Assignment
Question 1
If someone told you that the marginal and average tax rates both increase each time taxable income increases, would you agree? If you disagree, what is the reason?
I agree.
I disagree because marginal tax rates increase and decrease as taxable income increases; average tax rate increases consistently as taxable income increases.
I disagree because average tax rates increase and decrease as taxable income increases; marginal tax rate increases consistently as taxable income increases.
I disagree because both tax rates increase and decrease as taxable income increases.
Question 2
Describe how revenue is recognized as it pertains to the realization principle.
Revenue is recorded on the books at the time of the transaction.
Revenue is recorded on the books at the time of the transaction for long-term liability and when cash is received for short-term liability.
Revenue is recorded on the books when the cash is received
Revenue is recorded on the books at the time of the transaction for short-term liability and when cash is received for long term-liability.
Question 3
You and Bob are enrolled together in a course on financial management. You missed the class last Friday, and Bob copied his lecture notes for you to study. Unfortunately, after reading the book, you believe the following statements in Bob's notes are incorrect:
A - "The amount money needed to borrow and invest in the purchase of land for expansion is a function of working capital management."
B - "The financial manager acts in the best interest of management."
C - "The general partners in a partnership are the only type of business owners that can be sued for their personal property to resolve the business' debt."
D - "The main purpose of financial management is to increase revenue annually by a percentage set by the Board of Directors."
E - "Management and owners generally agree on investment decisions because both are acting in the best interest of the company."
F - "All of the cash generated by a company's operations is either re-invested in assets or used to pay off debt."
What changes should Bob make to Statement B?
The financial manager acts in the best interest of the employees.
None; Bob is correct.
The financial manager acts in the best interest of shareholders.
The financial manager acts in the best interest of the consumer.
Question 4
You and Bob are enrolled together in a course on financial management. You missed the class last Friday, and Bob copied his lecture notes for you to study. Unfortunately, after reading the book, you believe the following statements in Bob's notes are incorrect:
A - "The amount money needed to borrow and invest in the purchase of land for expansion is a function of working capital management."
B - "The financial manager acts in the best interest of management."
C - "The general partners in a partnership are the only type of business owners that can be sued for their personal property to resolve the business' debt."
D - "The main purpose of financial management is to increase revenue annually by a percentage set by the Board of Directors."
E - "Management and owners generally agree on investment decisions because both are acting in the best interest of the company."
F - "All of the cash generated by a company's operations is either re-invested in assets or used to pay off debt."
What changes should Bob make to Statement E?
A common goal of owners is to show that they have the resources to buy smaller companies; this type of investment does not benefit management and is a source of disagreement.
Owners are more concerned with job loss that results from an unsuccessful investment, and this might cause debate over investments.
Management and owners might disagree because owners often seek out a less expensive investment.
Management and owners might disagree on investment decisions because management is more concerned with long term effects.
Question 5
You and Bob are enrolled together in a course on financial management. You missed the class last Friday, and Bob copied his lecture notes for you to study. Unfortunately, after reading the book, you believe the following statements in Bob's notes are incorrect:
A - "The amount money needed to borrow and invest in the purchase of land for expansion is a function of working capital management."
B - "The financial manager acts in the best interest of management."
C - "The general partners in a partnership are the only type of business owners that can be sued for their personal property to resolve the business' debt."
D - "The main purpose of financial management is to increase revenue annually by a percentage set by the Board of Directors."
E - "Management and owners generally agree on investment decisions because both are acting in the best interest of the company."
F - "All of the cash generated by a company's operations is either re-invested in assets or used to pay off debt."
What changes should Bob make to Statement C?
All partners in a partnership have unlimited liability.
The owner of a sole proprietorship also has unlimited liability.
The president and vice president of a corporation also have unlimited liability.
All partners in a partnership have limited liability.
Question 6
If you had to decide-96;whether or not to lend money to a company, would you use the market value of its assets or the book value? Why?
Either; they are usually the same.
Book value; it tell you how much money they spent on assets in the past.
Market value; it tells you how much the company could sell the assets for if it has to re-pay the debt.
Market value; it is the only method consistent with GAAP.
Question 7
As you analyze a company's operating cash flow, what is most important to note?
Whether or not it consistently pays out dividends to shareholders.
Whether or not it is accurately calculating and recognizing depreciation.
Whether or not it is correctly re-investing money into its fixed assets.
Whether or not it can finance its daily operations without going further into debt.
Question 8
Bob Lawson is the president of his company; his CFO is Mark Ziegler. Like many entrepreneurs, Bob is more concerned about the big picture and leaves the day-to-day accounting details up to Mark. Bob reviews the financial statements regularly; however, Mark would like to help him understand how to make better use of the company's financial statements to gauge the changes in his business and plan for the future. Even though Mark generates all statements in terms of dollars and percents (common-size statements), Bob ignores the common-size statements. The two have agreed to meet next week.
Mark plans to begin his coaching with the following topics:
• Making comparisons using standardized financial statements
• Calculating and understanding performance ratios
• Determining the company's profitability and growth
• Drawbacks associated with financial statement comparisons
If Mark wanted to help Bob improve the company's ability to grow, how would you summarize the effect of the retention ratio vs. the dividend payout ratio on that goal?
There is no relationship between these ratios and the firm's ability to grow.
All else being equal, a higher retention ratio will hurt the company's ability to sustain growth through internal financing.
All else being equal, a higher dividend payout ratio will help the company's ability to sustain growth through internal financing.
All else being equal, a higher retention ratio will help the company's ability to sustain growth through internal financing.
Question 9
Bob Lawson is the president of his company; his CFO is Mark Ziegler. Like many entrepreneurs, Bob is more concerned about the big picture and leaves the day-to-day accounting details up to Mark. Bob reviews the financial statements regularly; however, Mark would like to help him understand how to make better use of the company's financial statements to gauge the changes in his business and plan for the future. Even though Mark generates all statements in terms of dollars and percents (common-size statements), Bob ignores the common-size statements. The two have agreed to meet next week.
Mark plans to begin his coaching with the following topics:
• Making comparisons using standardized financial statements
• Calculating and understanding performance ratios
• Determining the company's profitability and growth
• Drawbacks associated with financial statement comparisons
Now that Bob has a better understanding of financial ratios, he's anxious to begin comparing last year's performance with this year's performance. What-96;initial advice should Mark offer?
He should remind Bob that the company switched from a calendar year to a fiscal year beginning in June of this year.
In spite of what Bob believes, the sale of obsolete plant equipment last year will not affect the comparison.
Bob can compare results with similar companies, even if it is operating overseas, as long as those companies subscribe to GAAP.
Bob can compare results with similar companies that operate within the U.S.
Question 10
You and Bob are enrolled together in a course on financial management. You missed the class last Friday, and Bob copied his lecture notes for you to study. Unfortunately, after reading the book, you believe the following statements in Bob's notes are incorrect:
A - "The amount money needed to borrow and invest in the purchase of land for expansion is a function of working capital management."
B - "The financial manager acts in the best interest of management."
C - "The general partners in a partnership are the only type of business owners that can be sued for their personal property to resolve the business' debt."
D - "The main purpose of financial management is to increase revenue annually by a percentage set by the Board of Directors."
E - "Management and owners generally agree on investment decisions because both are acting in the best interest of the company."
F - "All of the cash generated by a company's operations is either re-invested in assets or used to pay off debt."
What changes should Bob make to Statement F?
Cash is always either re-invested or used to pay taxes or various stakeholders.
Cash is also used to pay taxes and stockholder dividends.
Cash is used only to pay off debt and pay stockholder dividends.
Cash is used only to pay off debt.