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Chapter 24: Question BE24-9 (page 1447)

Heartland Company鈥檚 budgeted sales and budgeted cost of goods sold for the coming year are \(144,000,000 and \)99,000,000, respectively. Short-term interest rates are expected to average 10%. If Heartland can increase inventory turnover from its present level of 9 times a year to a level of 12 times per year, compute its expected cost savings for the coming year.

Short Answer

Expert verified

The expected cost savings for the coming year is $275,000.

Step by step solution

01

Meaning of Cost of Goods Sold

The direct cost of manufacturing the goods sold by a corporation is known as the cost of goods sold (COGS). This amount directly covers the cost of materials and labor used in manufacturing the final product. When calculating COGS, indirect costs such as advertising and administrative costs are not included.

02

Computation of expected Cost savings for the coming year

Average inventory (current) $11,000,000

Working Notes:

InventoryTurnover=CostofgoodssoldAverageinventory9=$99,000,000AverageinventoryAverageInventory=$99,000,0009=$11,000,000

Average inventory (new) $8,250,000

InventoryTurnover=CostofgoodssoldAverageInventory12=$99,000,000AverageInventoryAverageInventory=$99,000,00012=$8,250,000

Calculation of Cost savings

Costsaving=AverageInventorycurrent-Averageinventorynew脳Averagerate=$11,000,000-$8,250,000脳10%=$2,750,000脳10%=$275,000

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Most popular questions from this chapter

Madrasah Corporation issued its financial statements for the year ended December 31, 2017, on March 10, 2018. The following events took place early in 2018.

  1. On January 10, 10,000 shares of \(5 par value common stock were issued at \)66 per share.
  2. On March 1, Madrasah determined after negotiations with the Internal Revenue Service that income taxes payable for 2017 should be \(1,270,000. On December 31, 2017, income taxes payable were recorded at \)1,100,000.

Instructions

Discuss how the preceding post-balance-sheet events should be reflected in the 2017 financial statements.

The following statement is an excerpt from the FASB pronouncement related to interim reporting. Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise. The usefulness of such information rests on the relationship that it has to the annual results of operations. Accordingly, the Board has concluded that each interim period should be viewed primarily as an integral part of an annual period. In general, the results for each interim period should be based on the accounting principles and practices used by an enterprise in the preparation of its latest annual financial statements unless a change in an accounting practice or policy has been adopted in the current year. The Board has concluded, however, that certain accounting principles and practices followed for annual reporting purposes may require modification at interim reporting dates so that the reported results for the interim period may better relate to the results of operations for the annual period.

Instructions

The following six independent cases present how accounting facts might be reported on an individual company鈥檚 interim financial reports. For each of these cases, state whether the method proposed to be used for interim reporting would be acceptable under generally accepted accounting principles applicable to interim financial data. Support each answer with a brief explanation.

f) LaBrava Company was reasonably certain it would have an employee strike in the third quarter. As a result, it shipped heavily during the second quarter but plans to defer the recognition of the sales in excess of the normal sales volume. The deferred sales will be recognized as sales in the third quarter when the strike is in progress. LaBrava Company management thinks this is more representative of normal second- and third-quarter operations.

Answer each of the questions in the following unrelated situations.

c) A company has current assets of \(90,000 (of which \)40,000 is inventory and prepaid items) and current liabilities of \(40,000. What is the current ratio? What is the acid-test ratio? If the company borrows \)15,000 cash from a bank on a 120-day loan, what will its current ratio be? What will the acid-test ratio be?

The following statement is an excerpt from the FASB pronouncement related to interim reporting. Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise. The usefulness of such information rests on the relationship that it has to the annual results of operations. Accordingly, the Board has concluded that each interim period should be viewed primarily as an integral part of an annual period. In general, the results for each interim period should be based on the accounting principles and practices used by an enterprise in the preparation of its latest annual financial statements unless a change in an accounting practice or policy has been adopted in the current year. The Board has concluded, however, that certain accounting principles and practices followed for annual reporting purposes may require modification at interim reporting dates so that the reported results for the interim period may better relate to the results of operations for the annual period.

Instructions

The following six independent cases present how accounting facts might be reported on an individual company鈥檚 interim financial reports. For each of these cases, state whether the method proposed to be used for interim reporting would be acceptable under generally accepted accounting principles applicable to interim financial data. Support each answer with a brief explanation.

d) Gansner Company realized a large gain on the sale of investments at the beginning of the second quarter. The company wants to report one-third of the gain in each of the remaining quarters.

Olga Conrad, a financial writer, noted recently, 鈥淭here are substantial arguments for including earnings projections in annual reports and the like. The most compelling is that it would give anyone interested something now available to only a relatively select few鈥攍ike large stockholders, creditors, and attentive bartenders.鈥� Identify some arguments against providing earnings projections.
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