If at all possible, compare your answer to Exercise 1.5 with the answers of students from different national backgrounds. Try to explore likely causes of any major differences that emerge, in terms of legal, economic and cultural environments.
> Consider the binary variable version of the fixed effects model in Equation except with an additional regressor, D1i; that is, let a. Suppose that n = 3. Show that the binary regressors and the “constant” regressor are
> Let ^1DM denote the entity-demeaned estimator given in Equation (10.22), and let ^BA1 denote the “before and after” estimator without an intercept, so that Show that, if Data from E
> X is a Bernoulli random variable with Pr (X = 1) = 0.90; Y is distributed N (0, 4); W is distributed N (0, 16); and X, Y, and W are independent. Let S = XY + (1 – X) W. (That is, S = Y when X = 1, and S = W when X = 0.) a. Show that E(Y2) = 4 and E(W2) =
> A researcher wants to estimate the determinants of annual earnings—age, gender, schooling, union status, occupation, and sector of employment. He has been told that if he collects panel data on a large number of randomly chosen individuals over time, he
> This exercise refers to the drunk driving panel data regression summarized in Table 10.1. a. New Jersey has a population of 8.85 million people. Suppose New Jersey increased the tax on a case of beer by $2 (in 1988 dollars). Use the results in column (5)
> Consider the linear regression of TestScore on Income shown in Figure 8.2 and the nonlinear regression in Equation (8.18). Would either of these regressions provide a reliable estimate of the causal effect of income on test scores? Would either of these
> Would the regression in Equation (4.9) in chapter 4 be useful for predicting test scores in a school district in Massachusetts? Why or why not? Data from Equation 4.9:
> Are the following statements true or false? Explain your answer. a. “An ordinary least squares regression of Y onto X will not be internally valid if Y is correlated with the error term.” b. “If the error term exhibits heteroskedasticity, then the estima
> Suppose that n = 50 i.i.d. observations for (Yi, Xi) yield the following regression results: Y^ = 49.2 + 73.9X, SER = 13.4, R2 = 0.78. Another researcher is interested in the same regression, but he makes an error when he enters the data into his regress
> The demand for a commodity is given by Q = 0 + 1P + u, where Q denotes quantity, P denotes price, and u denotes factors other than price that determine demand. Supply for the commodity is given by Q = 0 + 1P + v, where v denotes factors other than pr
> Using the regressions shown in columns (2) of Table 9.3, and column (2) of Table 9.2, construct a table like Table 9.3 and compare the estimated effects of a 10 percentage point increase in the students eligible for free lunch on test scores in Californi
> Labor economists studying the determinants of women’s earnings discovered a puzzling empirical result. Using randomly selected employed women, they regressed earnings on the women’s number of children and a set of control variables (age, education, occup
> Consider the one-variable regression model Yi = 0 + 1Xi + ui, and suppose it satisfies the least squares assumptions. Suppose Yi is measured with error, so the data are Y∼i = Yi + wi, where wi is the measurement error, which is i.i.d. and independent o
> Compute the following probabilities: a. If Y is distributed t12, find Pr (Y
> Assume that the regression model Yi = 0 + 1Xi + ui satisfies the least squares assumptions. You and a friend collect a random sample of 300 observations on Y and X. a. Your friend reports that he inadvertently scrambled the X observations for 20% of th
> Consider the one-variable regression model Yi = 0 + 1Xi + ui, and suppose it satisfies the least squares assumptions in Key Concept 4.3. The regressor Xi is missing, but data on a related variable, Zi, are available, and the value of Xi is estimated us
> Read the box “The Demand for Economics Journals” in Section 8.3. Discuss the internal and external validity of the estimated effect of price per citation on subscriptions. Data from Section 8.3: Professional economist
> Read the box “The Effect of Ageing on Healthcare Expenditures: A Red Herring?” in Section 8.3. Discuss the internal and external validity as a causal effect of the relationship between age and healthcare expenditures,
> Suppose that you have just read a careful statistical study of the effect of improved health of children on their test scores at school. Using data from a project in a West African district in 2000, the study concluded that students who received multivit
> Explain how you would use approach 2 to calculate the confidence interval discussed below Equation (8.8). Data from Equation 8.8:
