Write a summary of the document

Opinion 1

Common size balance sheets are another form of vertical analysis, used by investors and internal use of companies to get a better understanding of the financial standpoint of a company. Common size balance sheets breakdown each part of assets, liabilities, and equity. Common size balance sheets use whole numbers and percentages.

 Although the common sized balance sheets are more for internal purpose use from management. Under GAAP it is not required to report the common size balance sheets. Investors and companies can still use common sized balance sheets to get a better understanding of the strengths and weaknesses of a particular company, easily comparable against other companies. Managers can see where improvements need to be done, and where to focus their next goals for the future.

With Nike’s common size balance sheet over the past three years Nike has stayed consistent with only minor changes with their Assets and liabilities. Nike’s liabilities have had a steady decline from 2020 to 2022. This is mostly done in part by reducing their non-current liabilities steadily over the last three years. Nike’s assets look to increase steadily over time, while their liabilities are being lowered. Predicting that the company is heading in the right direction.

Opnion 2

Common-size balance sheets are another form of vertical analysis. While horizontal analysis shows how different financial statement items change over time, vertical analysis shows the relative size of each line item as a percentage of a total amount or base figure (Braun, et. al., 2021, p. 980). This format helps accountants and users of the financial data understand the impact each line item has on the financial statements, and its contribution to the underlying base figure. For common size balance sheets, the underlying base figure is typically total asset value. This enables an analysis of a firm's capital structure in comparison with its competition. 

In assessing The Swatch Group's common size balance sheet for the last three consecutive years, their overall assets and liabilities seem pretty stable. Liabilities comprises of about 15-16% of total assets across all three years, while equity comprises the remaining 84-85%. I would say this is a pretty decent spread, and is indicative of decent financial health. A very low amount of their balance consists of long-term and short-term debts at less than 1% versus total assets. This indicates that a very low portion of their assets are financed by debt. If we take these figures and use them to determine Swatch Group's debt-to-asset ratio, it would calculate at 0.01 for their 2021 fiscal year. This formula takes long-term and short-term debt divided by total assets.

Opinion 3

Appendix covers standard costing. "Many companies integrate standard costs directly into their general ledger accounting by recording inventory-related costs at standard cost rather than at actual cost" (Braun, et. al., 2021, p. 791). This method isolates price and quantity variances as soon as they occur. On a typical standard costing income statement, each type of variance has its own general ledger account. A debit balance, which is the same as an expense, is considered unfavorable- while a credit balance, which is the same as revenue, is considered favorable. In a standard costing system, the manufacturing costs flow through in the following order: raw materials - work in process - finished goods - cost od goods sold (Braun, et. al., 2021, p. 791). The main difference is that standard costs are recorded as opposed to actual costs. "At the end of the period, the variance accounts are closed to Cost of Goods Sold to correct for the fact that the standard costs recorded in the accounts were different from actual costs" (Braun, et. al., 2021, p. 791).

The Appendix goes on to discuss how journal entries are made using the standard costing method. The first entry is the recording of raw materials purchases. In this entry, Raw Materials Inventory is debited for the actual quantity purchased- recorded at the standard price. Accounts Payable is then credited for the actual quantity and actual price, because this amount is what is actually owed to the vendor. Finally, the difference is recorded in a Direct Materials Price Variance account. The use of the direct materials then needs to be recorded as they are used. Here, Work in Process Inventory is debited for the standard price, and Raw Materials Inventory is credited for the standard price. It is recorded this way because that is how the raw materials purchase was recorded in the initial journal entry. The remaining journal entries are recording direct labor costs, recording actual manufacturing overhead costs, allocating overhead, recording completion, recording sale and release of inventory, and closing manufacturing overhead.

The final section of the Chapter 11 Appendix discusses a standard costing income statement. At the end of the period, as stated previously, all cost variance accounts are closed to zero-out their balances. The reasons for this are: "(1) the financial statements prepared for external users never show variances (variances are only for internal management's use) and (2) the general ledger must be corrected for the fact that standard costs, rather than actual costs, were used to record manufacturing costs" (Braun, et. al., 2021, p. 795). If everything that was produced is sold by the end of the period, the cost variances will in the Cost of Goods Sold account.

Opinion 4

Standard cost is budget cost for each product, is the target for estimating actual costs in manufacturing process. I can tell for example in the company where I work the standard cost is different to actual cost. Sometimes companies are not able to charge the cost increase to their consumers as a price increase, in this case the profit margin will shrink with every additional penny.

Ideal standards are the standards base in the perfect or ideal conditions.

Perfection standards do not allow any poor-quality raw materials, waste in the production process, machine breakdown or other issues.

Practical or attainable standards are base in the current conditions taking in consideration normal amounts of waste and inefficiency.

Standard cost should be updated at least once a year and take in consideration real conditions, current cost of inputs and raw materials then process to estimate how much will be the charges in the manufacturing process, all these is for each product.

Direct materials Price Variance shows how much variance, higher or lower price is due depending on the quantity of materials purchased.

Direct material flexible budget variance will be used in Direct materials Price Variance (Actual cost) and Direct materials Quantity Variance (Flexible Budget)

Actual cost= Actual Quantity x Actual Price

Actual Quantity x Standard Price

Standard Quantity Allowed x Standard Price