ACT202 Management Accounting and Financing Activities

Q1. Discuss the differences between operating, investing and financing activities, then describe the cash flows between a company and its stakeholders.

Q2. ALHAMD Watch Company manufactures two product lines—digital watches and analog watches. Income statement data for the most recent year follow:
Total Digital Watches Analog Watches
Sales revenue $850,000 $500,000 $350,000
Variable expenses (530,000) (250,000) (280,000)
Contribution margin $320,000 $250,000 $70,000
Fixed expenses (180,000) (90,000) (90,000)
Operating income (loss) $140,000 $160,000 $(20,000)

Assuming fixed costs remain unchanged, and that there would be no adverse effect on other sales, what will be the effect of dropping the Analog Watches line on the operating income of the company? ( Choose the right answer )
A.Operating income will increase by $20,000
B.Operating income will increase by $90,000
C.Operating income will decrease by 70,000
D.Operating income will decrease by $350,000

Q3. Creative Yachting Fabrics Company manufactures sails for sailboats. The company has the capacity to produce 35,000 sails per year, and is currently producing and selling 25,000 sails per year. The following information relates to current production:
Sale price per unit $175
Variable costs per unit:

Manufacturing 60
Marketing and administrative 20
Total fixed costs:
Manufacturing $700,000
Marketing and administrative $300,000

If a special sales order is accepted for 5,500 sails at a price of $150 per unit, and if the order requires both variable manufacturing and variable marketing as well as administrative costs, and incremental fixed costs of $400,000, what will be the impact on operating income.

Question 1

Differences between operating, investing and financing activities:

Operating activities:

• Operating activities covers cash activities that are relating to net income.
• It involves transactions related to supply of goods and services to the customers and also the expenses incurred to generate revenue.
• These activities has the major impact on ‘income statement’ activities.

Investing activities:

• Investing activities covers cash activities that are in connection with non-current assets.
• It involves transactions relating to purchase or sale of assets that are long term in nature.
• It has the major impact on statement of financial position.

Financing activities:

• Financial activities covers cash activities that are connected to owner’s equity as well as non-current assets.
• It involves transactions in relation to the owners and creditors of business (Fraser, Ormiston & Fraser, 2010).
• It also affects the statement of financial position majorly.

There are two categories stakeholders of a company. One is internal stakeholders i.e. the employees, managers and others are external stakeholders such as investors, shareholders, creditors, suppliers, customers, government etc.

The company enters into various transactions with these stakeholders.

Shareholders: When company issues share capital it results in cash inflow from financing activity i.e. proceeds of the issued share capital. It also pays dividend to its shareholders which is its cash outflow from financing activities (Mirza & Azfa, 2010).

Investors: When investors invests their funds in the company it cash flow from financing activity and when they are paid interest on their investments, it amounts to cash outflows from financing activities (Dickinson, 2011).

Suppliers: when goods are supplied to the company by their suppliers, they are paid for the goods, such payment amounts to cash outflow from operating activities.

Customers: When sales collection is made by the company from its customers, then it amounts to cash flows of the company operating activities.

Government: The firm has to make several tax payments to the regulatory authorities and government such as income tax, goods and service tax. Payment of such taxes amounts to cash outflow from operating activities.

Question 2:

(DRURY, 2013)

When company was manufacturing Analog Watches also, it had an overall profitability of $ 140000. But if company stops dealing in the Analog Watches the profitability will be decreased to $70000.

Therefore the answer is option C.

Question 3:

Statement showing the net income of original as well as special order

Therefore, the overall operating income will decrease by $ 15000 if special order is accepted.

(Adler, 2011)

References:

Adler, R., 2011, Management Accounting: making it world class, Routledge, Abingdon

Dickinson, V., 2011. Cash flow patterns as a proxy for firm life cycle. The Accounting Review, 86(6), pp.1969-1994.

DRURY, C.M., 2013. Management and cost accounting. Springer.

Fraser, L.M., Ormiston, A. and Fraser, L.M., 2010. Understanding financial statements. Pearson.

Mirza, H.H. and Azfa, T., 2010. Ownership structure and cash flows as determinants of corporate dividend policy in Pakistan.