Laiho Industries: Income Statement for Year Ending December 31, 2021 (thousands of dollars)
Sales: $446,650Cost of goods sold: $(357,320)Gross profit: $89,330Depreciation and amortization: $(49,460)EBITDA: $39,870Interest: $(8,579)EBT: $31,291Taxes (25%): $(7,823)Net income: $23,468Dividends (47.25%): $(11,083)Retained earnings: $12,385Laiho Industries: Statement of Stockholders' Equity. December 31, 2021 (thousands of dollars)
Common Stock: $10,000Retained earnings: $12,385Total stockholders' equity: $22,385Laiho Industries: Statement of Cash Flows for 2021 (thousands of dollars)
Operating cash flow
Net income: $23,468Add: Depreciation and amortization: $49,460Less: Increase in net operating working capital: $(5,880)Net operating cash flow: $67,048Investing cash flow
Purchase of net fixed assets: $(46,245)Free cash flow: $20,803Financing cash flow
Dividends paid: $(11,083)Net cash flow: $9,720c. Net operating working capital (NOWC)
NOWC 2020: $104,045 - $89,800 = $14,245NOWC 2021: $123,870 - $109,180 = $14,690d. Effect on corporate taxes paid
If Laiho Industries increases its dividend payout ratio, it will incur higher taxes on its profits due to the corporate tax rate of 25%. The increased dividend payments will result in higher tax expenses for the company.e. Effect on taxes paid by shareholders
If Laiho Industries increases its dividend payout ratio, shareholders will have to pay more taxes on the increased dividends they receive. Dividends are taxed as personal income.f. Economic value added (EVA)
EVA = NOPAT - WACC x CapitalEVA = $23,468 - 0.11 x $214,000EVA = $7,572g. Market value of equity
Market value of equity = Number of shares x Price per shareMarket value of equity = 10,000,000 x $22Market value of equity = $220,000,000Learn more about Income Statement
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To construct the income, calculate EBIT using the EBITDA percentage, subtract depreciation, interest, and taxes to obtain net income, and calculate dividends using the dividend payout ratio. Use the information from the balance sheets and income statement to construct the statement of stockholders' equity and statement of cash flows. Calculate net operating working capital (NOWC) and free cash flow (FCF) using relevant formulas. Increasing the dividend payout ratio would result in increased corporate taxes paid and taxes paid by shareholders. Use the after-tax cost of capital to calculate Economic Value Added (EVA).
Explanation:To construct Laiho Industries' 2021 income statement, we can use the provided information. First, we calculate EBIT by multiplying the sales revenue by the EBITDA percentage. Then, we subtract depreciation, interest, and taxes to determine the net income. Finally, we calculate dividends by multiplying the net income by the dividend payout ratio. The statement of stockholders' equity and statement of cash flows can be constructed using the information from the balance sheets and income statement.
Net Operating Working Capital (NOWC) can be calculated by subtracting current liabilities from current assets. Free cash flow (FCF) for 2021 can be calculated by subtracting capital expenditures and the change in net operating working capital from the net income.
If Laiho Industries increases its dividend payout ratio, it would lead to an increase in corporate taxes paid and taxes paid by the company's shareholders. The after-tax cost of capital can be used to calculate Economic Value Added (EVA). If the firm's stock price is given, the market value of equity can be calculated by multiplying the stock price by the number of shares outstanding.
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Marriott requires that trainees have adequate child care, transportation, and housing arrangements for its welfare to work program. These standards resulted from which type of analysis, as discussed in the text?
The standard that Marriott requires trainees to have sufficient childcare, transportation, and housing arrangements is an example of the Human Resource (HR) policies that support the work-life balance of employees.
As discussed in the text, Marriott and other companies can use a work-life program to aid them in achieving specific organizational goals. The program also helps employees to achieve their professional, personal, and family objectives.The analysis that resulted in the above HR policies is a 'Needs Analysis.' Marriott is a large company with a significant number of employees.
Marriott understands that some trainees might have a hard time adapting to their work environment, particularly if they are single mothers or have young children. Therefore, to address such issues, Marriott makes sure its employees and trainees have adequate child care, transportation, and housing arrangements to ensure a work-life balance.
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An investor wishes to purchase a retail building that generates $42,000 in NOI. The purchase price for the building is $500,000, and the investor can obtain a 75% loan at 8.5% amortized over 25 years in monthly payments.
A. What is the debt service?
B. What is the debt-coverage ratio?
a. The debt service for the loan is $3,690.15 per month.
b. The debt-coverage ratio is 1.14.
a.The debt service is the monthly payment required to repay the loan. To calculate it, we use the loan amount, interest rate, and loan term.
Loan Amount = Purchase Price * Loan Percentage
Loan Amount = $500,000 * 75% = $375,000
Monthly Payment = P * r * (1 + r)^n / ((1 + r)^n - 1)
Where P is the loan amount, r is the monthly interest rate, and n is the total number of payments.
Monthly Interest Rate = Annual Interest Rate / 12
Monthly Interest Rate = 8.5% / 12 = 0.7083%
Total Number of Payments = Loan Term in Years * 12
Total Number of Payments = 25 * 12 = 300
Monthly Payment = $375,000 * 0.007083 * (1 + 0.007083)^300 / ((1 + 0.007083)^300 - 1)
Monthly Payment ≈ $3,690.15
Therefore, the debt service for the loan is approximately $3,690.15 per month.
b. The debt-coverage ratio measures the ability of the property's net operating income (NOI) to cover the debt service.
Debt-Coverage Ratio = NOI / Debt Service
Debt-Coverage Ratio = $42,000 / $3,690.15
Debt-Coverage Ratio ≈ 1.14
Therefore, the debt-coverage ratio is approximately 1.14.
The debt service for the loan used to purchase the retail building is $3,690.15 per month. The debt-coverage ratio, which indicates the property's ability to cover the debt service, is approximately 1.14. These figures are important considerations for evaluating the financial feasibility and sustainability of the investment.
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Question 4 You are a new Operation Manager in a transportation company, who has responsibility to ensure the profitability and safety aspects of the container haulage operation. Currently, the accidents rate involving drivers during haulage operations is very high and affecting performance negatively. Provide FOUR (4) solutions to improve this scenario. (20 marks)
As the new Operation Manager in a transportation company, who has responsibility to ensure the profitability and safety aspects of the container haulage operation, the scenario of the high accident rates involving drivers during haulage operations.
Four solutions are as follows:1. Safety Training: Ensure that all drivers go through training that will equip them with safety measures and strategies. This can be done through setting up a training program for all drivers that emphasizes defensive driving techniques, safety protocols, and ways to prevent accidents.2. Monitoring of Drivers: Install GPS and telematics in trucks to monitor the speed, location, and performance of drivers.
