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Masum, Bangladesh Uni versity of Textil es
The Statement ofCash Flows
THE STATEMENT OF CASHFLOWS Provides information about an entitys
cash receipts and cash payments during a
period.
1)Where did the cash come from duringthe period?
2)What was the cash used for during the
period?
3)What was the change in the cash
balance during the period?
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MEANING OFCASH FLOWSPrepared using cash and cash equivalents as
its basis.
Cash equivalents- short-term, highly liquid
investments that are both:
1)readily convertible to known amounts ofcash
2)so near to their maturity that theirmarket value is relatively insensitive tochanges in interest rates.
Types of Cash FlowsOperating Activities Cash inflows:
From sale of goods or services
From return on loans (interest received) and on
equity securities (dividends received)
Cash outflows:
To suppliers for inventory
To employees for services
To government for taxes
To lenders for interest
To others for expenses
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Types of Cash FlowsInvesting Activities Cash inflows:
From sale of property, plant, and equipment
From sale of debt or equity securities of other entities
From collection of principal on loans to other entities
Cash outflows:
To purchase property, plant, and equipment
To purchase debt or equity securities of other entities
To make loans to other entities
Types of Cash FlowsFinancing Activities Cash inflows:
From sale of equity securities (company's own
stock)
From issuance of debt (bonds and notes)
Cash outflows:
To stockholders as dividends
To redeem long-term debt or reacquire capital
stock
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SignificantNoncash Activities... That do NOTaffect cash are NOTreported
in the body of the statement of cash flows.
Are reported:
In a separate schedule at the bottom
of the statement of cash flows or
In a separate note or supplementary
schedule to the financial statements.
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SignificantNoncash Activities...1. Issuance of common stock to
purchase assets.
2. Conversion of bonds into common
stock.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.
COMPANY NAMEStatement of Cash Flows
Period Covered
Cash flows from operating activities
(List of individual items) XX
Net cash provided (used) by operating activities XXX
Cash flows from investing activities
(List of individual inflows and outflows) XX
Net cash provided (used) by investing activities XXX
Cash flows from financing activities(List of individual inflows and outflows) XX
Net cash provided (used) by financing activities XXX
Net increase (decrease) in cash XXX
Cash at beginning of period XXX
Cash at end of period XXX
Noncash investing and financing activities
(List of individual noncash transactions) XXX
The general
format of the
SCF:
Is the 3activities
previously
discussed
operating,
investing, and
financingplus
the significant
noncash investing
and financing
activities.
FORMAT OF STATEMENT OFCASH FLOWS
Square Textiles Example
http://localhost/var/www/apps/conversion/tmp/scratch_8/annual%20reports/stxl_annual_report_2011.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_8/annual%20reports/stxl_annual_report_2011.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_8/annual%20reports/stxl_annual_report_2011.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_8/annual%20reports/stxl_annual_report_2011.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_8/annual%20reports/stxl_annual_report_2011.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_8/annual%20reports/stxl_annual_report_2011.pdfhttp://localhost/var/www/apps/conversion/tmp/annual%20reports/stxl_annual_report_2011.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_8/annual%20reports/stxl_annual_report_2011.pdfhttp://localhost/var/www/apps/conversion/tmp/annual%20reports/stxl_annual_report_2011.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_8/annual%20reports/stxl_annual_report_2011.pdf8/12/2019 Short Cut Lecture (Dell's Conflicted Copy 2014-01-25)
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USEFULNESS OFTHE STATEMENT OF CASHFLOWS
1)Ability to generate future cash flows.
2)Ability to pay dividends and meet obligations.
3)Reasons for the difference between net income
and net cash provided (used) by operating
activities.
4)Cash invested and financing transactions
during the period.
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Chapter 8
Activity-Based Costing: A
Tool to Aid Decision Making
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8-13 How Costs are Treated UnderActivityBased Costing
ABC differs from traditional cost accounting in three ways.
Manufacturing
costs
Nonmanufacturing
costs
ABC assigns both types of costs to products.
Traditionalproduct costing
ABCproduct costing
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How Costs are Treated UnderActivityBased Costing
ABC does not assign all manufacturing costs to products.
Manufacturing
costs
Nonmanufacturing
costs
Traditional
product costing
ABC
product costing
All
Som
e
ABC differs from traditional cost accounting in three ways.
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Simple count
of the number oftimes an activity
occurs.
Transaction
driver
A measure
of the amountof time needed
for an activity.
