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Introduction to Accounting FINAL EXAM REVIEW Chapters 10,11,12, 13, 14, & 15 Prof. W. Bentz A&MIS 212 1 Standard Cost Card – Variable Production Cost A standard cost card for one unit of product might look like this: A B AxB Standard Standard Standard Quantity Price Cost Inputs or Hours or Rate per Unit Direct materials 3.0 lbs. $ 4.00 per lb. $ 12.00 Direct labor 2.5 hours 14.00 per hour 35.00 Variable mfg. overhead 2.5 hours 3.00 per hour 7.50 Total standard unit cost $ 54.50 Prof. W. Bentz A&MIS 212 2 Standards vs. Budgets A standard is the expected cost for one Are standards the unit. same as budgets? A budget is the expected cost for all units. Prof. W. Bentz A&MIS 212 3 A General Model of Variances Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Standard price is the amount that should have been paid for the resources acquired. Prof. W. Bentz A&MIS 212 4 A General Model of Variances Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Standard quantity is the quantity allowed for the actual good output. Prof. W. Bentz A&MIS 212 5 A General Model of Variances Actual Quantity Actual Quantity Standard Quantity × × × actual price standard price standard price Price Variance Quantity Variance AQP(ap - sp) sp(AQU - SQ) AQP = Actual Quantity sp = Standard Price ap = Actual Price SQ = Standard Quantity Prof. W. Bentz A&MIS 212 6 Material Variances Example Zippy Hanson Inc. has the following direct material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week 1,700 pounds of material were purchased for $3.90 per pound, at total cost of $6,630, and used to make 1,000 Zippies. Prof. W. Bentz A&MIS 212 7 Material Price Variance Based on purchases: AQP(ap - sp) = 1,700 lbs. ($3.90 - $4.00) = - $170 Favorable Based on usage: AQU(ap - sp) = 1,700 lbs. ($3.90 - $4.00) = - $170 Favorable Prof. W. Bentz A&MIS 212 8 Material Quantity Variance Standard quantity = output sq per unit = 1,000 units 1.5 lbs./unit = 1,500 lbs. Quantity variance = (AQ – SQ) sp = (1,700 -1,500 lbs.) $4 = $800 Unfavorable Prof. W. Bentz A&MIS 212 9 Material Variances Summary Zippy Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 1,700 lbs. 1,700 lbs. 1,500 lbs. × × × $3.90 per lb. $4.00 per lb. $4.00 per lb. = $6,630 = $ 6,800 = $6,000 Price variance Quantity variance $170 favorable $800 unfavorable Prof. W. Bentz A&MIS 212 10 Material Variances The price variance is Hanson purchased and computed on the entire used 1,700 pounds. quantity purchased. How are the variances computed if the amount The quantity variance is purchased differs from computed only on the the amount used? quantity used. Prof. W. Bentz A&MIS 212 11 Material Variances Continued Zippy Hanson Inc. has the following material standard to manufacture one Zippy: 1.5 pounds per Zippy at $4.00 per pound Last week 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700 pounds were used to make 1,000 Zippies. Compute the price variance. Prof. W. Bentz A&MIS 212 12 Material Variances Continued Actual Quantity Actual Quantity Purchased Purchased Zippy × × Actual Price Standard Price 2,800 lbs. 2,800 lbs. × × $3.90 per lb. $4.00 per lb. = $10,920 = $11,200 Price variance increases Price variance because quantity $280 favorable purchased increases. Prof. W. Bentz A&MIS 212 13 Material Variances Continued Actual Quantity Zippy Used Standard Quantity × × Standard Price Standard Price 1,700 lbs. 1,500 lbs. × × $4.00 per lb. $4.00 per lb. = $6,800 = $6,000 Quantity variance is unchanged because actual and standard Quantity variance quantities are unchanged. $800 unfavorable Prof. W. Bentz A&MIS 212 14 Labor Variances Example Zippy Hanson Inc. has the following direct labor standard to manufacture one Zippy: 1.5 standard hours per finished Zippy at $6.00 per direct labor hour Last week 1,550 direct labor hours were worked at an average cost of $6.20 per hour, for a total labor cost of $9,610, to make 1,000 Zippies. Prof. W. Bentz A&MIS 212 15 Labor Rate Variance Zippy Based on labor usage: AQ (ar - sr) = 1,550 hrs.