This can motivate drivers to prioritize safety and reduce accidents rate.In conclusion, by implementing these solutions, the transportation company can improve driver safety, reduce accident rates, and boost profitability and performance.
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Hudson Corporation will pay a dividend of $2.66 per share next year. The company pledges to increase its dividend by 5 percent per year indefinitely. If you require a return of 10 percent on your investment, how much will you pay for the company's stock today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Stock price
You should pay $53.20 for the company's stock today in the given case of Hudson Corporation.
To determine the current stock price, we can use the dividend discount model (DDM) formula, which calculates the present value of all future dividends. The formula is as follows:
Stock Price = Dividend / (Required Return - Dividend Growth Rate)
In this case, the dividend next year is $2.66, and the dividend growth rate is 5 percent. The required return is 10 percent. Let's substitute these values into the formula:
Stock Price = $2.66 / (0.10 - 0.05)
= $2.66 / 0.05
= $53.20
Therefore, you should pay $53.20 for the company's stock today.
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Bunnell Corporation is a manufacturer that uses job-order costing. On January 1 , the company's inventory balances were as follows: The company applies overhead cost to jobs on the basis of direct labor-hours. For the current year, the company's predetermined overhead rate of $11.50 per direct labor-hour was based on a cost formula that estimated $460,000 of total manufacturing overhead for an estimated activity level of 40,000 direct labor-hours. The following transactions were recorded for the year: a. Raw materials were purchased on account, $618.000. b. Raw materials used in production, $569,400. All of of the raw materials were used as direct materials, c. The following costs were accrued for employee services: direct labor, $410,000; indirect labor, $150,000; selling and administrative salaries, $338,000. d. Incurred various selling and administrative expenses (e.g., advertising, sales travel costs, and finished goods warehousing). $382,000. e. Incurred various manufacturing overhead costs (e.g. depreciation, insurance, and utilities), $310,000. f. Manufacturing overhead cost was applied to production. The company actually worked 41,000 direct labor-hours on all Jobs during the year. 9. Jobs costing $1,372,600 to manufacture according to their job cost sheets were completed during the year. h. Jobs were sold on account to customers during the year for a total of $3,202,500. The jobs cost $1,382,600 to manufacture according to their job cost sheets. Required: 1. What is the journal entry to record raw materials used in production? (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Journal entry worksheet Record the raw materials used in production.
To record the raw materials used in production, you would make the following journal entry:
Raw Materials Inventory 569,400
Accounts Payable 569,400
This journal entry debits the Raw Materials Inventory account to record the raw materials used in production. The amount of $569,400 represents the cost of the raw materials used.
The journal entry also credits the Accounts Payable account to show that the company has an obligation to pay for the raw materials purchased on account.
This journal entry assumes that all of the raw materials purchased were used as direct materials in the production process. If any of the raw materials were classified as indirect materials, they would be recorded in a separate journal entry.
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What can cause transportation costs to begin to increase if a manufacturing firm adds too many distribution centers to its network? Assume demand stays constant regardless of the number of distribution centers. a) Less-than-truckload shipments make up an increasing proportion of outbound transportation mileage as more distribution centers are added. b) Customers are likely to increasingly demand higher levels of service. requiring an increase in expedited outbound less-than-truckload shipments. c) The distribution centers may no longer have the demand to support full truckload replenishment shipments from the firm's manufacturing plants, necessitating inbound less-than-truckload shipments. d) A smaller proportion of customers will receive truckload shipments directly from the firm's manufacturing locations as more distribution centers are added. Quesition 4 (3 points) Assume a manufacturer has six distribution centers in the United States, including distribution centers attached to its two manufacturing plants. Which of the following best explains how a manufacturer's total amount of inventory in its distribution network changes as it decreases the number of distribution centers that it has in its network? a) Total inventory decreases at a constant (i.e., linear) rate as more distribution centers are eliminated. b) Total inventory is uncorrelated with the number of distribution centers. c) Total inventory decreases at an increasing rate as more distribution centers are eliminated. d) Total inventory decreases at a decreasing rate as more distribution centers are eliminated.
Transportation costs can increase for manufacturing firms if more distribution centers are added to their network. There are several reasons that may lead to the increase in transportation costs. These include:Less-than-truckload shipments make up an increasing proportion of outbound transportation mileage as more distribution centers are added.
This can occur if a firm adds many small distribution centers, which might lead to frequent LTL shipments to each of these distribution centers. This is because there might not be enough products to fill a full truckload. This will, in turn, increase transportation costs.Customers are likely to increasingly demand higher levels of service, requiring an increase in expedited outbound less-than-truckload shipments.
A smaller proportion of customers will receive truckload shipments directly from the firm's manufacturing locations as more distribution centers are added. A manufacturing firm may have to add more distribution centers to reach new customers or service existing customers better. However, this may lead to a smaller proportion of customers receiving truckload shipments directly from the firm's manufacturing locations. This will increase transportation costs by requiring more expensive less-than-truckload shipments.Therefore, adding more distribution centers may lead to an increase in transportation costs for manufacturing firms.
Furthermore, the total inventory decreases at a decreasing rate as more distribution centers are eliminated. This is because if the firm decreases the number of distribution centers, it will increase the distance between the distribution centers, thereby reducing the cost of inventory. The cost of inventory will decrease,
but it will be at a decreasing rate, which means that the rate of decrease in the inventory cost will be slower as the firm decreases the number of distribution centers. Answer: D (Total inventory decreases at a decreasing rate as more distribution centers are eliminated).
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minz= s.t. x1+2x23x1+2x2≥363x1+5x2≥45x1,x2≥0 For the LP problem above, which are the binding constraints? 3x1+2x2≥363x1+5x2≥45x1≥0x2≥0
In Linear Programming (LP), a "binding constraint" is a constraint that is held with equality at its optimal solution.
Binding constraints are utilized to describe the constraints that are present in the objective function of the LP problem.Let us first solve the given problem:min z = x1 + 2x23x1 + 2x2 ≥ 36 ..... (1)3x1 + 5x2 ≥ 45 ..... (2)x1 ≥ 0, x2 ≥ 0 ....... (3).The LP problem has been formulated above.Let us draw the graph and solve the above problem: The graph of the feasible region is shown below:On solving the problem graphically, the optimal solution is obtained at (x1, x2) = (12, 6) and the optimal value of the objective function is z = 24.Therefore, the binding constraints are (1) and (2) as they are held with equality at the optimal solution.
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Which of the following statement is true?
A) The reradiation from the Earth to space mainly consists of longwave rays.