Duration
driver
Two common types of activity measures:
How Costs are Treated UnderActivityBased Costing
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Chapter 10
Standard Costs and
Balanced Scorecard
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Standard Costs
Standards are benchmarks or norms
for measuring performance. Two types
of standards are commonly used.
Quantity standards
specify how much of an
input should be used to
make a product orprovide a service.
Cost (price)
standards specify
how much should be
paid for each unitof the input.
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Standard Costs
DirectMaterial
Deviations from standards deemed significant
are brought to the attention of management, a
practice known as management by exception.
Type of Product Cost
Amount
DirectLabor
ManufacturingOverhead
Standard
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Variance Analysis Cycle
Prepare standard
cost performance
report
Analyze
variances
Begin
Identify
questions
Receive
explanations
Take
corrective
actions
Conduct next
periods
operations
Exhibit
10-1
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Learning Objective 6
Compute delivery cycle
time, throughput time,
and manufacturing
cycle efficiency (MCE).
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Process time is the only value-added time.
Delivery Performance Measures
Wait TimeProcess Time + Inspection Time
+ Move Time + Queue Time
Delivery Cycle Time
OrderReceived
ProductionStarted
GoodsShipped
Throughput Time
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Delivery Performance Measures
Manufacturing
Cycle
Efficiency
Value-added time
Manufacturing cycle time=
Wait TimeProcess Time + Inspection Time
+ Move Time + Queue Time
Delivery Cycle Time
OrderReceived
ProductionStarted
GoodsShipped
Throughput Time
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Quick Check
A TQM team at Narton Corp has recorded the
following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the throughput time(Manufacturing cycle time)?
a. 10.4 days
b. 0.2 days
c. 4.1 days
d. 13.4 days
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10-24
A TQM team at Narton Corp has recorded the
following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the throughput time?
a. 10.4 days
b. 0.2 days
c. 4.1 days
d. 13.4 days
Quick Check
Throughput time = Process + Inspection + Move + Queue
= 0.2 days + 0.4 days + 0.5 days + 9.3 days
= 10.4 days
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Quick Check
A TQM team at Narton Corp has recorded the
following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the Manufacturing Cycle Efficiency?
a. 50.0%
b. 1.9%
c. 52.0%
d. 5.1%
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A TQM team at Narton Corp has recorded the
following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 daysWhat is the Manufacturing Cycle Efficiency?
a. 50.0%
b. 1.9%
c. 52.0%
d. 5.1%
Quick Check
MCE = Value-added time Throughput time
= Process time Throughput time
= 0.2 days10.4 days= 1.9%
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Quick Check
A TQM team at Narton Corp has recorded the
following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the delivery cycle time?
a. 0.5 days
b. 0.7 days
c. 13.4 days
d. 10.4 days
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10-28
A TQM team at Narton Corp has recorded the
following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the delivery cycle time?
a. 0.5 days
b. 0.7 days
c. 13.4 days
d. 10.4 days
Quick CheckDelivery cycle time = Wait time + Throughput time= 3.0 days + 10.4 days
= 13.4 days
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End of Chapter 10
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Segment Reporting and
Decentralization
Chapter Twelve
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Cost, Profit, and Investments Centers
Responsibility
Center
Cost
Center
Profit
Center
Investment
Center
Cost, profit,
and investment
centers areallknown as
responsibility
centers.Masum, Bangladesh University of Textiles
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Cost Center
A segment whose
manager has control
over costs,but not over revenues
or investment funds.
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Profit Center
A segment whose
manager has control
overbothcosts and
revenues,
but no control over
investment funds.
Revenues
Sales
Interest
Other
Costs
Mfg. costs
Commissions
Salaries
Other
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Investment Center
A segment whose
manager has control
over costs, revenues,and investments in
operating assets.
Corporate Headquarters
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Responsibility Centers
Salty SnacksProduct Manger
Bottling Plant
Manager
Warehouse
Manager
Distribution
Manager
BeveragesProduct Manager
ConfectionsProduct Manager
OperationsVice President
FinanceChief FInancial Officer
LegalGeneral Counsel
PersonnelVice President
Superior Foods Corporation
Corporate HeadquartersPresident and CEO
Cost
Centers
InvestmentCenters
Superior Foods Corporation provides an example of the
various kinds of responsibility centers that exist in an
organization.