($6.20 - $6.00) = $310 Unfavorable Prof. W. Bentz A&MIS 212 16 Labor Quantity Variance Standard quantity = output sq per unit = 1,000 units 1.5 hrs./unit = 1,500 hrs. Quantity variance = (AQ – SQ) sp = (1,550 -1,500 hrs.) $6 = $300 Unfavorable Zippy Prof. W. Bentz A&MIS 212 17 Labor Variances Summary Zippy Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 1,550 hours 1,550 hours 1,500 hours × × × $6.20 per hour $6.00 per hour $6.00 per hour = $9,610 = $9,300 = $9,000 Rate variance Efficiency variance $310 unfavorable $300 unfavorable Prof. W. Bentz A&MIS 212 18 Labor Efficiency Variance – A Closer Look Poorly Poor trained quality workers materials Unfavorable Efficiency Variance Poor Poorly supervision maintained of workers equipment Prof. W. Bentz A&MIS 212 19 Variable Overhead Variances (VOH) Example Zippy Hanson Inc. has the following variable manufacturing overhead standard to manufacture one Zippy 1.5 standard hours per Zippy at $3.00 per direct labor hour Last week 1,550 hours were worked to make 1,000 Zippies, and $5,115 was spent for variable manufacturing overhead. Prof. W. Bentz A&MIS 212 20 VOH Spending Variance Zippy Based on labor usage: AQ (ar - sr) = 1,550 hrs. ($3.30 - $3.00) = $465 Unfavorable Prof. W. Bentz A&MIS 212 21 Variable Efficiency Variance Standard quantity = output sq per unit = 1,000 units 1.5 hrs./unit = 1,500 hrs. Efficiency variance = (AQ – SQ) sp = (1,550 -1,500 hrs.) $3 = $150 Unfavorable Zippy Prof. W. Bentz A&MIS 212 22 Variable Manufacturing Overhead Variances Zippy Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate 1,550 hours 1,550 hours 1,500 hours × × × $3.30 per hour $3.00 per hour $3.00 per hour = $5,115 = $4,650 = $4,500 Spending variance Efficiency variance $465 unfavorable $150 unfavorable Prof. W. Bentz A&MIS 212 23 Fixed Manufacturing Overhead Suppose budgeted fixed overhead associated with the production of Zippys is $9,000 and the budgeted labor hours at standard total 1,800 hours per period. The standard fixed overhead cost per unit is determined as follows: POR = $9,000/1,800 standard hours (DQ) = $5 per standard labor hour Prof. W. Bentz A&MIS 212 24 Unit FOH Standard The standard fixed overhead cost per unit is computed as = sq POR = 1.5 hours $5 per standard hour = $7.50 per complete unit Prof. W. Bentz A&MIS 212 25 Fixed Overhead Variances Assume the fixed overhead cost incurred (actual) was $9,350. Fixed overhead budget variance (BV) = Actual – Budgeted fixed overhead = $9,350 - $9,000 = $350, Unfavorable Prof. W. Bentz A&MIS 212 26 Fixed Overhead Variances Fixed overhead volume variance (VV) = Budgeted FOH – Applied FOH = $9,000 – 1,000 units @ $7.50 = $9,000 - $7,500 = $1,500, Unfavorable Prof. W. Bentz A&MIS 212 27 Volume Variance Check What was the production level used to find the denominator quantity (DQ)? 1,800 standard hours/1.5 hours per unit = 1,200 units Volume variance in unit = 1,000 – 1,200 U Volume variance in $ = 200 units @ $7.50 = $1,500, Unfavorable Prof. W. Bentz A&MIS 212 28 Per Unit Standard Cost Zippy Direct material (1.5 lbs. @ $5) $ 7.50 Direct labor (1.5 hrs. @ $6) 9.00 Variable overhead (1.5 hrs. @ $3) 4.50 Fixed overhead (1.5 hrs. @ $5) 7.50 Total standard cost per unit $28.50 Prof. W. Bentz A&MIS 212 29 Chapter 12 Topics Segment margin Report format Omission of costs Treatment of traceable costs Treatment of common costs Telescoping of segments Prof. W. Bentz A&MIS 212 30 E12-2 Parts 1 & 2 Raner, Harris & Chan Income Statement For the Year Ending December 31, 2001 Total Company Chicago Minneapolis Sales $ 500,000 100.0% $ 200,000 