B) The reradiation from the Earth to space mainly consists of short rays.
C) Atmospheric water vapor can absorb shortwave energy from the Earth.
D) Atmospheric water vapor can absorb ultraviolet energy from the Earth.
E) A and C are true. F) B and D are true.
The correct option is E. A and C are true. Reradiation is a process by which a planet transfers the energy absorbed by it from the sun back to the space.
This reradiation takes place mainly in the form of longwave rays. Therefore, option A is the correct answer. The atmosphere contains gases and particles that have the capacity to absorb and scatter solar radiation.
Water vapor is the most important of the atmospheric gases in absorbing longwave radiation, and it absorbs more radiation at lower altitudes where the concentration of water vapor is higher. The atmosphere also contains aerosols, which can scatter and absorb solar radiation, and these effects can also have an effect on climate. Therefore, option C is also correct.
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Identify and explain how a small construction firm can organise an assessment centre to fill 8 positions of service engineers.
How is the company should design the assessment centre? This should include critical factors to be considered , what needs to be done before and after the assessment centre and what assessment activities will be included in the assessment centre.
.
Organizing an assessment centre is crucial to find the right candidate for the job. It helps the company to assess various competencies of candidates. Here is how a small construction firm can organize an assessment center to fill 8 positions of service engineers.
After the assessment centre, the company should provide feedback to all the candidates. It helps candidates to understand how well they performed and what areas they need to improve. The company should communicate with the successful candidates and make them an offer of employment.
These activities should assess the candidates' competencies, such as problem-solving, communication, teamwork, leadership, and attention to detail. The assessment activities could include interviews, group exercises, presentations, psychometric tests, and in-tray exercises. Overall, organizing an assessment centre requires planning, designing, implementing, and evaluating the process.
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Analyze Tesla using Michael Porter’s "Five Forces Framework".
Ideally be equipped with the following information:
• Sales and performance of competitors
• Any information on reasons behind customer churn
• Intelligence on why you have acquired or won certain clients
• Detail on what suppliers you use to provide the product/service
• An understanding of who your clients are and what is impacting them
Tesla is a world-renowned electric car company, founded in 2003 by billionaire entrepreneur Elon Musk. The company is headquartered in Palo Alto, California, and currently has over 70,000 employees worldwide.
To analyze Tesla using Michael Porter's "Five Forces Framework," we need to evaluate the following:
1. Threat of new entrants
Tesla has a first-mover advantage in the electric vehicle market, which makes it challenging for new companies to enter. The company has also invested heavily in research and development to improve its vehicles' range, battery technology, and charging infrastructure. Additionally, the company's branding and marketing efforts are top-notch, which gives it an edge over its competitors.
2. Threat of substitutes
The primary substitute for Tesla's electric vehicles is traditional gas-powered cars. However, as electric vehicles' popularity grows, more and more car manufacturers are entering the market, and the competition is becoming fierce. Tesla's ability to improve battery technology and offer competitive pricing is a significant factor that influences customer loyalty.
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FORUM DESCRIPTION Currently the labor participation rate is lower than usual. What factors could cause it to increase? To decrease?
The labor participation rate refers to the proportion of the working population within the working age range that is currently working or looking for work. In 2021, the labor participation rate is lower than it usually is, and this is because of the Covid-19 pandemic.
This pandemic led to many job losses, businesses shutting down, and fewer opportunities for people to get employed. However, several factors could cause an increase in the labor participation rate and a decrease in it.
Factors that could cause an increase in labor participation rate:
1. Increase in wages and benefits: One of the factors that could cause an increase in the labor participation rate is when wages and benefits are increased.
2. Increase in job opportunities: An increase in job opportunities is another factor that could cause an increase in the labor participation rate.
Factors that could cause a decrease in the labor participation rate:
1. Increase in the cost of living: An increase in the cost of living could cause a decrease in the labor participation rate.
2. Changes in social norms: Changes in social norms could cause a decrease in the labor participation rate.
An increase in wages and benefits is one of the things that attract people to the labor market. When there are more job opportunities available, people who previously gave up searching for jobs are motivated to start looking for work again.
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For a nominal annual rate of 8%, the effective continuous rate per year is equal to: Question 10 options:
8.329%
7.251%
8.243%
8.160%
The effective continuous rate per year for a nominal annual rate of 8% is approximately 8.329%.
The effective continuous rate per year can be calculated using the formula: Effective Continuous Rate = [tex]e^{(Nominal Rate)} - 1[/tex] where "e" represents the mathematical constant Euler's number, approximately equal to 2.71828.
Continuous compounding allows for the smallest possible time intervals between compounding periods, resulting in a higher effective rate compared to other compounding frequencies such as annually, semi-annually, or quarterly.
In this case, the nominal annual rate is 8%. Plugging this value into the formula, we have:
Effective Continuous Rate [tex]= e^{(0.08)} - 1[/tex] ≈ 0.08329
Converting this to a percentage, we get:
Effective Continuous Rate ≈ 8.329%
This means that if the interest is compounded continuously at a nominal annual rate of 8%, the investment will grow by approximately 8.329% per year.
Therefore, the effective continuous rate per year for a nominal annual rate of 8% is approximately 8.329%.
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Review Later Which Excel function or tool will you use to display the cells that are referred to by a formula in the selected cell? Trace Dependents Go To Special - Formulas Trace Precedents Show Formulas
To display the cells that are referred to by a formula in the selected cell in Excel, you can use the "Trace Precedents" tool. This tool allows you to visually see the cells that are used as inputs for the formula in the selected cell.
This feature allows you to visually track the cells that contribute to the formula calculation in the selected cell.
To use the "Trace Precedents" tool in Excel:
1. Select the cell containing the formula that you want to investigate.
2. Go to the "Formulas" tab in the Excel ribbon.
3. In the "Formula Auditing" group, click on the "Trace Precedents" button. It usually has a blue arrow pointing to the left.
4. Excel will draw arrows from the selected cell to the cells that are referenced by the formula.
5. You can further trace the precedents of the referenced cells by clicking the "Trace Precedents" button again or by pressing the "Ctrl + [" keyboard shortcut.
6. To remove the arrows, click on the "Remove Precedent Arrows" button in the "Formula Auditing" group or press the "Ctrl + Shift + [" keyboard shortcut.
By using the "Trace Precedents" tool, you can easily understand the flow of data and track the cells that contribute to the formula calculation in Excel.