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Responsibility Centers
Salty Snacks
Product Manger
Bottling Plant
Manager
Warehouse
Manager
Distribution
Manager
Beverages
Product Manager
Confections
Product Manager
OperationsVice President
FinanceChief FInancial Officer
LegalGeneral Counsel
PersonnelVice President
Superior Foods CorporationCorporate Headquarters
President and CEO
Superior Foods Corporation provides an example of the
various kinds of responsibility centers that exist in an
organization.
Profit
Centers
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Responsibility Centers
Salty SnacksProduct Manger
Bottling Plant
Manager
Warehouse
Manager
Distribution
Manager
BeveragesProduct Manager
ConfectionsProduct Manager
OperationsVice President
FinanceChief FInancial Officer
LegalGeneral Counsel
PersonnelVice President
Superior Foods Corporation
Corporate HeadquartersPresident and CEO
Cost
Centers
Superior Foods Corporation provides an example of the
various kinds of responsibility centers that exist in an
organization.
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Learning Objective 1
Prepare a segmented
income statement using
the contribution margin
format, and explain thedifference between
traceable fixed costs and
common fixed costs.
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12-39 Decentralization and
Segment Reporting
Asegmentis any part
or activity of an
organization about
which a manager
seeks cost, revenue,
or profit data. A
segment can be . . .
Quick MartAn Individual Store
A Sales Territory
A Service Center
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Keys to Segmented Income Statements
There are two keys to building
segmented income statements:
A contribution format should be used
because it separates fixed from variable
costs and it enables the calculation of acontribution margin.
Traceable fixed costs should be separated
from common fixed costs to enable the
calculation of a segment margin.
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Identifying Traceable Fixed Costs
Traceable costsarise because of the existenceof a particular segment and would disappearover time if the segment itself disappeared.
No computer
division means . . .
No computer
division manager.
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Identifying Common Fixed Costs
Common costsarise because of the overall
operation of the company and would not
disappear if any particular segment were
eliminated.
No computerdivision but . . .
We still have acompany president.
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Segment Margin
Thesegment margin, which is computed bysubtracting the traceable fixed costs of a segmentfrom its contribution margin, is thebest gaugeof
the long-run profitability of a segment.
Time
Profits
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Traceable and Common Costs
Fixed
Costs
Traceable Common
Dont allocate
common costs to
segments.
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Levels of Segmented Statements
Lets look more closely at the Television
Divisions income statement.
Webber Inc. has two divisions.
Computer Division Television Division
Webber, Inc.
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Levels of Segmented Statements
Our approach to segment reporting uses the
contribution format.
Income Statement
Contribution Margin Format
Television Division
Sales 300,000$Variable COGS 120,000
Other variable costs 30,000
Total variable costs 150,000
Contribution margin 150,000
Traceable fixed costs 90,000
Division margin 60,000$
Cost of goods
sold consists of
variable
manufacturingcosts.
Fixed and
variable costs
are listed in
separate
sections.
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Levels of Segmented Statements
Segment marginis Televisions
contribution
to profits.
Our approach to segment reporting uses thecontribution format.
Income Statement
Contribution Margin Format
Television Division
Sales 300,000$
Variable COGS 120,000
Other variable costs 30,000
Total variable costs 150,000Contribution margin 150,000
Traceable fixed costs 90,000
Division margin 60,000$
Contribution margin
is computed by
taking sales minus
variable costs.
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Levels of Segmented Statements
Income Statement
Company Television Computer
Sales 500,000$ 300,000$ 200,000$
Variable costs 230,000 150,000 80,000
CM 270,000 150,000 120,000
Traceable FC 170,000 90,000 80,000
Division margin 100,000 60,000$ 40,000$
Common costs
Net operating
income
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Levels of Segmented Statements
Income Statement
Company Television Computer
Sales 500,000$ 300,000$ 200,000$
Variable costs 230,000 150,000 80,000
CM 270,000 150,000 120,000
Traceable FC 170,000 90,000 80,000
Division margin 100,000 60,000$ 40,000$
Common costs 25,000
Net operating
income 75,000$
Common costs should not
be allocated to thedivisions. These costswould remain even if one
of the divisions wereeliminated.
Masum, Bangladesh University of Textiles
Transfer Pricing
Appendix 12A
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Key Concepts/Definitions
A transfer priceis the pricecharged when one segment of
a company provides goods or
services to another segment of
the company.
The fundamental objective in
setting transfer prices is to
motivate managers to act in the
best interests of the overallcompany.
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Three Primary Approaches
There are three primary
approaches to setting
transfer prices:
1. Negotiated transfer prices;2. Transfers at the cost to the
selling division; and
3. Transfers at market price.
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Negotiated Transfer Prices
A negotiated transfer price results from discussionsbetween the selling and buying divisions.
