Ch12(6th)Post - Analysis of Analysis of Investing Investing...

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Unformatted text preview: Analysis of Analysis of Investing Investing Activities Activities Chapter Chapter F12 F12 12-2 1. Explain why investing decisions are important to a company and how they can affect its profits. 2. Explain how operating leverage affects a companys risk and profits. 3. Use financial statements to evaluate investing activities for various companies. Objectives Objectives 12-3 4. Explain how investing activities affect company value, and use accounting information to measure value-increasing activities. 5. Identify ways in which a company can use its assets to improve effectiveness and efficiency. 6. Explain why accounting information about long-term assets is useful for creditors. Objectives Objectives 12-4 Exhibit 1 Exhibit 1 The Production Process for Favorite Cookie Company Obj - 1 12-5 Exhibit 2 Exhibit 2 An Alternative Production Process for Favorite Cookie Company Obj - 1 12-6 If we select manual equipment, we can start with less investment and add equipment as demand increases. Investing Decisions and Profit Investing Decisions and Profit Obj - 1 12-7 If we select automated equipment, we must invest more initially, but we will have the capacity to expand. Also, we will be able to produce a higher quality product because the automated process is more reliable. Investing Decisions and Profit Investing Decisions and Profit Obj - 1 12-8 What effect do the choices have on our expected profits if we anticipate sales of $3,000,000? Investing Decisions and Profit Investing Decisions and Profit Obj - 1 12-9 (in thousands) Manual Automated (in thousands) Manual Automated Assets: Current assets $1,000 $1,000 Plant assets 3,500 4,000 Total assets $4,500 $5,000 Sales $3,000 $3,000 Cost of ingredients (800) (800) Depreciation (250) (300) Wages and benefits (780) (700) Other operating expenses (1,000 ) (1,000 ) Operating income 170 200 Interest expense (170 ) (170 ) Pretax income--- 30 Income taxes--- (9 ) Net income $ --- $ 21 Sales of $3.0 Million Obj - 1 12-10 In the second year of operations we anticipate sales of $3.6 million. What would be our projected net income if our expectations are correct? Investing Decisions and Profit Investing Decisions and Profit If we select manual equipment, we will have to purchase an additional $250,000 of equipment to meet the higher demand. Obj - 1 12-11 (in thousands) Manual Automated (in thousands) Manual Automated Assets: Current assets $1,200 $1,440 Plant assets 3,750 4,000 Total assets $4,950 $5,440 Sales $3,600 $3,600 Cost of ingredients (960) (960) Depreciation (275) (300) Wages and benefits (936) (700) Other operating expenses (1,000 ) (1,000 ) Operating income 429 640 Interest expense (170 ) (170 ) Pretax income 259 470 Income taxes (78 ) (141 ) Net income $ 181 $ 329 Sales of $3.6 Million Depreciation for Depreciation for manul increases manul increases due to additional due to additional equipment required equipment required costing $250,000 costing $250,000 Obj - 1 12-12 (in thousands) Manual Automated (in thousands)...
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This note was uploaded on 09/04/2008 for the course ACC 310F taught by Professor Verduzco during the Spring '07 term at University of Texas at Austin.

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Ch12(6th)Post - Analysis of Analysis of Investing Investing...

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