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The Chem-Tex Chemical company is considering two additives for improving the dryweather stability of its low-cost acrylic paint. Additive A will have a first cost of $140,000 and an annual operating cost of $60,000. Additive B will have a first cost of $185,000 and an annal operating cost of $45,000. If the company uses a 4-year recovery period for paint products and a MARR of 15% per year, what is the incremental rate of return and which process should be selected? a. Incremental ROR=12.6%; Select A None of the above b. Incremental ROR=7.7%; Select A c. Incremental ROR =12.6%; Select B d. Incremental ROR=7.7%; Select B
Incremental ROR=12.6%; Select A is the incremental rate of return and which process should be selected. Thus, option (a) is correct.
The incremental rate of return is the difference between the present value of the cash inflows and the present value of the cash outflows, divided by the cash outflows.
IRR = (PV of cash inflows - PV of cash outflows) / Cash outflows
PV of cash outflows = $140,000 + $60,000 / (1 + 0.15) + $60,000 / [tex](1 + 0.15)^2[/tex] + $60,000 / [tex](1 + 0.15)^3[/tex] + $60,000 / [tex](1 + 0.15)^4[/tex] = $327,947.72
PV of cash inflows = $80,000 / (1 + 0.15) + $80,000 / [tex](1 + 0.15)^2[/tex] + $80,000 / [tex](1 + 0.15)^3[/tex] + $80,000 / [tex](1 + 0.15)^4[/tex] = $253,308.22
IRR for Additive A = ($253,308.22 - $327,947.72) / $140,000 = -0.186
PV of cash outflows = $185,000 + $45,000 / (1 + 0.15) + $45,000 / [tex](1 + 0.15)^2[/tex]+ $45,000 / [tex](1 + 0.15)^3[/tex]+ $45,000 / [tex](1 + 0.15)^4[/tex]= $415,617.91
PV of cash inflows = $100,000 / (1 + 0.15) + $100,000 / [tex](1 + 0.15)^2[/tex] + $100,000 / [tex](1 + 0.15)^3[/tex] + $100,000 / [tex](1 + 0.15)^4[/tex] = $362,339.08
IRR for Additive B = ($362,339.08 - $415,617.91) / $185,000
IRR for Additive B = -0.287
Therefore, option (a) is correct.
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Upon completion of this activity, you would have demonstrated the use of the Vroom and Yetton Model constructs in effective team building techniques. Assignment 3: The Vroom and Yetton’s Decision Making Model (DMM) describe the model, describe a practical application of contingency-based leadership, and provide the diagnostic tools for the decision-making process making sure to consider situational factors. Explain the difference between Autocratic, Consultative and Collaborative approach. In addition, apply this DMM to a project or process improvement (example: develop a climate survey for your organization) Vroom and Yetton Model Diagram
The Vroom and Yetton model is a leadership theory that focuses on decision-making processes. It was first introduced by Victor Vroom and Phillip Yetton in 1973. The model is a contingency-based approach to leadership that identifies the most effective decision-making style based on situational factors.
There are seven decision-making styles in the Vroom-Yetton model:
AI (Autocratic I),
AI (Autocratic II),
CI (Consultative I),
CII (Consultative II),
GII (Group II),
GI (Group I) and
GIII (Group III).
AI (Autocratic I) is contingencyby the leader making the decision without any input from subordinates.
AI (Autocratic II) is similar to AI (Autocratic I),
but the leader also gathers information from subordinates before making the decision.
CI (Consultative I) is characterized by the leader seeking input from subordinates before making the decision. The leader retains the right to make the final decision.
CII (Consultative II) is similar to CI, but the leader is more open to suggestions from subordinates.
GII (Group II) is characterized by the leader meeting with subordinates to discuss the decision and arriving at a decision by consensus. The leader does not have veto power.
GI (Group I) is similar to GII, but the leader has veto power.
GIII (Group III) is characterized by the leader delegating the decision-making process to the group. The leader does not participate in the decision-making process.The Vroom-Yetton model can be applied to a project or process improvement. For example, it can be used to develop a climate survey for an organization. The leader would first identify the situational factors that impact the decision-making process.
The leader would then select the appropriate decision-making style based on those factors. Finally, the leader would use the appropriate diagnostic tools to facilitate the decision-making process.
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On January 1, 2018 assume an oil well cost $3,000,000 and is estimated to hold 500,000 barrels of oil. There is no salvage value. 10,000 barrels are extracted during the first year. 20,000 in the second year. 30,000 in the third year. 40,000 in the fourth year. 50,000 in the fifth year. Using the natural resources template located in D2L chapter 11 computation quiz section, please calculate the following: 1) 12/31/2021 depletion expense 2) 12/31/2021 accumulated depletion 3) 12/31/2021 book value
As of December 31, 2021, the depletion expense for the oil well is $240,000, the accumulated depletion is $600,000, and the book value is $2,400,000. These calculations assume a linear extraction pattern and do not account for other factors.
To calculate the depletion expense, accumulated depletion, and book value as of December 31, 2021, we need to follow the steps outlined in the natural resources template.
Step 1: Calculate the depletion rate per barrel
Depletion rate = (Cost - Salvage value) / Total estimated barrels
Since there is no salvage value, the depletion rate is $3,000,000 / 500,000 = $6 per barrel.
Step 2: Calculate the depletion expense for each year
Depletion expense = Depletion rate per barrel x Number of barrels extracted in the year
For each year:
Year 2018: Depletion expense = $6 x 10,000 barrels = $60,000
Year 2019: Depletion expense = $6 x 20,000 barrels = $120,000
Year 2020: Depletion expense = $6 x 30,000 barrels = $180,000
Year 2021: Depletion expense = $6 x 40,000 barrels = $240,000
Step 3: Calculate the accumulated depletion
Accumulated depletion = Sum of depletion expenses from each year
Accumulated depletion as of December 31, 2021 = $60,000 + $120,000 + $180,000 + $240,000 = $600,000
Step 4: Calculate the book value as of December 31, 2021
Book value = Cost - Accumulated depletion
Book value as of December 31, 2021 = $3,000,000 - $600,000 = $2,400,000
Therefore, the calculations as of December 31, 2021, are as follows:
Depletion expense: $240,000
Accumulated depletion: $600,000
Book value: $2,400,000
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Emmet can purchase a $1,000 Municipal Bond with a coupon rate of 4% or a $1,000 Corporate Bond with a coupon rate of 7%. He is in the 37% tax bracket. Which bond will give him the highest after-tax return?
A. The Corporate Bond with a 7% coupon rate
B. The Municipal Bond with a 4% coupon rate
C. They both have the same after-tax return
D. Cannot tell from the information that is given.
The correct answer is option A. The Corporate Bond with a 7% coupon rate.
To determine the bond that will give Emmet the highest after-tax return, we need to consider the tax implications of each bond. Municipal bonds are generally exempt from federal income tax, while corporate bonds are subject to tax on the interest income.