Advantages of negotiated transfer prices:
1. They preserve the autonomy of the
divisions, which is consistent with
the spirit of decentralization.
2. The managers negotiating the
transfer price are likely to have much
better information about the potentialcosts and benefits of the transfer
than others in the company.
Upper limit is
determined by the
buying division.
Lower limit is
determined by the
selling division.
Range of Acceptable
Transfer Prices
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Harris and LouderAn Example
Imperial Beverages:
Ginger beer production capactiy per month 10,000 barrels
Variable cost per barrel of ginger beer 8 per barrel
Fixed costs per month 70,000
Selling price of Imperial Beverages ginger beer
on the outside market 20 per barrel
Pizza Maven:
Purchase price of regular brand of ginger beer 18 per barrel
Monthly comsumption of ginger beer 2,000 barrels
Assume the information as shown with
respect to Imperial Beverages and Pizza
Maven (both companies are owned by Harris
and Louder).
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Harris and LouderAn Example
The selling divisions (Imperial Beverages) lowest acceptable transferprice is calculated as:
Variable cost Total contribution margin on lost sales
per unit Number of units transferredTransfer Price +
Transfer Price Cost of buying from outside supplier
The buying divisions (Pizza Maven) highest acceptable transfer price is
calculated as:
Lets calculate the lowest and highest acceptable
transfer prices under three scenarios.
Transfer Price Profit to be earned per unit sold (not including the transfer price)
If an outside supplier does not exist, the highest acceptable transfer price
is calculated as:
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Harris and LouderAn Example
If Imperial Beverages has sufficient idle capacity(3,000 barrels) to satisfy
Pizza Mavens demands (2,000 barrels), without sacrificing sales to other
customers, then the lowest and highest possible transfer prices are
computed as follows:
0
2,000 = 8Transfer Price +8
Selling divisions lowest possible transfer price:
Transfer Price Cost of buying from outside supplier = 18Buying divisions highest possible transfer price:
Therefore, the range of acceptable
transfer price is 818.
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Harris and LouderAn Example
If Imperial Beverages has no idle capacity(0 barrels) and must sacrifice other
customer orders (2,000 barrels) to meet Pizza Mavens demands (2,000
barrels), then the lowest and highest possible transfer prices are computed
as follows:
( 20 - 8) 2,000
2,000= 20Transfer Price +8
Selling divisions lowest possible transfer price:
Transfer Price Cost of buying from outside supplier = 18
Buying divisions highest possible transfer price:
Therefore, there is no range of
acceptable transfer prices.
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Harris and LouderAn Example
If Imperial Beverages has some idle capacity(1,000 barrels) and must
sacrifice other customer orders (1,000 barrels) to meet Pizza Mavens
demands (2,000 barrels), then the lowest and highest possible transfer prices
are computed as follows:
Transfer Price Cost of buying from outside supplier = 18Buying divisions highest possible transfer price:
Therefore, the range of acceptable
transfer price is 1418.
Selling divisions lowest possible transfer price:
( 20 - 8) 1,000
2,000 = 14Transfer Price
+8
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Transfers at the Cost to the Selling Division
Many companies set transfer prices at either
the variable cost or full (absorption) cost
incurred by the selling division.
Drawbacks of this approach include:
1. Using full cost as a transfer price
and can lead to suboptimization.
2. The selling division will never
show a profit on any internal
transfer.
3. Cost-based transfer prices do not
provide incentives to control
costs.
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Transfers at Market Price
A market price(i.e., the price charged for an
item on the open market) is often regarded as
the best approach to the transfer pricing
problem.
1. A market price approach works
best when the product or service
is sold in its present form to
outside customers and the
selling division has no idle
capacity.
2. A market price approach does
not work well when the selling
division has idle capacity.
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Divisional Autonomy and Sub optimization
The principles ofdecentralization suggest
that companies should
grant managers autonomy
to set transfer prices and
to decide whether to sell
internally or externally,
even if this may
occasionally result in
suboptimal decisions.
This way top management
allows subordinates to
control their own destiny.
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International Aspects of Transfer Pricing
Transfer Pricing
Objectives
DomesticGreater divisional autonomy
Greater motivation for managers
Better performance evaluation
Better goal congruence
InternationalLess taxes, duties, and tariffs
Less foreign exchange risks
Better competitive position
Better governmental relations
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End of Chapter 12
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