Differential Analysis

Differential Analysis

  1. Are variable costs always relevant costs? Please discuss.

No, this is not the case. Variable cost can only be considered a relevant cost if there is a difference in the total between the alternatives being considered.

  1. Are variable costs and differential costs the same thing? Explain.

No, variable cost and differential cost is not the same. A variable cost is considered as the total amount directly proportional to the changes in activity level. A differential cost, on the other hand, measures the difference in cost that exists between two alternatives (Chari, Kehoe &McGrattan, 2014).In a case where the level of activity is similar for the two alternatives, a variable cost would not be affected and would not be relevant as well.

  1. What are outsourcing decisions?

Outsourcing decisions are the type of decisions considered as a ‘make or buy’since they involve deciding whether to manufacture (make) a product or buy the same from an outside source. It enables a business to reduce costs or benefit from the efficiencies of a supplier.

  1. What are the potential pitfalls or dangers from deciding to outsource?

One of the greatest dangers of outsourcing is the risk of losing sensitive data as well as the loss of confidentiality. Data loss has been a significant risk. Outsourcing may also result in loss of management control of the business functions. This means that you may no longer be at a position of controlling operations and deliverables of the services you outsource(Chari, Kehoe& McGrattan, 2014).At the same time, there may be an issue with quality mainly when the outsourcing provider lacks the appropriate processes or experience of functioning in an outsourcing relationship.

  1. What is a segment elimination decision?

This is the comparison between the revenues that would be lost through elimination process and the total costof operating the segment. Segments are examined regularly by executives and accountants to ensure that the income consistently exceed its expenses.

  1. Under what conditions should a company decide to drop a segment?

To decide whether to drop a segment or not, the company must consider the relevant benefits and costs. Business segments should be evaluated based on their traceable expenses and revenues.


  1. Discuss the three major sections on a statement of cash flows.

The three major sections on the statement of cash flows include operating, financing and investing activities.Operating activities entails the production, sales, anddelivery of the business products and collection of payments from customers. Investing activities are the sales or purchases of assets, loans received from customers or made to the suppliers, and the payment associated with acquisition and mergers(Doupnik &Perera, 2017).Financing activities, on the other hand, includes the flow of cash from the investors like shareholders and banks and the outflow of money like dividends to shareholders as the company makes a profit.

  1. Discuss the general rules that decide the transactions that should be included in each section of the statement of cash flow.

Cash flow statements should include changes in cash as well as cash equivalents. The US GAAP allows cash only or cash and cash equivalents. Under IAS 7, bank borrowings can be included in cash equivalents. Additionally, the US GAAP requires interest paid to be part of the operating or financial activities (Chan, 2014).

  1. Discuss how to do direct, and the indirect methods differ in their approach to computing the net cash provided by operating activities.

When the indirectmethod is used, the section of SCF will start with a company’s net income. The income would then be followed by the changes required to convert the accrual accounting net income to the cash flows from the operating activities. But when a direct method is used, the amount of net incomeis not the beginning point. Cash amount received and paid by the business is listed.

  1. What are cash equivalents, and why are they included with cash on a statement of cash?

These are investment securities which provide short-term investment with high credit quality, and most have a high liquid. They are included in a cash statement because they indicate the health of a company.

  1. Can a company have a negative cash flow from operations for the year on the Statement of Cash Flows but still have a net income on the income statement?  Explain.

Yes. This can result from depreciation expense that reduces the net income, but it does not involve the payment of cash in the present period. Accrual accounting may also be included. A company must report its expenditures as they are incurred and this consists in paying for the invoice.

  1. Discuss why transactions involving accounts payable are not considered to be financing activities?

These transactions are often associated with the daily operations of a companyinstead of a company’s financial activities. For instance, if an organization purchase office supplies on account, this expense is associated with an operating activity for running the business.

  1. How do the direct and the indirect methods differ in their approach to computing the net cash provided by operating activities?

In the indirect method, you begin from the net profit and include all the non-operating expenses while also deducting all the operating income to enable calculation of cash flow. But in the direct approach, you begin computing the net income by using operating activities only.

  1. A business executive once said, “Depreciation is one of our biggest sources of cash.” Do you agree that depreciation is a source of cash? Explain.

Depreciation entails an attempt to assign the initial cost of a productover its useful life. It generates actual cash to an organization by offering a tax cover from the projected income. While preparing an income return, a company can list depreciation as an expenseto decrease the amount of taxable income reported. If the depreciation is allowed in the calculation of taxable income, its inclusion would generallyreduce the tax amount that the company would be obliged to pay (Chan, 2014).

  1. Describe how the investing activities section is calculated. Identify what types of sources are considered investing activities.

Investing activities section is calculated by adding together the losses and gain from the previous investment, and the total is included in the cash flow statements. Sources that are considered as investing activities include the purchase of fixed assets, the sale of fixed assets, and lending of money, as well as the sale of investment instruments.

  1. Describe how the financing activities section is calculated. Identify what types of sources are considered financing activities.

Financial activities section is calculated by adding cash inflows from equity and issuing debt, adding all cash outflows from dividend payments, debt repayment, and stock purchases, and subtracting the cash outflows from inflows. This will give the cash flow from the period’s financing activities. Sources considered financing activities include issuance of stock or equity, borrowing of debt, and issuance of a bond.



Chan, J. L. (2014). Government accounting: an assessment of theory, purposes, and standards. Public Money & Management, 23(1), 13-20.

Chari, V. V., Kehoe, P. J., & McGrattan, E. R. (2017). Business cycle accounting. Econometrica, 75(3), 781-836.

Doupnik, T. S., & Perera, M. H. B. (2017). International accounting. New York: McGraw-Hill.

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