> X is a continuous variable that takes on values between 5 and 100. Z is a binary variable. Sketch the following regression functions (with values of X between 5 and 100 on the horizontal axis and values of Y^ on the vertical axis): a. Y^ = 2.0 + 3.0 * ln
> This problem is inspired by a study of the gender gap in earnings in top corporate jobs (Bertrand and Hallock, 2001). The study compares total compensation among top executives in a large set of U.S. public corporations in the 1990s. (Each year these pub
> Refer to Table 8.3. a. A researcher suspects that the effect of %Eligible for subsidized lunch has a nonlinear effect on test scores? In particular, he conjectures that increases in this variable from 10% to 20% have little effect on test scores but that
> Read the box “The Demand for Economics Journals” in Section 8.3. a. The box reaches three conclusions. Looking at the results in the table, what is the basis for each of these conclusions? b. Using the results in regre
> Compute the following probabilities: a. If Y is distributed X23, find Pr (Y
> Read the box “The Effect of Ageing on Healthcare Expenditures: A Red Herring?” a. Consider a male aged 60 years. Use the results from column (1) of Table 8.1 and the method in Key Concept 8.1 to estimate the expected c
> After reading this chapter’s analysis of test scores and class size, an educator comments, “In my experience, student performance depends on class size, but not in the way your regressions say. Rather, students do well when class size is less than 20 stu
> Suppose a researcher collects data on houses that have sold in a particular neighbourhood over the past year and obtains the regression results in the following table. a. Using the results in column (1), what is the expected change in price of building a
> The discussion following Equation (8.28) interprets the coefficient on interacted binary variables using the conditional mean zero assumption. This exercise shows that this interpretation also applies under conditional mean independence. Consider the hyp
> Derive the expressions for the elasticities for the linear and log-log models.
> Consider the regression model Yi = 0 + 1X1i + 2X2i + 31X(i * X2i) + ui. Show that; a. ∆Y>∆X1 = 1 + 3X2 (effect of change in X1, holding X2 constant). b. ∆Y>∆X2 = 2 + 3X1 (effect of change in X2, holding X1 constant). c. If X1 changes by ∆X1 and
> Sales in a company are $243 million in 2018 and increase to $250 million in 2019. a. Compute the percentage increase in sales, using the usual formula 100 * (Sales2019 - Sales2018)/ Sales2013. Compare this value to the approximation 100 * [ln (Sales2019)
> Consider the regression model Yi = 0 + 1X1i + 2X2i + ui. Transform the regression so that you can use a t-statistic to test a. 1 = 2. b. 1 + 22 = 0. c. 1 + 2 = 1. (Hint: You must redefine the dependent variable in the regression.)
> Referring to the Table: a. Construct the R2 for each of the regressions. b. Show how to construct the homoskedasticity-only F-statistic for testing 4 = 5 = 6 = 0 in the regression shown in column (3).
> Reported the following regression (where standard errors have been added): a. Is the coefficient on BDR statistically significantly different from zero? b. Typically, four-bedroom houses sell for more than three-bedroom houses. Is this consistent with yo
> Compute the following probabilities: a. If Y is distributed N (4, 9), find Pr (Y 2). c. If Y is distributed N (1, 4), find Pr (2
> Let Y denote the number of “heads” that occur when two coins are tossed. Assume the probability of a heads is 0.4 on either coin. a. Derive the probability distribution of Y. b. Derive the mean and variance of Y.
> This information has been taken from the company´s books as at 31 December 20X1, but the information below has not been allowed for. (a) Inventory at 31 December 20X1 is €20,000. (b) Plant and machinery is to be depreciated
> The information has been taken from the company´s books as at 31 December 20X1, but the following has not been allowed for: (a) Inventory at the end of the year is €25,000. (b) Audit fees owing amounted to €
> Explain the various advantages and disadvantages of moving to a corporate form of business instead of operating as a partnership.
> Explain the various possible advantages that a number of sole traders might obtain by joining together as a partnership.
> Set out in Figure 16.9 is summarized balance sheets and income statements for F Co. for 20X1 and 20X2. You are required to: (a) prepare a table of ratios, covering all aspects of interpretation as far as the infor- mation allows, for each of the two year
> The details in Figure 16.8 relate to D Co. Using that information and appropriate ratios, prepare a financial report on the company. The opening inventory value figures were €135,000 20X1 actual and €210,000 20X2 budget.
