The purpose of this exercise is to demonstrate the matching principle in a familiar setting. Assume that you own a car that you drive about 15,000 miles each year. a. List the various costs to you associated with owning and operating this car. Make an estimate of the total annual cost of owning and operating the car, as well as the average cost per mile that you drive. b. Assume also that you have a part-time job. You usually do not use your car in this job, but today your employer asks you to drive 100 miles (round-trip) to deliver some important documents. Your employer offers to “reimburse you for your driving expenses.” You already have a full tank of gas, so you are able to drive the whole 100 miles without stopping and you don’t actually spend any money during the trip. Does this mean that you have incurred no “expenses” for which you should be reimbursed? Explain.
> Now let the production function for output be Yt = AtKa tL1−a yt . That is, we’ve made the exponent on capital a parameter (
> Consider the combined model studied in this appendix. Suppose the economy begins on a balanced growth path in the year 2000. Then in 2030, the depreciation rate
> Suppose we observe the following growth rates in various economies. Discuss whether or not each economy is on its balanced growth path. (a) A European economy: gY/L = 0.03, gK/L = 0.03. (b) A Latin American economy: gY/L = 0.02, gK/L = 0.01. (c) An Asian
> What is the principle of transition dynamics in the combined Solow- Romer model?
> Indian GDP in 2014 was 119 trillion rupees, while U.S. GDP was $16.5 trillion. The exchange rate in 2014 was 61.0 rupees per dollar. India turns out to have lower prices than the United States (this is true more generally for poor countries): the price l
> Write a couple of paragraphs about the state of the economy in the euro area over the past several years. What has happened to inflation, real GDP growth, and unemployment? What about a key policy interest rate set by the European Central Bank (ECB)? [Hi
> The Federal Open Market Committee (FOMC) is the formal name of the group chaired by Yellen, Bernanke, and others that meets every 6 weeks or so to set monetary policy in the United States. Immediately after the meeting, the FOMC issues a statement consis
> Suppose the economy starts with GDP at potential, the real interest rate and the marginal product of capital both equal to 3 percent, and a stable inflation rate of 2 percent. A mild financial crisis hits that raises the financial friction from zero to 2
> (a) Why does the AD curve slope downward? (b) If the AD curve were more steeply sloped, how would the economy respond differently to aggregate demand shocks (shocks to
> (a) Why does the AS curve slope upward? (b) If the AS curve were more steeply sloped, how would the economy respond differently to aggregate demand shocks (shocks to
> In the late 1990s and early 2000s, inflation was actually negative in Japan (look back at Figure 13.19). This question asks you to explore a change in policy to achieve a higher inflation rate. Consider an economy that begins with output at potential and
> Suppose the European and Japanese economies succumb to a recession and reduce their demand for U.S. goods for several years. Using the AS/AD framework, explain the macroeconomic consequences of this shock, both immediately and over time.
> Between 2006 and the middle of 2008, oil prices rose sharply—from around $60 to more than $140 per barrel. By the end of 2008, however, oil prices had fallen even more sharply, to just over $40 per barrel. Think of these events as two separate shocks. (a
> It is common to blame some of the poor macroeconomic performance of the 1970s on the rise in oil prices. In the middle of the 1980s, however, oil prices declined sharply. Using the AS/AD framework, explain the macroeconomic consequences of a one- time ne
> This question asks you to use the FRED database to predict the fed funds rate using the chapter’s monetary policy rule. Of course, there are many possible inflation measures you could use. This question lets you consider two common ones. (a) The Fed like
> Consider the economy from exercise 4. Calculate the inflation rate for the 2020–2021 period using the GDP deflator based on the Laspeyres, Paasche, and chain- weighted indexes of GDP. Data from Exercise 4: Look back at Tab
> Using the FRED database, locate the data on real and nominal GDP for the U.S. economy. You may notice that there are both annual and quarterly data (i.e., measures of production every 3 months) available. For the purpose of this question, let’s stick wit
> What is the meaning of the term expenses? Does the payment of cash by a business indicate that an expense has been incurred? Explain.
> How do dividends affect owners’ equity? Are they treated as a business expense? Explain.
> What are some of the limitations of a trial balance?