100.0% $ 300,000 100.0% Variable expenses 240,000 48.0% 60,000 30.0% 180,000 60.0% Contribution margin $ 260,000 52.0% $ 140,000 70.0% $ 120,000 40.0% Traceable fixed costs 126,000 25.2% 78,000 39.0% 48,000 16.0% Office segment margin $ 134,000 26.8% $ 62,000 31.0% $ 72,000 24.0% Common expenses 63,000 12.6% Net income $ 71,000 14.2% Prof. W. Bentz A&MIS 212 31 E12-2 E12-2 Raner, Harris & Chan Income Statement For the Year Ending December 31, 2001 Minneapolis Medical Dental Sales $ 300,000 100.0% $ 200,000 100.0% $ 100,000 100.0% Variable expenses 180,000 60.0% 128,000 64.0% 52,000 52.0% Contribution margin $ 120,000 40.0% $ 72,000 36.0% $ 48,000 48.0% Traceable fixed costs 33,000 11.0% 12,000 6.0% 21,000 21.0% Office segment margin $ 87,000 29.0% $ 60,000 30.0% $ 27,000 27.0% Common expenses 15,000 5.0% Net income $ 72,000 24.0% Prof. W. Bentz A&MIS 212 32 Chapter 12 Topics Return on investment ROI = Net income from operations Average Operating Assets ROI = Margin Turnover ROI = NIO/Sales Sales/Avg. Op. Assets Prof. W. Bentz A&MIS 212 33 Chapter 12 Topics Residual income RI = NIO – (Cost of Capital Average Operating Assets Instead of the cost of capital, a problem might refer to the rate of return required by management, or the minimum rate of return expected Prof. W. Bentz A&MIS 212 34 Example Sales $25,000,000 Net operating income $ 3,000,000 Average operating assets $10,000,000 Prof. W. Bentz A&MIS 212 35 Example ROI = $3,000,000/$10,000,000 = 30% Or Margin = $3M/$25M = 12% Turnover = $25M/$10M = 2.5 ROI = 12% 2.5 = 30% Prof. W. Bentz A&MIS 212 36 Example Residual income = $3M – 20% $10M = $3M - $2M = $1M Prof. W. Bentz A&MIS 212 37 Points Regarding ROI & RI Both start with net income from operations (aka, operating income) Both utilize average operating assets as their measures of investment Both would exclude non-operating items from consideration because the purpose is to monitor operations. Prof. W. Bentz A&MIS 212 38 Other Comments The discussion of ROI in chapter 12 is in the context or evaluations the accounting return on investment earned by an entity (division or investment center), not a project being evaluated. In chapters 13, 14, and 15, we sometimes talk about the incremental ROI of a project, which is somewhat different, yet similar. Prof. W. Bentz A&MIS 212 39 Overview of Ch. 13 In chapter 13, we consider the use of accounting information to analyze the impact of decisions on the profitability of an organization. In general, profitability is a function of the income and cash flow generated by a business. Specific projects or options about which a decision must be made are the subject of this chapter. Prof. W. Bentz A&MIS 212 40 Chapter 13 - Assumptions The approach to decisions outlined in chapter 13 is based on some key assumptions ◈ The incremental investment is too small to affect the decision under consideration ◈ Revenues, variable costs and fixed costs can be adequately modeled with linear models. Prof. W. Bentz A&MIS 212 41 Chapter 13 - Assumptions ◈ Total fixed costs will not change unless a problem or case specifies otherwise. ◈ As in chapter 6, any changes in per- unit prices or variable costs will be made explicit. Otherwise, assume no changes in the per-unit amounts Prof. W. Bentz A&MIS 212 42 Maximizing Income Given the above assumptions, one can focus on the impact of decision options on the income from operations and ignore changes in investment. Also, since the incremental investment is small, we can ignore the time value of money (chapter 14). Prof. W. Bentz A&MIS 212 43 Decisions Mentioned in Ch. 13 Replace equipment (or not) Adding or dropping product lines Make or buy component parts Accept or reject special order Utilizing constrained resources Sell or process further Prof. W. Bentz A&MIS 212 44 Incremental Perspective The