> ‘Financial ratios are only as good as the accounting information from which they are calculated’. Discuss.
> The stated accounting policy treatment for foreign currency translation for SKF, a Swedish company, before it adopted IFRS was as follows: Translation of foreign financial statements The current rate method is used for translating the income statements a
> ‘The variety of possible methods of foreign currency translation, and the different ways of treating gains arising, show that adequate harmonisation for international comparison purposes is a long way away’. Discuss.
> (a) How would you define goodwill? (b) Three possible accounting treatments of goodwill are: (i) retain goodwill as an asset to be amortised over its estimated useful life; (ii) retain goodwill as an asset indefinitely, subjecting it to annual impairment
> The balance sheets of A and B as at 31 December 20X7 are as shown in Figure 14.8. In addition: (a) A had acquired 37,500 shares in B in 20X3 when there was a debit balance on the reserves of €3,000. (b) B purchases goods from A, providin
> Repeat Exercise 13.3, but now assume that non-current assets originally costing €30,000, with accumulated depreciation of €12,000, were sold for €11,000 during the year ended 31 December 20X2.
> The balance sheet of Dot Co. for the year ended 31 December 20X2, together with comparative figures for the previous year, is shown in Figure 13.7 (all figures €000). You are informed that there were no sales of non-current assets durin
> Explain the concept of a ‘temporary difference’ in the context of IASB rules. Why is it thought necessary to account for deferred tax on these differences?
> In Activity 12.A, the balance on the deferred tax liability account is growing every year over the five-year period and, if tax conditions remain stable and annual investment continues to rise, then it will continue to grow. Could it be argued that, beca
> How might a company seek to raise extra finance in ways other than issuing new debt or equity securities?
> Distinguish between debt capital and equity capital and suggest which is likely to be favored by a company raising finance in a high-taxation environment.
> What uses of the word ‘reserve’ might be found in practice in various parts of the world?
> What is the definition of a fixed (or non-current) asset? Why is this difficult to use in the context of investments and why does that matter?
> What is meant by ‘lower of cost and net realizable value’? What difficulties exist in the application of this measurement basis?
> A firm buys and sells a single commodity. During a particular accounting period it makes a number of purchases of the commodity at different prices. Explain how assumptions made regarding which units were sold will affect the firm’s reported profit for t
> R and A are brothers. Recently, their aunt died leaving them €1,000 each. Initially, they intended setting up in partnership selling pils and lager. However, R felt that there was no future in the lager market, whereas A expected that lager sales would b
> In the context of your own national background, rank the seven ‘external’ user groups suggested in the text (i.e. omitting managers), in order of the priority that you think should be given to their needs. Explain your reasons.
> Using the information contained in Exercise 10.3 above, calculate the value of the year-end inventories using FIFO and LIFO. Also, prepare profit and loss accounts showing the gross profit under each of the valuation methods for all three years.
> Outline three different depreciation methods and appraise them in the context of the definition and objectives of depreciation.
> The payments set out in Table 9.8 have been made during the year in relation to a non-current asset bought at the beginning of the year. What cost figure should be used as the basis for the depreciation charge for the year and why?
> Provide in your own words: (a) an explanation of what depreciation is; (b) an explanation of the net book value (NBV) of a partially depreciated non-current asset.
> A company borrows money at 10 per cent interest in order to finance the building of a new factory. Suggest arguments for and against the proposition that the interest costs should be capitalized and regarded as part of the ‘cost’ of the factory. Which se
> On 21 December 20X7, your client paid €10,000 for an advertising campaign. The advertisements will be heard on local radio stations between 1 January and 31 January 20X8. Your client believes that, as a result, sales will increase by 60 per cent in 20X8
> Are depreciation expenses either too subjective or too arbitrary to provide useful information?
> The following actual and estimated figures are available. Based on these figures, evaluate the following. (a) Calculate annual depreciation under the straight-line method. (b) Calculate the depreciation charge for each of the four years under the reducin
> Explain the meaning of capital maintenance. Why is it important?
> What various alternatives to historical cost could be used for the valuation of assets? Which do you prefer?
> Do you think that users know what to ask for from their accountants or financial advisers? Explain your answer.
> What disadvantages are there in measuring assets on the basis of historical cost?
> What general rule can be used to decide whether a payment leads to an expense or to an asset?
