the extra mile to the friend's house and back to your own the company.
house.

2. $7.50 for gas (150 miles/30 miles per gallon = 5 gallons at $1.50 = $7.50). 1-12 Ethics (5 minutes)

Note to the Instructor: The concepts of allocated costs and differential costs are introduced in Chapters 3-
5, but students should have little difficulty understanding the points raised here. To concentrate on the main
points, we did not list other costs that would vary with miles driven, such as oil and tires. Some students will
see that some other costs would be incurred in making the trip as opposed to not making it. A few might
think of opportunity costs in the form of lost income from a job, or of the alternative value of time spent
driving instead of doing something more pleasant.
1­6
Much as you might like to, you cannot tell your father to sell (and then to sell short) without violating the
Standards and becoming liable for criminal prosecution under insider trading rules. (Most students will not
know about insider trading.) The situation is a moral dilemma. And it is doubtful that your father will
understand your failure to tell him when he loses most of his investment.
The confidentiality standards explicitly prohibit "disclosing confidential information acquired in the course
of their work . . . " and "using or appearing to use confidential information . . . for unethical or illegal
advantage either personally or through third parties." The latter provision probably applies even if the
management accountant does not gain from the disclosure. (The person in the current situation could gain
through inheritance if the father's estate benefits from selling the stock.)
manufactures in cells, which minimizes handling, among other advantages.
Jason inspects at the end of production, while workers in a JIT environment inspect continually. Continual
inspection makes possible keeping little inventory and eliminating separate inspection. Moreover, Jason
cannot always identify the source of a defect, while a JIT manufacturer can do so.

1-13 Ethics (10 minutes) Jason's cycle times are much higher than those of a JIT manufacturer.

1. The issue here is not that the lunch is an unacceptable gift that compromises Taylor's integrity. Many
students will say Taylor committed no breach because the gift of a lunch is negligible. Rather, Taylor might
have violated the Standards because she did not disclose her interest. She did not, as required by the
objectivity standard, "disclose fully all relevant information that could reasonably be expected to influence an
intended user's understanding of the reports, comments, and recommendations presented." Taylor might
not have done anything culpable, but she should have known better. Whether the final decision would have
changed had Taylor revealed her friendship is debatable, but the point is whether the managers making the
decision might have thought differently had they known about the friendship.

2. Taylor is now clearly in violation of the integrity standard that prohibits accepting ". . . any gift, favor, or
hospitality that would influence or would appear to influence their actions." The amount of the gift is now
relevant, as, of course, is the failure to disclose the friendship.

1-14 Conventional and JIT Manufacturing (15 minutes)

The memorandum might cover the following points.

Updating designs to meet customer suggestions without considering manufacturability, effects on cycle
time, cost, and effect on operations is unwise. A JIT manufacturer ensures that design and manufacturing
coordinate activities.

Jason warehouses materials and components. A JIT manufacturer orders stock as needed, eliminating the
handling and storage. Jason goes to great lengths to get the best prices on materials and components. A JIT
manufacturer is more concerned about quality and meeting delivery schedules. Jason deals with many
suppliers, while a JIT manufacturer deals with relatively few.

Jason inspects all incoming shipments, while a JIT manufacturer stops inspecting once it determines that a
vendor delivers defect-free components. Jason also inspects for deterioration before it puts components into
process, which a JIT manufacturer would not tolerate.

Jason maintains inventories at work stations, has long setup times, and considerable moving of goods
during production. A JIT manufacturer keeps no inventories at stations, strives for short setup times, and
1­7