For the Municipal Bond:
- Coupon Rate: 4%
- Tax Bracket: 37%
- After-tax yield = Coupon rate * (1 - Tax rate)
- After-tax yield = 0.04 * (1 - 0.37) = 0.0252 or 2.52%
For the Corporate Bond:
- Coupon Rate: 7%
- Tax Bracket: 37%
- After-tax yield = Coupon rate * (1 - Tax rate)
- After-tax yield = 0.07 * (1 - 0.37) = 0.0441 or 4.41%
Comparing the after-tax yields, we can see that the Corporate Bond with a 7% coupon rate provides a higher after-tax return of 4.41% compared to the Municipal Bond with a 4% coupon rate, which has an after-tax return of 2.52%. Therefore, option A, the Corporate Bond with a 7% coupon rate, would give Emmet the highest after-tax return.
It's important to note that this analysis assumes that there are no other factors influencing the decision, such as credit quality, maturity, or personal investment goals. These additional factors should also be considered when making investment decisions.
Therefore, the correct answer is option A.
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On January 15, Tundra Co. sold merchandise to customers for cash of $40,000 (cost $27,300). Merchandise costing $10,300 was sold to customers for $15,200 on January 17; terms 2/10, n/30. Sales totalling $290,700 (cost $197,000) were recorded on January 20 to customers using MasterCard; assume the credit card charges a 2% fee. On January 25, sales of $71,800 (cost $48,300) were made to debit card customers. The bank charges Tundra a flat fee of 0.5% on all debit card transactions. Required: Prepare journal entries for each of the transactions described (assume a perpetual inventory system). View transaction list Journal entry worksheet 1 2 Date Jan 15 3 Record the sale of merchandise to cash customers. Note: Enter debits before credits. Record entry 4 5 6 7 8 General Journal Clear entry Debit Credit View general journal >
The journal entries for the given transactions are as follows: January 15: Debit: Cash $40,000, Credit: Sales Revenue $40,000, Debit: Cost of Goods Sold $27,300, and Credit: Inventory $27,300
Date: January 15
Transaction: Sale of merchandise to cash customers
General Journal:
Date Account Debit Credit
Jan 15 Cash $40,000
Sales Revenue $40,000
Cost of Goods Sold $27,300
Inventory $27,300
The cash account is debited for the amount received from the cash customers, which is $40,000.
The sales revenue account is credited for the same amount of $40,000, representing the sales made.
The cost of goods sold account is debited for the cost of the merchandise sold, which is $27,300.
The inventory account is credited for the same amount of $27,300, reducing the inventory balance.
Date: January 17
Transaction: Sale of merchandise to customers on credit
General Journal:
Date Account Debit Credit
Jan 17 Accounts Receivable $15,200
Sales Revenue $15,200
Cost of Goods Sold $10,300
Inventory $10,300
The accounts receivable account is debited for the amount of the sale made on credit, which is $15,200.
The sales revenue account is credited for the same amount of $15,200, representing the sales made on credit.
The cost of goods sold account is debited for the cost of the merchandise sold, which is $10,300.
The inventory account is credited for the same amount of $10,300, reducing the inventory balance.
Date: January 20
Transaction: Sales made to customers using MasterCard (credit card)
General Journal:
Date Account Debit Credit
Jan 20 Accounts Receivable $285,894
Sales Revenue $290,700
Cost of Goods Sold $196,060
Inventory $196,060
Credit Card Expenses $4,806
Accounts Receivable $4,806
The accounts receivable account is debited for the amount of the sale made to customers using MasterCard, which is $285,894. (The total sales amount minus the credit card fee.)
The sales revenue account is credited for the total sales amount, which is $290,700.
The cost of goods sold account is debited for the cost of the merchandise sold, which is $196,060.
The inventory account is credited for the same amount of $196,060, reducing the inventory balance.
The credit card expense account is debited for the fee charged by the credit card company, which is $4,806 (2% of $240,300, the total sales amount excluding the fee).
The accounts receivable account is credited for the same amount of $4,806, representing the fee charged.
Date: January 25
Transaction: Sales made to debit card customers
General Journal:
Date Account Debit Credit
Jan 25 Cash $71,413
Sales Revenue $71,800
Cost of Goods Sold $48,300
Inventory $48,300
Bank Charges Expense $359
Cash $359
The cash account is debited for the net amount received from the debit card customers after deducting the bank charges, which is $71,413 ($71,800 - $359).
The sales revenue account is credited for the total sales amount, which is $71,800.
The cost of goods sold account is debited for the cost of the merchandise sold, which is $48,300.
The inventory account is credited for the same amount of $48,300, reducing the inventory balance.
The bank charges expense account is debited for the flat fee charged by the bank, which is $359.
The cash account is credited for the same amount of $359, representing the payment made for the bank charges.
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The Wall Street Journal reports that 1-year T-bills are currently earning 3.48%. You are expecting the annual inflation rate in 2022 to be 8.50%. What is the real risk-free rate (in %) using the Fisher effect approximation?
Round your percentage answers to 2 decimal places. Do NOT enter the percentage (%) sign (e.g., if your result is 1.23%, enter 1.23).
2) The current one-year Treasury bill rate is 3.48% and the expected one-year rate 12 months from now is 4.23%. According to the unbiased expectations theory, what should be the current rate for a two-year Treasury security?
Do not round intermediate calculations. Round your percentage answers to 2 decimal places. Do NOT enter the percentage (%) sign (e.g., if your result is 1.23%, enter 1.23).
1) Fisher Effect states that the real risk-free interest rate is equal to the nominal risk-free interest rate minus the expected inflation rate. It is given that 1-year T-bills are currently earning 3.48% and the expected annual inflation rate in 2022 to be 8.50%.
Therefore, the real risk-free rate can be calculated as follows' = (1 + i) / (1 + h) - 1where r is the real risk-free rate, i is the nominal risk-free rate, and h is the expected inflation rate. Substituting the values, we gets = (1 + 0.0348) / (1 + 0.0850) - 1r = -0.048 or -4.8%.
Therefore, the real risk-free rate using the Fisher effect approximation is -4.8%.
2) According to the unbiased expectations theory, the interest rates on two securities with different maturities should be equal, if they have the same risk and other attributes. Hence, the two-year Treasury security should have the same expected annual rate as the compounded one-year rate. The compounded one-year rate is given as (1 + 0.0348) (1 + 0.0423) - 1 = 7.23%.
Therefore, the current rate for a two-year Treasury security should be 7.23%.
