Solutions Manual for Fundamental Managerial Accounting Concepts 10th Edition by Edmonds Full Chapter Latest Test Bank.

ManagerialB10eB–BChapterB1B–
BSolutionsBManual

ANSWERS TO QUESTIONS - CHAPTER 1
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1. Financial accounting deals with regulated, historical, financial infor
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mation that pertains to the whole company and is designed primari
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ly to meet the information needs of outsiders. Managerial accounti
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ng is concerned with unregulated financial, economic, and nonfina
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ncial data, which pertains more to the sub-
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units of the organization, that is current and future oriented, and th
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at is designed primarily to meet the information needs of insiders.
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2. The value- B


added principle means that management accountants are free to e
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ngage in any information gathering and reportingactivity so long a
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s the activity adds value in excess of its cost. Estimates of future p
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roduct costs are permissible in managerial accounting reports for
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budgeting and product costing but would not be allowed by financi
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al regulations in financial accounting.
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3. The two dimensions of the TQM program are: (1) management sho
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uld follow a continuous, systematic problem-
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solving philosophy that encourages achievement of zero defects in
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production and engages all employees to eliminate waste anderror
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s and to simplify the design and delivery of products and services t
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o customers, and (2) organizations need a strong commitment to c
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ustomer satisfaction. TQM is being used in business to maintain pr
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ofitability in an increasingly competitive global market. In this envir
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onment, profit margins are tight, and therefore, inefficiencies can
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more easily erode business profits. To eliminate waste, errors, an
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d dissatisfied customers, informationmust be timely and relevant i
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n order to prevent or discover and correct mistakes immediately.
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4. Both financial and managerial accountants need cost information a
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bout the company’s products and services. In managerial accounti
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ng cost information is useful in product pricing decisions and is an
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Bessential part of cost control (comparing actual product cost to bu
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dgeted product cost to assess needed improvement) and perform
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ance evaluation (assess managers’ success in controlling and elim
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inating unnecessary cost). In financial accounting, cost informatio
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n about the product is needed to determine ending inventory on th
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e balance sheet and cost of goods sold on the income statement. P
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roduct costing in financial accounting can impact the decisions of
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not only managers but also outsiders such as investors, creditors,
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Band taxing authorities. Product costing information in managerial
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accounting can affect the product’s selling price as well as manage
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ment’s decisions as to whether cost correction changes are neede
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d.

5. Costs are assets used in the process of earning revenue but not
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all costs of the earning process are used in the same period in whi
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ch they are incurred. Therefore, a cost that is used in the process o
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f earning revenue is recorded as an expense (e.g. administrative sa
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laries and product cost for products sold) and a cost that has futur
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e benefit in the earning process is recorded as an asset in the perio
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d that it is incurred.
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6. The cash paid to production workers has not been used to produc
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e revenue but to produce inventory. The revenue is earned when th
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e inventory is sold at which time the cost of salaries associated wit
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h those products sold should be expensed as cost of goods sold.
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7. Product costs associated with goods that have not been sold are r
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ecorded in the account called inventory. Inventory cost is shown o
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n the balance sheet as an asset. The amount of total assets and net
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Bincome will be higher if a product cost is classified as an assettha
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n if it is expensed. Product cost associated with goods that have b
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een sold should be recorded in the account called cost of goods so
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ld. Cost of goods sold is an expense shown on the income stateme
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nt. The amount of total assets and net income will be lower if a pro
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duct cost is classified as an expense as opposed to being classifie
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d as an asset.
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8. An indirect product cost cannot be easily or economically tracedt
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o a specific product. Product costs that would be considered indire
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ct include costs such as production supplies, salaries ofproductio
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n supervisors, and depreciation, rent, and utilities onfactory faciliti
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es.

9. Product costs are all costs incurred to obtain a product or provide
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a service. These costs are treated as assets, recorded in inventor
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y, and expensed when the associated products are sold. Period co
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sts are all costs not associated with a product. They are associated
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with the general, selling, and administrative functions of the busin
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ess and most are expensed in the period in which the associated e
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conomic sacrifice is made. A product cost would be the cost of dir
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ect materials used in the production of a product. A period cost wo
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uld be rent on administrative facilities.
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10. The effects of cost classification on the financial statements can
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have important implications with respect to the following:
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(1) The availability of financing -
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BInvestors and creditors use financial statement data to predi
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ct businesses’ future earnings. Favorable financial statement
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s provide evidence of favorable future performance whereas
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unfavorable financial statements are an indication of possible
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Bpoor future financial performance. A company with favorable
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Bfinancial performance is more likely to generate sufficient ca
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sh flows to make interest payments, to repay the principal bal
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ance of its liabilities, and to pay dividends. Hence, investors a
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nd creditors believe they have a greater probability of receivi
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ng interest payments, the return of principal, and return on in
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vestment when companies show favorable financial statemen
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ts. Since expenses reduce profit and financial performance, cl
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assifying a cost as an expense will inhibit the company’s abili
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ty to obtain financing. Classifying a cost as an asset, which
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will increase profit, total assets, and equity, enhances busine
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sses’ ability to obtain financing.
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(2) Management motivation - B B


Executive compensation may be affected by financial statem
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ent data. Many managers’ bonuses are based on a percentag
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e of net income. If costs are classified as expenses, net incom
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e will be reduced which in turn affects managerial income. Ma
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nagers may even be tempted to misclassify costs in order to
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manipulate financial statement data to their advantage. B B B B B B




(3) Income tax considerations - B B B


BWith respect to taxes, managers prefer to classify costs as e
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xpenses rather than assets. Classifying a cost as an expense
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reduces net income and in turn reduces income taxes, which
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are determined by computing a designated percentage of tax
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able income. B




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