> What is the meaning of the term revenue? Does the receipt of cash by a business indicate that revenue has been earned? Explain.
> Does net income represent a supply of cash that could be distributed to stockholders in the form of dividends? Explain.
> On May 26, Breeze Camp Ground paid KPRM Radio $500 cash for ten 30-second advertisements. Three of the ads were aired in May, five in June, and two in July. a. Apply the realization principle to determine how much advertising revenue KPRM Radio earned f
> Happy Trails, Inc., is a popular family resort just outside Yellowstone National Park. Summer is the resort’s busy season, but guests typically pay a deposit at least six months in advance to guarantee their reservations. The resort is currently seeking
> Visit the home page of PC Connection at the following Internet location: www.pcconnection. com Follow the “Investor Relations” link at the bottom of the company’s home page and access its most recent 10-K by following the link to “SEC Filings.” Locate th
> Wagner Excavating organized as a corporation on January 18 and engaged in the following transactions during its first two weeks of operation. Jan. 18 Issued capital stock in exchange for $400,000 cash. Jan. 22 Borrowed $100,000 from its bank by issuing
> Kim Morris purchased Print Shop, Inc., a printing business, from Chris Stanley. Morris made a cash down payment and agreed to make annual payments equal to 40 percent of the company’s net income in each of the next three years. (Such “earn-outs” are a co
> Record the following selected transactions in general journal form for Quantum Clinic, Inc. Include a brief explanation of the transaction as part of each journal entry. Oct. 1 The clinic issued 5,000 additional shares of capital stock to Doctor Soges
> Listed as follows in random order are the eight steps comprising a complete accounting cycle. Prepare a trial balance. Journalize and post the closing entries. Prepare financial statements. Post transaction data to the ledger. Prepare an adjuste
> Explain the effect of operating profitably on the balance sheet of a business entity.
> What requirement is imposed by the double-entry system in the recording of any business transaction?
> State briefly the rules of debit and credit as applied to asset accounts and as applied to liability and owners’ equity accounts.
> List some of the more analytical functions performed by professional accountants.
> Explain the rules of debit and credit with respect to transactions recorded in revenue and expense accounts.
> In what accounting period does the matching principle indicate that an expense should be recognized?
> When do accountants consider revenue to be realized? What basic question about recording revenue in accounting records is answered by the realization principle?
> Using the information in the ledger accounts presented in Exercise 3.3, prepare a trial balance for Avenson Insurance Company dated November 30. Data from Exercise 3.3: Transactions are first journalized and then posted to ledger accounts. In this exer
> The realization principle determines when a business should recognize revenue. Listed are three common business situations involving revenue. After each situation, we give two alternatives as to the accounting period (or periods) in which the business mi
> Listed as follows are eight technical accounting terms introduced in this chapter Realization principle Credit Time period principle Accounting period Matching principle Expenses Net income Accounting c
> Listed as follows are descriptions of six transactions, followed by a table listing six unique combinations of financial statement effects (I is for increase, D is for decrease, and NE is for no effect). In the blank space to the left of each transaction
> Listed as follows are descriptions of six transactions, followed by a table listing six unique combinations of financial statement effects (I is for increase, D is for decrease, and NE is for no effect). In the blank space to the left of each transaction
> Listed are eight transactions the Foster Corporation made during November. a. Issued stock in exchange for cash. b. Purchased land. Made partial payment with cash and issued a note payable for the remaining balance. c. Recorded utilities expense for N
> The following information came from a recent balance sheet of The Coca Cola, Co. a. Determine the amount of total liabilities reported in Coca-Cola’s balance sheet at the beginning of the year. b. Determine the amount of total owners
> Harley Consulting has provided the following information regarding cash payments to its employees in May and June. Salary payments in May for work performed by employees in April $25,000 Salary payments in May for work performed by employees in May 30,0
> Sky Bound Airlines has provided the following information regarding cash received for ticket sales in September and October. Cash received in September for October flights $1,700,000 Cash received in October for October flights 1,300,000 Cash received in
> Hewitt Corporation’s Retained Earnings account balance was $108,000 on January 1. During January, the company recorded revenue of $600,000, expenses of $312,000, and dividends of $18,000. The company also paid a $42,000 account payable during the period.