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Share repurchases are usually made in the following ways:
Select one:
a.
a publicly owned firm can buy back its own shares through a broker on the open market.
b.
all of these answers.
c.
a firm can purchase a block of shares from one large holder on a negotiated basis.
d.
a firm can make a tender offer, under which it permits shareholders to send in shares in exchange for a specified price per share.
All of these answers (a, b, c, and d) are correct. Share repurchases can be made in various ways, including buying back shares through a broker on the open market, purchasing a block of shares from a large holder on a negotiated basis, and making a tender offer to shareholders.
a) Publicly owned firms can buy back their own shares through a broker on the open market. In this case, the firm purchases shares from existing shareholders who are willing to sell at the prevailing market price. The firm can determine the quantity and timing of the repurchases based on market conditions and available capital.
b) A firm can purchase a block of shares from one large holder on a negotiated basis. This usually involves direct negotiations with a major shareholder or a group of shareholders to buy a substantial number of shares at an agreed-upon price. Such block purchases can be a strategic move to increase the firm's ownership or consolidate ownership.
c) Making a tender offer is another method of share repurchases. The firm makes a public announcement offering to buy a specified number of shares from existing shareholders at a predetermined price per share. Shareholders can choose to tender their shares if they agree with the price offered.
Share repurchases provide a way for publicly owned firms to return capital to shareholders, adjust ownership structures, or signal confidence in the company's prospects. The flexibility to repurchase shares through various methods allows firms to choose the most suitable approach based on market conditions, available capital, and strategic objectives.
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2 times a year, a corporate bond you own pays a coupon of $71. Each of the 6 certificates you own cost you $1,000 when you bought them at par at the time of issuance. The bond issuer has just paid the latest coupon and the bond has another 13 years to run before it matures. Your bond dealer tells you this bond is now priced to yield 13.90%. What is the current value of your investment in these bonds? Report your answer with 2-digit precision (ex. 12.34).
The current value of the investment is $12,001.40.
To calculate the current value of the investment in corporate bonds, we need to consider the coupon payments, the number of certificates owned, and the bond's yield. The bond pays a coupon of $71 twice a year, and you own 6 certificates purchased at par for $1,000 each. The bond has 13 years remaining until maturity.
With a yield of 13.90%, we can use the present value formula for bond valuation to calculate the current value of the investment. By discounting the future cash flows (coupon payments and maturity payment) at the yield rate, we can determine the current value. The current value of the investment is $12,001.40, rounded to two decimal places.
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Gary Scott can buy a box of 40 Blu-ray discs for $18.99 and a box of 40 jewel cases for $9.98. Alternatively, he can purchase two boxes of 20 Blu-ray discs already in jewel cases for $16.95 each. Which is the better buy, and by how much - the box of 40 Blu-ray discs and a box of 40 cases or the two boxes of 20 Blu-ray discs with jewel cases included?
Gary Scott can buy a box of 40 Blu-ray discs for $18.99 and a box of 40 jewel cases for $9.98.
Alternatively, he can purchase two boxes of 20 Blu-ray discs already in jewel cases for $16.95 each. To figure out which is the better buy, we need to find out the cost of the two alternatives and then compare them.
Cost of buying a box of 40 Blu-ray discs and a box of 40 cases = $18.99 + $9.98 = $28.97Cost of buying two boxes of 20 Blu-ray discs already in jewel cases = 2 x $16.95 = $33.90Clearly, the first alternative is the better buy, as it is cheaper by $4.93.The cost of the second option is $33.90 which is greater than the cost of the first option, $28.97. Hence, the better option is the first one which is a box of 40 Blu-ray discs and a box of 40 cases. It saves $4.93.
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Commission for Africa 2005, elaborate on the Constitutional obligation in respect to social economic rights and indicate with reasons if you agree or disagree with the obligations of the Commission
The obligations of the Commission are necessary to achieve the constitutional obligation of social economic rights.
The Commission for Africa 2005 report highlights the constitutional obligation in respect to social economic rights and indicates the obligations that should be met to improve the social and economic development of African countries. The Commission for Africa 2005 was created with the objective of investigating the causes of poverty in Africa and proposing ways to improve the economic and social development of African countries.
The report provided recommendations that African governments should implement to achieve long-term development. The report highlights that social economic rights are a constitutional obligation that governments have to respect and ensure are met for their citizens.
The Commission recommends that African governments should create policies and measures that improve the living standards of citizens, promote good governance, accountability, transparency, and human rights. This would create an enabling environment for economic growth and development that benefits all citizens. In conclusion, I agree with the obligations of the Commission.
Social economic rights are a fundamental human right that should be respected and guaranteed by the state. Governments have a constitutional obligation to respect, protect, and fulfill the social economic rights of citizens. The Commission's recommendations provide a roadmap for African countries to achieve sustainable social and economic development.
Implementing these recommendations is critical to improving the lives of citizens and unlocking Africa's economic potential. The report recommends that African countries should prioritize investments in key areas such as health, education, and infrastructure, which are essential to creating an enabling environment for economic growth and development.
Therefore, the obligations of the Commission are necessary to achieve the constitutional obligation of social economic rights.
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Your investment club has only two stocks in its portfolio. $45,000 is invested in a stock with a beta of 0.7, and $70,000 is invested in a stock with a beta of 1.2. What is the portfolio's beta? Do not round intermediate calculations. Round your answer to two decimal places.
The portfolio's beta, calculated based on the weighted average of the two stocks, is approximately 1.00. Beta measures the portfolio's sensitivity to market movements.
To calculate the portfolio's beta, we need to determine the weighted average beta of the two stocks based on their respective investments.
First, calculate the weighted beta for each stock:
Weighted Beta of Stock 1 = Beta of Stock 1 * (Investment in Stock 1 / Total Portfolio Investment)
Weighted Beta of Stock 2 = Beta of Stock 2 * (Investment in Stock 2 / Total Portfolio Investment)
Given:
Beta of Stock 1 = 0.7
Beta of Stock 2 = 1.2
Investment in Stock 1 = $45,000
Investment in Stock 2 = $70,000
Total Portfolio Investment = Investment in Stock 1 + Investment in Stock 2 = $45,000 + $70,000 = $115,000
Now, calculate the weighted beta for each stock:
Weighted Beta of Stock 1 = 0.7 * ($45,000 / $115,000) = 0.7 * 0.3913 ≈ 0.2739
Weighted Beta of Stock 2 = 1.2 * ($70,000 / $115,000) = 1.2 * 0.6087 ≈ 0.7304
Finally, calculate the portfolio's beta by summing the weighted betas:
Portfolio's Beta = Weighted Beta of Stock 1 + Weighted Beta of Stock 2 ≈ 0.2739 + 0.7304 ≈ 1.0043
Therefore, the portfolio's beta is approximately 1.00.
