Managerial 10e – Chapter 1 – Solutions Manual
ANSWERS TO QUESTIONS - CHAPTER 1
1. Financial accounting deals with regulated, historical, financial
information that pertains to the whole company and is designed
primarily to meet the information needs of outsiders. Managerial
accounting is concerned with unregulated financial, economic,
and nonfinancial data, which pertains more to the sub-units of the
organization, that is current and future oriented, and that is
designed primarily to meet the information needs of insiders.
2. The value-added principle means that management accountants
are free to engage in any information gathering and reporting
activity so long as the activity adds value in excess of its cost.
Estimates of future product costs are permissible in managerial
accounting reports for budgeting and product costing but would
not be allowed by financial regulations in financial accounting.
3. The two dimensions of the TQM program are: (1) management
should follow a continuous, systematic problem-solving
philosophy that encourages achievement of zero defects in
production and engages all employees to eliminate waste and
errors and to simplify the design and delivery of products and
services to customers, and (2) organizations need a strong
commitment to customer satisfaction. TQM is being used in
business to maintain profitability in an increasingly competitive
global market. In this environment, profit margins are tight, and
therefore, inefficiencies can more easily erode business profits.
To eliminate waste, errors, and dissatisfied customers, information
must be timely and relevant in order to prevent or discover and
correct mistakes immediately.
1-b-1
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, Managerial 10e – Chapter 1 – Solutions Manual
4. Both financial and managerial accountants need cost information
about the company’s products and services. In managerial
accounting cost information is useful in product pricing decisions
and is an essential part of cost control (comparing actual product
cost to budgeted product cost to assess needed improvement)
and performance evaluation (assess managers’ success in
controlling and eliminating unnecessary cost). In financial
accounting, cost information about the product is needed to
determine ending inventory on the balance sheet and cost of
goods sold on the income statement. Product costing in financial
accounting can impact the decisions of not only managers but
also outsiders such as investors, creditors, and taxing authorities.
Product costing information in managerial accounting can affect
the product’s selling price as well as management’s decisions as
to whether cost correction changes are needed.
5. Costs are assets used in the process of earning revenue but not
all costs of the earning process are used in the same period in
which they are incurred. Therefore, a cost that is used in the
process of earning revenue is recorded as an expense (e.g.
administrative salaries and product cost for products sold) and a
cost that has future benefit in the earning process is recorded as
an asset in the period that it is incurred.
6. The cash paid to production workers has not been used to
produce revenue but to produce inventory. The revenue is earned
when the inventory is sold at which time the cost of salaries
associated with those products sold should be expensed as cost
of goods sold.
1-b-2
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, Managerial 10e – Chapter 1 – Solutions Manual
7. Product costs associated with goods that have not been sold are
recorded in the account called inventory. Inventory cost is shown
on the balance sheet as an asset. The amount of total assets and
net income will be higher if a product cost is classified as an asset
than if it is expensed. Product cost associated with goods that
have been sold should be recorded in the account called cost of
goods sold. Cost of goods sold is an expense shown on the
income statement. The amount of total assets and net income will
be lower if a product cost is classified as an expense as opposed
to being classified as an asset.
8. An indirect product cost cannot be easily or economically traced
to a specific product. Product costs that would be considered
indirect include costs such as production supplies, salaries of
production supervisors, and depreciation, rent, and utilities on
factory facilities.
9. Product costs are all costs incurred to obtain a product or provide
a service. These costs are treated as assets, recorded in
inventory, and expensed when the associated products are sold.
Period costs are all costs not associated with a product. They are
associated with the general, selling, and administrative functions
of the business and most are expensed in the period in which the
associated economic sacrifice is made. A product cost would be
the cost of direct materials used in the production of a product. A
period cost would be rent on administrative facilities.
1-b-3
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, Managerial 10e – Chapter 1 – Solutions Manual
10. The effects of cost classification on the financial statements can
have important implications with respect to the following:
(1) The availability of financing - Investors and creditors use
financial statement data to predict businesses’ future
earnings. Favorable financial statements provide evidence of
favorable future performance whereas unfavorable financial
statements are an indication of possible poor future financial
performance. A company with favorable financial
performance is more likely to generate sufficient cash flows
to make interest payments, to repay the principal balance of
its liabilities, and to pay dividends. Hence, investors and
creditors believe they have a greater probability of receiving
interest payments, the return of principal, and return on
investment when companies show favorable financial
statements. Since expenses reduce profit and financial
performance, classifying a cost as an expense will inhibit the
company’s ability to obtain financing. Classifying a cost as
an asset, which will increase profit, total assets, and equity,
enhances businesses’ ability to obtain financing.
(2) Management motivation - Executive compensation may be
affected by financial statement data. Many managers’
bonuses are based on a percentage of net income. If costs
are classified as expenses, net income will be reduced which
in turn affects managerial income. Managers may even be
tempted to misclassify costs in order to manipulate financial
statement data to their advantage.
(3) Income tax considerations - With respect to taxes, managers
prefer to classify costs as expenses rather than assets.
Classifying a cost as an expense reduces net income and in
turn reduces income taxes, which are determined by
computing a designated percentage of taxable income.