first four categories of decisions mentioned above can be approached by looking at changes in contribution margin less any change in fixed costs incurred to determine the impact on income from operations. If you are not told of any specific change in total fixed cost, then assume that it is indeed fixed. Prof. W. Bentz A&MIS 212 45 Resource Environments Unconstrained – If there are no important constraints, then we will evaluate the effects of the decision options on contribution margin or income from operations. If fixed costs do not change, then we can focus on the effects on contribution margin. If fixed costs do change, then evaluate the effects on income from operations. Prof. W. Bentz A&MIS 212 46 Resource Environments Single constraint – If there is a single binding constraint, we must determine the contribution margin per unit of the constrained resource. Then we use this information to determine how best to use the constrained resource to maximize contribution margin and income from operations. Prof. W. Bentz A&MIS 212 47 Example of a Single Constraint Product Unit Information X Y Z Selling price $ 40 $ 30 $ 35 Variable cost 24 16 20 Contribution margin $ 16 $ 14 $ 15 Capacity (labor hours) 60,000 Maximum demand for X (units) 10,000 Maximum demand for Y (units) 8,000 Maximum demand for Z (units) 9,000 Prof. W. Bentz A&MIS 212 48 Unconstrained Production Sales With No Constraint on Production Product Unit cm Units CM X $ 16.00 10,000 $ 160,000 Y $ 14.00 8,000 112,000 Z $ 15.00 9,000 135,000 Total $ 15.07 27,000 $ 407,000 Production capacity unconstrained Prof. W. Bentz A&MIS 212 49 Constrained Labor Case Product Unit Information X Y Z Selling price $ 40 $ 30 $ 35 Variable cost 24 16 20 Contribution margin $ 16 $ 14 $ 15 Direct labor hours 4 2 3 Contribution margin per labor hour $ 4 $ 7 $ 5 Prof. W. Bentz A&MIS 212 50 Constrained Labor Case Sales With Constrained* Labor Hours Product Labor Hrs. Units Hrs. Req. X ($4**) 4.00 4,250 17,000 Y ($7) 2.00 8,000 16,000 Z ($5) 3.00 9,000 27,000 Total 2.82 21,250 60,000 *Constrained to 60,000 labor hours **cm per labor hour Prof. W. Bentz A&MIS 212 51 Constrained Labor Case Sales With Constraint on Direct Labor Product cm/hour Units CM X $ 16.00 4,250 $ 68,000 Y $ 14.00 8,000 112,000 Z $ 15.00 9,000 135,000 Total $ 14.82 21,250 $ 315,000 Constrained to 60,000 direct labor hours Prof. W. Bentz A&MIS 212 52 Constrained Machine Hours Product Unit Information X Y Z Selling price $ 40 $ 30 $ 35 Variable cost 24 16 20 Contribution margin $ 16 $ 14 $ 15 Machine hours 5 7 4 Contribution margin per machine hour $ 3 $ 2 $ 4 Prof. W. Bentz A&MIS 212 53 Constrained Machine Hours Sales With Constrained* Machine Hours Product Mach. Hrs. Units Hrs. Req. X ($3**) 5.00 10,000 50,000 Y ($2) 7.00 2,000 14,000 Z ($4) 4.00 9,000 36,000 Total 4.76 21,000 100,000 *Constrained to 100,000 machine hours **cm per machine hour Prof. W. Bentz A&MIS 212 54 CM - Constrained Mach. Hrs. Sales With Constrained* Machine Hours Product Unit cm Units CM X $ 16.00 10,000 $ 160,000 Y $ 14.00 2,000 28,000 Z $ 15.00 9,000 135,000 Total $ 15.38 21,000 $ 323,000 *Constrained to 100,000 machine hours Prof. W. Bentz A&MIS 212 55 Recapitulation Recap: CM Unconstained case $ 407,000 Constrained labor case $ 315,000 Constrained machine hours $ 323,000 Prof. W. Bentz A&MIS 212 56 Resource Environments Multiple constraints – In the case of multiple constraints in a complex environment, we would maximize an objective function subject to a set of constraints (in Mgt. Sci. 331 & A&MIS 525). Prof. W. Bentz A&MIS 212 57 Sell or Process Further A B C Sales value at split-off $ 120 $ 150 $ 60 Sales value after further processing 160 240 90 Allocated joint costs 80 100 40 Separable cost of processing 50 60 10 Pp. 636-9 of text Prof. W. Bentz A&MIS 212 58 Sell or Process