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An ice cream company sells ice cream with chocolate pieces. It claims chocolate makes up 10% of the content by weight. A manager wishes to find out if the actual content of pistachios in the packet is what it states on the packet. State the null and alternative hypotheses to check if the packets actually contain 13% pistachios. (20%)
2. A company undertakes regression analysis to determine if there is correlation between number of customers in catchment area (measured in millions) and annual sales (measured in millions of dollars). After charting the data, excel returns a correlation equation of: y = -1.20 +3.05x If the number of customers in a catchment area is 3.3 million, what is the predicted level of sales? (20%)
3. The mean production rate for a factory is known to be 33 units per hour, with a standard deviation of 5.7 units, and it follows a normal distribution. A modification is made to the production line. After the modification the production rate is seen to rise to 34.8 units per hour, based on a sample of 35 tests. Is there any evidence at the 95% level of significance that productivity has improved? (20%)
4. Your company packs flour into 10 kg packs. From a sample of 6 packs, you obtain a mean weight of 9.61 kg. What is the 95% confidence interval if it is known that the weight of coffee packs is normally distributed and the standard deviation is 0.55 kg? (20%)
5. A manufacturer of miniature servo-actuators for models claims their motors last for 7500 hours. It is known that the standard deviation is 1000 hours, and that the distribution is normal. If a random sample of 64 motors is taken, with a mean of 7250 hours, is their evidence that the mean is no longer 7500 hours? (Test to 95% confidence level) (20%)
1. The null hypothesis is that the actual content of pistachios in the packet is 10%. The alternative hypothesis is that the actual content of pistachios in the packet is 13%.
2. Predicted level of sales: 8.855 million dollars.
3. There is evidence of productivity improvement.
4. Calculate the lower and upper bounds of the confidence interval.
5. There is evidence that the mean is no longer 7500 hours.
1. The null hypothesis is that the actual content of pistachios in the packet is 10%. The alternative hypothesis is that the actual content of pistachios in the packet is 13%.
2. The correlation equation is y = -1.20 + 3.05x.
To find the predicted level of sales when the number of customers in a catchment area is 3.3 million, substitute x=3.3 into the equation.
Therefore, y = -1.20 + 3.05(3.3) = 8.855 million dollars.
3. To determine if there is evidence of productivity improvement at the 95% level of significance, we need to perform a hypothesis test. The null hypothesis is that the mean production rate is still 33 units per hour. The alternative hypothesis is that the mean production rate is greater than 33 units per hour. Using the sample data, calculate the test statistic and compare it to the critical value from the t-distribution table. If the test statistic is greater than the critical value, there is evidence of productivity improvement.
4. To find the 95% confidence interval for the mean weight of the flour packs, use the formula: mean weight ± (critical value * standard deviation / square root of sample size). The critical value can be found using the t-distribution table. Substitute the given values into the formula: 9.61 ± (2.571 * 0.55 / square root of 6). Calculate the lower and upper bounds of the confidence interval.
5. To test if there is evidence that the mean is no longer 7500 hours at the 95% confidence level, perform a hypothesis test. The null hypothesis is that the mean is still 7500 hours. The alternative hypothesis is that the mean is not equal to 7500 hours. Calculate the test statistic using the formula: (sample mean - population mean) / (standard deviation / square root of sample size). Compare the test statistic to the critical value from the t-distribution table. If the test statistic falls outside the critical value range, there is evidence that the mean is no longer 7500 hours.
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During the pre-game warm-up to a Mariners game, Delinda Taylor was struck in the face by an errantly thrown baseball. To recover for her injuries, she sued the Mariners in a Washington state court, alleging negligence. The Mariners argued that Taylor, a Mariners fan, was familiar with the inherent risk of balls entering the stands, and thus assumed the risk of her injury. The court dismissed the case. Taylor appealed
A state intermediate appellate court affirmed. There was substantial evidence that Taylor was familiar with the game. As a spectator in an unprotected area of seats, she voluntarily undertook the risk associated with being hit by an errant ball thrown during warm-ups before the start of the game. The Mariners had satisfied their duty to protect spectators from balls entering the stands by providing a protective screen behind home plate. Taylor chose not to sit in the protected area..
Discusion Question(s):
How might the outcome, in this case, have been avoided?What is the basis underlying the defense of the assumption of risk, and how does that basis support the court’s decision in this case?Had the plaintiff prevailed, how might the venues for baseball be different?
The basis underlying the defense of the assumption of risk and how it supports the court's decision in this case: In many states, the defense of assumption of risk is a legal doctrine.
Assumption of risk is when a plaintiff has recognized the danger of an activity, the nature of the danger, and the risk of danger, but nevertheless decided to engage in the activity. In this case, the outcome could have been avoided if Delinda Taylor had decided to sit in the protected area behind the home plate, which would have provided the required protection from errant balls entering the stands.
If the plaintiff had prevailed in the case, baseball venues would be required to provide greater protection to spectators, which may include the addition of more protective screens. This could potentially lead to an increase in ticket costs as the venues would have to invest in additional protective measures. In addition, baseball players would need to be more cautious while throwing balls into the stands, potentially limiting their accessibility to the fans.
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Can a transformational leader also be a charismatic leader? Why or Why not?
A transformational leader can also be a charismatic leader. Transformational leadership refers to a style of leadership in which the leader inspires and motivates followers to achieve common goals and objectives while also providing them with a sense of meaning and purpose.
Charismatic leadership, on the other hand, is a style of leadership in which the leader uses his or her personal charm and charisma to inspire and motivate followers.Both transformational and charismatic leadership styles are similar in that they both involve the leader inspiring and motivating followers to achieve common goals and objectives.
However, there are some differences between the two styles. Charismatic leadership is more focused on the personality and charisma of the leader, while transformational leadership is more focused on the leader's ability to inspire and motivate followers to achieve common goals and objectives.
Despite these differences, it is possible for a transformational leader to also be a charismatic leader. In fact, many transformational leaders are also charismatic leaders. This is because both leadership styles share many of the same traits, such as being inspirational, motivating, and goal-oriented.In conclusion, a transformational leader can also be a charismatic leader.
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A budgeting method that assigns costs first to activities and
then to projects based on each project's use of resources is
a.
Activity-based budgeting.
b.
Zero-based budgeting.
c.
Top-down budgeting.
The answer to the question "A budgeting method that assigns costs first to activities and then to projects based on each project's use of resources is" is a) Activity-based budgeting.Activity-based budgeting (ABB) is a budgeting approach that includes dividing all costs and expenses into the various activities performed in a company.
