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The Cost of Sales (or Cost of Goods Sold) is usually considered the most important cost...

The Cost of Sales (or Cost of Goods Sold) is usually considered the most important cost in hospitality businesses. How is it determined? Please select the most appropriate answer.

1. It is calculated by adding up all purchases of inventory during one accounting period.

2. It is the amount of inventory on hand. It is calculated by adding the value of every item of inventory available on hand.

3. It is calculated by adding all purchase amounts to the beginning inventory amount; and by subtracting the ending inventory amount.

4. It is calculated by multiplying the management's target percentage (%) of the revenues to the amount of revenues generated.

How can we determine whether the payroll expense has truly grown in this year compared with that of the last year?

1. Compare the amount of the payroll expense of each year. If this year's amount is larger, it has grown by the amount of the difference.

2. Compare the amount of each year's payroll expense with the budget. If the actual expense amount is larger than the budget, it has grown.

3. Calculate the percentage (%) of the payroll expense of the revenues of the year. If this year's payroll expense percentage is larger than that of the last year, this year's payroll has grown.

4. Calculate the percentage (%) of this year's payroll expense of the last year's payroll expense. If this year's payroll expense % is larger than 100%, it has grown.

One company's Balance Sheet shows a huge increase in its Accounts Receivable (A/R) amount compared with the previous year. Which analysis of the following would you agree most?

1. The increase of A/R indicates the huge growth of revenues during the current year. This is considered a positive sign.

2. The increase of A/R indicates that the company has collected a large amount of cash from its uncollected revenues. It must have increased its cash flows.

3. The increase of A/R indicates that the company owes a lot to its creditors this year. When they are paid, the company will experience a huge cash decrease.

4. The increase of A/R indicates the company has failed to collect cash from its customers who have not paid. The company must have experienced huge amount of cash decrease.

If one company's Balance Sheet shows a huge increase of Inventory balance compared with the previous year, which one of the following analyses do you think is wrong?

1. The increase of Inventory indicates the company has spent a lot of expenses during the current year. Its profits must have declined.

2. The increase of Inventory indicates the company is ready to expand its operations in the next year.

3. The increase of Inventory must have had negative impact on the cash flows.

4. The increase of Inventory may have temporarily increased the company's Accounts Payable balance.

Expert Solution

1: Option 3

COGS is computed as Opening inventory+ Purchases- Closing stock

So Option 1 and 2 are incorrect since they only consider purchases and inventory separately. Option 4 calculates the target revenue of the company and not COGS.

2: Option 3

Option 1 is wrong since payroll will depend on the amount of revenue since it is a variable cost. Option 2 compares actual and budgeted payroll. Option 3 is right since it compares payroll as a percentage of sales in both years and option 4 is incorrect since it is not logical to calculate expenses of one year as a percentage of previous year expenses.

3: Option 4

Option 1 may or may not be true since high revenues should increase the receivables but not substantially. Option 2 is wrong since if cash is collected, the receivables would decrease. Option 3 is incorrect since receivables relate to customers and not creditors. Option 4 is right since huge increase in receivables means that the company has not been able to collect cash from its customers.

4: Option 1

Option 1 is wrong since huge inventory need not result in low profits. Option 2 is right since the company is stocking up to expand soon. Option 3 is right since high inventory means high purchases and so high outflows. Option 4 is also right since it could have been purchased on credit and so the payables balance would increase.

jeff jeffy answered 2 years ago

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