1-b-4
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
ANSWERS TO QUESTIONS - CHAPTER 1
1. Financial accounting deals with regulated, historical, financial
information that pertains to the whole company and is designed
primarily to meet the information needs of outsiders. Managerial
accounting is concerned with unregulated financial, economic,
and nonfinancial data, which pertains more to the sub-units of the
organization, that is current and future oriented, and that is
designed primarily to meet the information needs of insiders.
2. The value-added principle means that management accountants
are free to engage in any information gathering and reporting
activity so long as the activity adds value in excess of its cost.
Estimates of future product costs are permissible in managerial
accounting reports for budgeting and product costing but would
not be allowed by financial regulations in financial accounting.
3. The two dimensions of the TQM program are: (1) management
should follow a continuous, systematic problem-solving
philosophy that encourages achievement of zero defects in
production and engages all employees to eliminate waste and
errors and to simplify the design and delivery of products and
services to customers, and (2) organizations need a strong
commitment to customer satisfaction. TQM is being used in
business to maintain profitability in an increasingly competitive
global market. In this environment, profit margins are tight, and
therefore, inefficiencies can more easily erode business profits.
To eliminate waste, errors, and dissatisfied customers, information
must be timely and relevant in order to prevent or discover and
correct mistakes immediately.
1-b-1
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, Managerial 10e – Chapter 1 – Solutions Manual
4. Both financial and managerial accountants need cost information
about the company’s products and services. In managerial
accounting cost information is useful in product pricing decisions
and is an essential part of cost control (comparing actual product
cost to budgeted product cost to assess needed improvement)
and performance evaluation (assess managers’ success in
controlling and eliminating unnecessary cost). In financial
accounting, cost information about the product is needed to
determine ending inventory on the balance sheet and cost of
goods sold on the income statement. Product costing in financial
accounting can impact the decisions of not only managers but
also outsiders such as investors, creditors, and taxing authorities.
Product costing information in managerial accounting can affect
the product’s selling price as well as management’s decisions as
to whether cost correction changes are needed.
5. Costs are assets used in the process of earning revenue but not
all costs of the earning process are used in the same period in
which they are incurred. Therefore, a cost that is used in the
process of earning revenue is recorded as an expense (e.g.
administrative salaries and product cost for products sold) and a
cost that has future benefit in the earning process is recorded as
an asset in the period that it is incurred.
6. The cash paid to production workers has not been used to
produce revenue but to produce inventory. The revenue is earned
when the inventory is sold at which time the cost of salaries
associated with those products sold should be expensed as cost
of goods sold.
1-b-2
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, Managerial 10e – Chapter 1 – Solutions Manual
7. Product costs associated with goods that have not been sold are
recorded in the account called inventory. Inventory cost is shown
on the balance sheet as an asset. The amount of total assets and
net income will be higher if a product cost is classified as an asset
than if it is expensed. Product cost associated with goods that
have been sold should be recorded in the account called cost of
goods sold. Cost of goods sold is an expense shown on the
income statement. The amount of total assets and net income will
be lower if a product cost is classified as an expense as opposed
to being classified as an asset.
8. An indirect product cost cannot be easily or economically traced
to a specific product. Product costs that would be considered
indirect include costs such as production supplies, salaries of
production supervisors, and depreciation, rent, and utilities on
factory facilities.
9. Product costs are all costs incurred to obtain a product or provide
a service. These costs are treated as assets, recorded in
inventory, and expensed when the associated products are sold.
Period costs are all costs not associated with a product. They are
associated with the general, selling, and administrative functions
of the business and most are expensed in the period in which the
associated economic sacrifice is made. A product cost would be
the cost of direct materials used in the production of a product. A
period cost would be rent on administrative facilities.
1-b-3
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, Managerial 10e – Chapter 1 – Solutions Manual
10. The effects of cost classification on the financial statements can
have important implications with respect to the following:
(1) The availability of financing - Investors and creditors use
financial statement data to predict businesses’ future
earnings. Favorable financial statements provide evidence of
favorable future performance whereas unfavorable financial
statements are an indication of possible poor future financial
performance. A company with favorable financial
performance is more likely to generate sufficient cash flows
to make interest payments, to repay the principal balance of
its liabilities, and to pay dividends. Hence, investors and
creditors believe they have a greater probability of receiving
interest payments, the return of principal, and return on
investment when companies show favorable financial
statements. Since expenses reduce profit and financial
performance, classifying a cost as an expense will inhibit the
company’s ability to obtain financing. Classifying a cost as
an asset, which will increase profit, total assets, and equity,
enhances businesses’ ability to obtain financing.
(2) Management motivation - Executive compensation may be
affected by financial statement data. Many managers’
bonuses are based on a percentage of net income. If costs
are classified as expenses, net income will be reduced which
in turn affects managerial income. Managers may even be
tempted to misclassify costs in order to manipulate financial
statement data to their advantage.
(3) Income tax considerations - With respect to taxes, managers
prefer to classify costs as expenses rather than assets.
Classifying a cost as an expense reduces net income and in
turn reduces income taxes, which are determined by
computing a designated percentage of taxable income.
1-b-4
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