Further Analysis of Sell or Process Further A B C Incremetal revenue: Sales value after further processing $ 160 $ 240 $ 90 Sales value at split-off point 120 150 60 Incremental revenue $ 40 $ 90 $ 30 Cost of further processing 50 60 10 Incremental operating income $ (10) $ 30 $ 20 Pp. 636-9 of text Prof. W. Bentz A&MIS 212 59 Introduction to Accounting Capital Budgeting Prof. W. Bentz A&MIS 212 60 Objective To initiate and maintain projects and activities that earn an adequate rate of return on the required investment. To be adequate, the returns must be consistent with investor expectations, management plans, and business opportunities. Prof. W. Bentz A&MIS 212 61 Capital Budgeting Capital budgeting concerns the analysis and evaluation of projects that require investment in working capital or property, plant & equipment. These tend to be large projects that involve significant cash inflows and outflows over several fiscal years. However, the methods covered are applicable to investment decisions made by individuals as well as organizations. Prof. W. Bentz A&MIS 212 62 Internal rate of return The internal rate of return (IRR) is that interest return, positive or negative, that equates the present value of the investment with the present value of the cash inflows. In cases where there are multiple investments over time, it is that rate that equates the present value of the cash inflows with the present value of the cash outflows. Prof. W. Bentz A&MIS 212 63 Internal rate of return Thus, it as the discounted rate of return for which the net present value is zero. Prof. W. Bentz A&MIS 212 64 Internal rate of return Symbolically, PV = iN=0CFi (1+r)-i To find the internal rate of return, find that value of r such that 0.0 = i=0CFi (1+r)-i Prof. W. Bentz A&MIS 212 65 Internal Rate of Return (IRR) Alternatively, one can write out the terms of the above expression as follows: 0 = CF0 + CF1(1+r)-I + CF2(1+r)-2 +… + CFN(1+r)-N Again, the objective is to find a rate r such the above expression is satisfied. Prof. W. Bentz A&MIS 212 66 Internal rate of return Next we illustrate use of the annuity table to find IRR when the cash flows are uniform from one period to the next Prof. W. Bentz A&MIS 212 67 Interpolation Example (p. 676) Investment required $6,000 Annual cost savings $1,500 Life of project 15 years Prof. W. Bentz A&MIS 212 68 Table method (equal cash flow) PV = CF [1 – (1 + r)-N] / r $6,000 = $1,500 PVOA (10 periods, r %) PVOA (10, r %) = $6,000 = 4.000 $1,500 Prof. W. Bentz A&MIS 212 69 Factor Interpolation 20% factor (table) 4.192 4.192 Project factor (computed) 4.000 22% factor (table) 3.923 Difference 0.192 0.269 Prof. W. Bentz A&MIS 212 70 For example one Investment of $6,000 and annual cash flows of $1,500 for 10 years: 0.0 = - $6,000 + $1,500(1+ r)-1 + $1,500(1+ r)-2 + + $1,500(1+ r)-10 IRR (r) = 21.406% (using Excel worksheet) Prof. W. Bentz A&MIS 212 71 IRR Interpolation IRR = 20% + (0.192 / 0.269) (2%) IRR = 20% + 0.7137 (2%) IRR = 20% + 1.4247% IRR = 21.4247% Note that the true IRR was 21.406% Prof. W. Bentz A&MIS 212 72 Example 2 PV = CF [1 – (1 + r)-N] / r $10,000 = $2,432.50 [1 – (1 + r)-N] / r $10,000 = $2,432.50 PVOA (6 years, r %) PVOA (6 years, r %) = $10,000.00 $ 2,432.50 = 4.111 Prof. W. Bentz A&MIS 212 73 Example 2 From Exhibit 14C-4, we see that in row 6 (6 periods) we find the PVOA factor 4.111 in the column 12%. What luck! The internal rate of return on this project is exactly 12% per year. Prof. W. Bentz A&MIS 212 74 Example 3 Investment is $10,000 Annual cash flows are $3,000 per year for six years 0.0 = -$10,000 + $3,000(1+ r)-1 + $3,000(1+ r)-2 + + $3,000(1+ r)-6 IRR (r) = 19.905% (using Excel worksheet) Prof. W. Bentz A&MIS 212 75 Example 3 PV = CF [1 – (1 + r)-N] / r $10,000 = $3,000 [1 – (1 + r)-N] / r $10,000 = $3,000 PVOA (6 