> Why is it necessary to define an expense in terms of changes in an asset (or vice versa) rather than defining the terms independently?
> Figure 7.12 presents, in summarized form, the financial statements of Non Co. for the years 20X1 and 20X2. Six months after each of the two year-ends, a dividend of €20,000 is paid in relation to the results of that year. Prepare a tabl
> Business A and Business B are both engaged in retailing but seem to take a different approach to this trade according to the information available. The information consists of a table of ratios, shown as Table 7.9. Required: (a) Explain briefly how each
> The following information has been extracted from the recently published statements of company D, as set out in Figure 7.11. The ratios set out in Table 7.8 are those calculated for D based on its published statements for the previous year and also the
> If you live in, or work in connection with, a member country of the EU, investigate the progress in that country toward replacing national regulation to be in line with the 2013 Directive.
> Which presentation formats are usually used in your own jurisdiction? Why is this so?
> Is there a danger of having too much data in published financial statements?
> Discuss the advantages and disadvantages of the income statement formats allowed by the EU Directive, namely by function and by nature.
> The above information has been taken from the company´s books as at 31 December 20X1, but the following have not yet been allowed for. (a) Rent owing but not yet paid amounting to €1,000. (b) Insurance paid includes â&
> In which European countries have the standards of the IASB had the greatest influence?
> (a) Outline the objectives and achievements of the EU in the area of financial reporting. (b) Outline the objectives and achievements of the IASB and its predecessor in the area of financial reporting. (c) Do your answers to (a) and (b) suggest movement
> ‘The true and fair view requirement is now established in all European Union countries and so the aim of financial reporting has been harmonised’. Discuss.
> Do international differences in the rules for the calculation of taxable income cause accounting differences or is the influence the other way round?
> Bearing in mind that Section 5.5.2 of this chapter was written in 2019; rewrite it in the context of the time when you read this book.
> Who is supposed to obey accounting standards in the United States? Are they followed in practice?
> On 21 December 20X7, your client paid €10,000 for an advertising campaign. The advertisements will be heard on local radio stations between 1 January and 31 January 20X8. Your client believes that, as a result, sales will increase by 60 per cent in 20X8
> To what extent is the search for relevance of financial information hampered by the need for reliability?
> ‘Neutrality is about freedom from bias. Prudence is a bias. It is not possible to embrace both conventions in one coherent framework’. Discuss.
> Equity investors are major users of financial statements. Identify the general nature of the ‘information needs’ of this group of users. Describe the likely specific uses of company financial information by investors and give examples of information that
> Repeat Exercise 1.4 from Chapter 1. Do you think that users know what to ask for from their accountant or financial adviser?
> Use the information for Landstalker Enterprises in BE7.15 and assume instead that the receivables are sold with recourse. Prepare the journal entry for Landstalker to record the sale, assuming that the recourse obligation has a fair value of $9,000 and t
> On October l, 2020, Alpha Inc. assigns $3 million of its accounts receivable to Alberta Provincial Bank as collateral for a $2.6-million loan evidenced by a note. The bank's charges are as follows: a finance charge of 4% of the assigned receivables and a
> Emil Family Importers sold goods to Acme Decorators for $20,000 on November 1, 2020, accepting Acme's $20,000, six-month, 6% note. (a) Prepare Emil's November 1 entry, December 31 annual adjusting entry, and May 1 entry for the collection of the note and
> Use the information for Battle Tank Limited in BE7.7 and assume instead that the unadjusted balance in Allowance for Doubtful Accounts is a debit balance of $3,000. Based on this, prepare the December 31, 2020 journal entry to record the adjustment to Al
> Battle Tank Limited had net sales in 2020 of $2.3 million. At December 31, 2020, before adjusting entries, the balances in selected accounts were as follows: Accounts Receivable $350,000 debit; Allowance for Doubtful Accounts $4,600 credit. Assuming Batt
> Use the information for Ropers Ltd. in BE7.5, but assume instead that Ropers follows ASPE and records expected outstanding returns to Allowance for Sales Returns and Allowances. Prepare the required adjusting journal entry at the end of the reporting per
> To promote the sale of some specialty goods, Ropers Ltd. began a generous return policy to its customers. Customers can return merchandise for up to three months following the date of the invoice, no questions asked. For the current period, sales of thes
