1. Sometimes lawyers work on a contingency basis. They collect a
percentage of their client?s settlement instead of receiving a fixed
fee. Why might clients prefer this arrangement? Would the arrangement
mitigate an agency problem?
2. Baker Construction is a small corporation owned and managed by Tom
Baker. The corporation has 21 employees, few creditors, and no
investor other than Tom Baker. Thus, like many small businesses, it
has no obligation to issue financial statements to creditors or
investors. Under these circumstances, is there any reason for this
corporation to maintain accounting records?
3. Fill in the blanks in the following statements:
a. A firm has a cash surplus when its ________exceeds its ________.
The surplus is normally invested in ________.
b. In developing the short-term financial plan, the financial manager
starts with a(n)________ budget for the next year. This budget shows
the ________generated or absorbed by the firm ?s operations and also
the minimum ________needed to support these operations. The financial
manager may also wish to invest in ________as a reserve for unexpected
cash requirements.
4. True or false? Explain.
a. Financial planning should attempt to minimize risk.
b. The primary aim of financial planning is to obtain better forecasts
of future cash cows and earnings.
c. Financial planning is necessary because financing and investment
decisions interact and should not be made independently.
d. Firms ?planning horizons rarely exceed 3 years.
e. Individual capital investment projects are not considered in a
financial plan unless they are very large.
f. Financial planning requires accurate and consistent forecasting.
g. Financial planning models should include as much detail as possible.
5. The major focus of accounting information is to facilitate decision-making.
a. As an investor in a company, what would be your primary objective?
b. As a manager of a company, what would be your primary objective?
c. Is the same accounting information likely to be equally useful to
you in these two different roles?
6. Internal accounting information is used primarily for internal
decision-making by an enterprise ?s management.
a. What are the three primary purposes of internal accounting information?
b. Which of these is the most general and which is the most specific?
C. Give several examples of the kinds of decisions that internal
accounting information supports.
7. Describe which professional organization(s)would be of greatest
value to you if your position involved each of the following
independent roles:
a. Accounting educator.
b. Management accountant.
c. Public accountant.
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8. As you drive down a deserted highway you are overcome with a sudden
desire for a hamburger. Fortunately, just ahead are two hamburger
outlets; one is owned by a national brand, the other appears to be
owned by ?Joe. ?Which outlet has the greater incentive to serve you
cat meat? Why?
9. What are the dangers and disadvantages of using a financial model? Discuss.
10. Corporate financial plans are often used as a basis for judging
subsequent performance. What can be learned from such comparisons?
What problems might arise and how might you cope with such problems?
11. If agency problems can be mitigated by tying the manager ?s
compensation to the fortunes of the firm, why don ?t firms compensate
managers exclusively with shares in the firm?
12. Why are mutual funds called financial intermediaries? Why does it
make sense for an individual to invest her savings in a mutual fund
rather than directly in financial markets?
13. Pollution Busters, Inc. is considering purchase of 10 additional
carbon sequesters for $100,000 apiece. The sequesters only last for 1
year until saturated. Then the carbon is sold to the government.
a. Suppose the government guarantees the price of carbon. At this
price, the payoff after 1 year is $115,000 for sure. How would you
determine the opportunity cost of capital for this investment?
b. Suppose instead that the sequestered carbon has to be sold on the
London Carbon Exchange. Carbon prices have been extremely volatile,
but Pollution Busters ?CFO learns that average rates of return from
investment on that exchange have been about 20 percent. She thinks
this is a reasonable forecast for the future. What is the opportunity
cost of capital in this case? Is purchase of additional sequesters a
worthwhile capital investment?
14. Securities traded in active financial markets are liquid assets.
Explain why liquidity is important to individual investors and to
mutual funds.
15. Which of the following would you expect to find in a correctly
prepared income statement?
a. Cash balance at the end of the period.
b. Revenues earned during the period.
c. Contributions by the owner during the period.
d. Expenses incurred during the period to earn revenues.
16. What information would you find in a statement of cash flows that
you would not be able to get from the other two primary financial
statements?
a. Cash provided by or used in financing activities.
b. Cash balance at the end of the period.
c. Total liabilities due to creditors at the end of the period.
d. Net income.
17. Which of the following statements relating to the role of
professional judgment in the financial reporting process is (are)
valid?
a. Different accountants may evaluate similar situations differently.
b. The determination of which items should be disclosed in notes to
financial statements requires professional judgment.
c. Once a complete list of generally accepted accounting principles is
prepared, judgment by accountants will no longer enter into the
financial reporting process.
d. The possibility exists that professional judgment later may prove
to have been incorrect.
18. A company has the following cash balances:
Company ?s ledger balance =$600,000
Bank ?s ledger balance =$625,000
Available balance =$550,000
a. Calculate the payment float and availability float.
b. Why does the company gain from the payment float?
c. Suppose the company adopts a policy of writing checks on a remote
bank. How is this likely to affect the three measures of cash
balance?
19. Sherman ?s Sherbet currently takes about 6 days to collect and
deposit checks from customers. A lock-box system could reduce this
time to 4 days. Collections average $15,000 daily. The interest rate
is .02 percent per day.
A By how much will the lock-box system reduce collection float?
b. What is the daily interest savings of the system?
c. Suppose the lock-box service is offered for a fixed monthly fee
instead of payment per check. What is the maximum monthly fee that
Sherman ?s should be willing to pay for this service? (Assume a 30-day
month.)
20. At the beginning of the year, the Office Equipment account of Gulf
Coast Airlines had a debit balance of $126,900. During the year, debit
entries of $23,400 and credit entries of $38,200 were posted to the
account. What was the balance of this account at the end of the
year?(Indicate debit or credit balance.)
21. What relationship exists between the position of an account on the
balance sheet and the rules for recording increases in that account?
22. What are interim financial statements? Do accounts that appear in
a company?s interim balance sheet require any special computations to
be reported correctly? Explain.
23. Wilderness Guide Services,Inc., performs adjusting entries every
month, but closes its accounts only at year-end. The company ?s
year-end adjusted trial balance dated December 31,2002,follows:
WILDERNESS GUIDE SERVICES,INC.
Adjusted Trial Balance
December 31,2002
Cash $12,200
Accounts receivable 31,000
Camping supplies 7,900
Unexpired insurance policies 2,400
Equipment 70,000
Accumulated depreciation: equipment $60,000
Notes payable (due 4/1/03) 18,000
Accounts payable 9,500
Capital stock 25,000
Retained earnings 15,000
Dividends 1,000
Guide revenue earned 102,000
Salary expense 87,500
Camping supply expense 1,200
Insurance expense 9,600
Depreciation expense: equipment 5,000
Interest expense 1,700
$229,500 $229,500
A. Prepare an income statement and statement of retained earnings for
the year ended December 31,2002. Also prepare the company ?s balance
sheet dated December 31,2002. (Hint: Unprofitable companies have no
income taxes expense.)
B. Does the company appear to be liquid? Defend your answer.
C. Has the company been profitable in the past? Explain.
Can this be answered by noon on Thursday 051905, Please :-( |