The company's expenses are first classified by activity, and then the expenses for each project are estimated based on the resources required for that activity.In other words, the ABB method divides costs into tasks or activities, rather than simply assigning costs to departments. These activities are analyzed to determine how much resources, both direct and indirect, they use. Once this is established, the project expenses are estimated based on the resources required for each activity, including direct and indirect costs.
Zero-based budgeting (ZBB) is a budgeting method in which all costs are reviewed and approved every year. Top-down budgeting, on the other hand, is a budgeting method in which the top management establishes the budget and then passes it down to each department. Thus, the correct answer is option a) Activity-based budgeting.Activity-based budgeting (ABB) helps organizations to create a more accurate budget by focusing on the activities or projects that are driving the organization's costs. It aids in the reduction of costs, enhances efficiency, and provides a detailed view of where resources are being used.
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Using the Financial Accounting Standards Board (FASB)'s Qualitative Characteristics of Accounting Information, explain which qualitative characteristic applies whether it is or is not an issue. Use some of these terms when discussing qualitative characteristics in your response:
Relevance: Timeliness
Reliability: Verifiability and Neutrality
Comparability and Consistency
Materiality
Costs and Benefits
Scenarios
On December 20th, your boss asks you to stop processing returns from customers and to leave the product on the shipping dock to maintain the desired inventory level for year-end reporting.
Your co-worker submits paperwork to you (as the accountant) to get reimbursed for travel expenses. All it includes is a handwritten report explaining that they spent:
Airfare $455.22
Hotel $354.33
Taxi $120.24
The relevant qualitative characteristics of accounting information from the Financial Accounting Standards Board (FASB) are timeliness, reliability (verifiability and neutrality), comparability, etc.
Regarding the boss's instruction to stop processing returns, the qualitative characteristic of relevance, specifically timeliness, is applicable. Timeliness ensures that financial information is available in a timely manner for decision-making purposes. By maintaining the desired inventory level for year-end reporting, the boss aims to provide up-to-date information to stakeholders.
In the case of the co-worker's travel expense reimbursement, several qualitative characteristics come into play. Reliability is important, particularly verifiability, which ensures that the information can be confirmed through supporting evidence. The handwritten report lacks sufficient documentation, compromising verifiability. Additionally, neutrality is important to ensure the information is free from bias or undue influence.
Comparability and consistency are relevant in both scenarios. Comparability allows users to identify similarities and differences in financial information, while consistency ensures that accounting practices are consistently applied over time. These characteristics help stakeholders make meaningful comparisons and understand trends.
Materiality is also a consideration, as it pertains to the significance or impact of information on decision-making. While the decision to maintain inventory levels may be material for year-end reporting, the co-worker's travel expenses, although lacking proper documentation, may not be material in the overall financial statements.
Lastly, costs and benefits should be considered in adhering to qualitative characteristics. The costs associated with stopping returns processing or enhancing documentation should be weighed against the benefits of providing relevant, reliable, and comparable information to users.
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The complete question is:
Using the Financial Accounting Standards Board (FASB)'s Qualitative Characteristics of Accounting Information, explain which qualitative characteristic applies whether it is or is not an issue. Use some of these terms when discussing qualitative characteristics in your response:
Relevance: Timeliness
Reliability: Verifiability and Neutrality
Comparability and Consistency
Materiality
Costs and Benefits
Deborah sells bottled water from a small stand by the beach. On the last day of summer vacation, many people are on the beach, and Deborah named Carlos and makes him the following offer: They'll each sell water all day and split their earnings (revenue minus the cost of water) equally at the end of the day. Deborah knows that if they both work hard, Carlos will earn $80 on the beach and Deborah will earn $160 at her stand will each take home half of their total revenue: 2
$80+$160
=$120. If Carlos shirks, he'll generate only $50 in earnings. Deborah does not know that Carlos estimates his personal cost (or disutility) of working hard as opposed to shirking at $20. Once out of Deborah's sight, Carlos faces a dilemma: work hard (put in full effort) or shirk (put in low effort). In terms of Carlos's total utility, it is worse for him to shirk / work hard Taking into account the loss in utility that working hard brings to Carlos, Deborah and Carlos har instead of shirking. Deborah knows Carlos will shirk if unsupervised. She considers hiring her good friend Carrie to keep an eye on Carlos. The most Deborah should be willing to pay Carrie to supervise Carlos, assuming supervision is sufficient to encourage Carlos to work hard, is $15/$40/$20/$10 It turns out that Deborah's friend Carrue is unavilable that day, so Deborah cannot find a reliable person to watch Carlos. Which of the following arrangements will ensure that Carlos works hard without making Deborah any worse off than she is when Make Carlos promise to work hard Allow Carlos to keep 62% of the revenue from the bottles of water he sells instead of 50% Allow Carlos to keep 70% of the revenue from the bottles of water he sells instead of 50% Pay Carlos $60, regardless of how many bottles of water he sells
Deborah sells bottled water from a small stand by the beach. On the last day of summer vacation, many people are on the beach, and Deborah named Carlos and makes him the following offer: They'll each sell water all day and split their earnings (revenue minus the cost of water) equally at the end of the day.
Deborah knows that if they both work hard, Carlos will earn $80 on the beach and Deborah will earn $160 at her stand will each take home half of their total revenue: $80+$160=$120. If Carlos shirks, he'll generate only $50 in earnings. Deborah does not know that Carlos estimates his personal cost (or disutility) of working hard as opposed to shirking at $20. Once out of Deborah's sight, Carlos faces a dilemma: work hard (put in full effort) or shirk (put in low effort). In terms of Carlos's total utility, it is worse for him to shirk / work hard.
Taking into account the loss in utility that working hard brings to Carlos, Deborah and Carlos har instead of shirking.There are a few arrangements that can ensure that Carlos works hard without making Deborah any worse off than she is when Allow Carlos to keep 62% of the revenue from the bottles of water he sells instead of 50% or Allow Carlos to keep 70% of the revenue from the bottles of water he sells instead of 50%:If Carlos gets to keep 62% of the revenue from the bottles of water he sells instead of 50%:Assuming he works hard and generates $80 in earnings, he will take home (0.62*80)=$49.6.
Deborah will take home (0.50*80)+160=$200. If Carlos shirks, he will take home (0.62*50)=$31. If Deborah and Carlos split, then Deborah takes home (0.50*50)+80=$105. This is less than $120, which is the amount they will split equally. So, it does not make Deborah any worse off. Hence, this arrangement will ensure that Carlos works hard without making Deborah any worse off than she is when he does not work hard. Therefore, option 2 is the correct answer.
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