years, r %) PVOA (6 years, r %) = $10,000/$ 3,000 = 3.333 Prof. W. Bentz A&MIS 212 76 Example 3 From Exhibit 14C-4, we see that in row 6 (6 periods) we find the PVOA factor 3.333 is between the columns for 18 and 20%. What rotten luck! The internal rate of return on this project has to be estimated by interpolation! Prof. W. Bentz A&MIS 212 77 Factor Interpolation 18% factor (table) 3.498 3.498 Project factor (computed) 3.333 20% factor (table) 3.326 Difference 0.165 0.172 Prof. W. Bentz A&MIS 212 78 IRR Interpolation IRR = 18% + (0.165 / 0.172) (2%) IRR = 18% + 0.9593 (2%) IRR = 18% + 1.9186% IRR = 19.9186% Notice that this is very close to the true IRR of 19.905% Prof. W. Bentz A&MIS 212 79 IRR Summary The internal rate of return is a method that recognizes the time-value of money through determining the interest return earned by investments. If cash flows are constant from period to period, we can use the annuity table to approximate the IRR. Prof. W. Bentz A&MIS 212 80 IRR Summary If the cash flows vary from period to period, the best way to determine an IRR is to use a financial calculator or a computer program such as Excel to compute an exact rate. Prof. W. Bentz A&MIS 212 81 Project ROI Project ROI (Simple rate of return) = Incremental income from operations Incremental investment Incremental revenue –incremental expenses Incremental investment OR ΔROI = Incremental IO Incremental investment Prof. W. Bentz A&MIS 212 82 Payback period Payback period is the number of periods it takes to recover the cash investment in a project without regard to any income on that investment. Payback period = Project investment Annual net cash inflow Prof. W. Bentz A&MIS 212 83 Payback for Example 3 Above Payback = $10,000/$3,000 = 3.33 years or 3 years, 4 months Prof. W. Bentz A&MIS 212 84 Payback for Example 4 Unrecovered Period Investment Cash inflow Investment 1 $10,000 $2,000 $8,000 2 $4,000 $4,000 3 $6,000 Prof. W. Bentz A&MIS 212 85 Payback: Uneven Cash Flows Payback = 2 + (4,000 / 6,000) = 2 2/3 years or 2 years, 8 mo. Prof. W. Bentz A&MIS 212 86 Assumptions for Chapter 14 When working with discounted cash flow, assume cash inflows come at period end. (p. 672) Assume all cash flows generated by an investment are immediately reinvested at the project discount rate. Prof. W. Bentz A&MIS 212 87 Discount rate for NPV Cost of capital Target rate of return set by financial managers for this purpose The opportunity cost of capital Prof. W. Bentz A&MIS 212 88 Chapter 15 Chapter 15 brings the issue of taxes into our study of capital budgeting. Prof. W. Bentz A&MIS 212 89 Taxable Events The following events affect income taxes and should be analyzed on an after- tax basis on the exam for capital budgeting questions. 1. Revenue from operations 2. Operating expenses (other than depreciation) 3. Income tax savings due to the reduction in income for depreciation Prof. W. Bentz A&MIS 212 90 Taxable Events 4. Disposal of an asset for gain or loss 5. Disposal of a fully-depreciated asset (tax methods) for its salvage value 6. Special expenses usually described as repairs, overhaul, or renovation, which represent tax-deductible items 7. Dividend income, interest income, and interest expense Prof. W. Bentz A&MIS 212 91 Non-taxable Events The following events do not affect income taxes when they occur and should be analyzed on a pre-tax basis on the exam for capital budgeting purposes. 1. Deposits made for possible damages or the return of equipment if the deposits are returnable. 2. Increases and decreases in working capital Prof. W. Bentz A&MIS 212 92 Non-taxable Events 3. Purchase of an operating asset or an investment 4. Borrowing money (taking out a loan) 5. Repaying the principal (not the interest) on a loan 6. Payment of dividends by a corporation Prof. W. Bentz A&MIS 212 93