> Five account classifications are shown as column headings in the following table. For each account classification, indicate the manner in which increases and decreases are recorded (i.e., by debits or by credits). Owners' Rovenue Expensos Assets Lla
> Transactions are first journalized and then posted to ledger accounts. In this exercise, however, your understanding of the relationship between the journal and the ledger is tested by asking you to study some ledger accounts and determine the journal en
> During March, the activities of Evergreen Landscaping included the following transactions and events, among others. Which of these items represented expenses in March? Explain. a. Purchased a copying machine for $3,300 b. Paid $192 for gasoline purchas
> Throughout this text, we have many assignments based on the financial statements of Home Depot, Inc., in Appendix A. Refer to the financial statements to respond to the following items. a. Does the company’s fiscal year end on December 31? How can you t
> Elaine Consulting incorporated on February 1, current year. The company engaged in the following transactions during its first month of operations. Feb.1 Issued capital stock in exchange for $800,000 cash. Feb.5 Borrowed $100,000 from the bank by is
> Georgia Corporation incorporated on September 2, current year. The company engaged in the following transactions during its first month of operations. Sept.2 Issued capital stock in exchange for $1,170,000 cash. Sept.4 Purchased land and a building for
> Janet Enterprises incorporated on May 3, current year. The company engaged in the following transactions during its first month of operations. May 3 Issued capital stock in exchange for $950,000 cash. May 4 Paid May office rent expense of $1,800. M
> A number of transactions of Claypool Construction are described as follows in terms of accounts debited and credited. 1. Debit Wages Expense; credit Wages Payable. 2. Debit Accounts Receivable; credit Construction Revenue. 3. Debit Dividends; credit C
> Satka Fishing Expeditions, Inc., recorded the following transactions in July. 1. Provided an ocean fishing expedition for a credit customer; payment is due August 10. 2. Paid Marine Service Center for repairs to boats performed in June. (In June, Satka
> Does the term debit mean increase and the term credit mean decrease? Explain.
> What relationship exists between the position of an account in the balance sheet equation and the rules for recording increases in that account?
> Baker Construction is a small corporation owned and managed by Tom Baker. The corporation has 21 employees, few creditors, and no investor other than Tom Baker. Thus, like many small businesses, it has no obligation to issue financial statements to credi
> The following transactions were carried out during the month of May by Hagen and Associates, a firm of design architects. For each of the five transactions, state whether the transaction represented revenue to the firm during the month of May. Give reaso
> Infosys Technologies, Inc., an Indian technology company, reported net income of $419 million this year. Analysts expect the company’s earnings to be $1.468 billion in five years. What is the expected growth rate in the company’s earnings?
> What is the appropriate decision rule for a firm considering undertaking a capital project? Give a real-life example?
> What ethical conflict does insider trading present?
> Describe what an information asymmetry is in a business transaction. Explain how the inequity associated with an information asymmetry might be, at least partially, solved through the market for goods or services?
> What are some ways to resolve a conflict of interest?
> How can a lack of business ethics negatively affect the performance of an economy? Give an example.
> What is an agency relationship, and what is an agency conflict? How can agency conflicts be reduced in a corporation?
> What is the appropriate goal of financial managers? How do managers’ decisions affect how successful the firm is in achieving this goal?
> All public companies must hire a certified public accounting firm to perform an independent audit of their financial statements. What exactly does the term audit mean?
> What is the primary responsibility of the board of directors in a corporation?
> You have an opportunity to invest $2,500 today and receive $3,000 in three years. What would be the return on your investment if you accepted this opportunity?
> What is a partnership, and what is the biggest disadvantage of this form of business organization? How can this disadvantage be avoided?
> What are the advantages and disadvantages of a sole proprietorship?
> What is a firm’s capital structure, and why is it important?
> Suppose that the standard deviation of the returns on the shares of stock at two different companies is exactly the same. Does this mean that the required rate of return will be the same for these two stocks? How might the required rate of return on the
> What is the difference between the expected rate of return and the required rate of return? What does it mean if they are different for a particular asset at a particular point in time?
> Suppose that you know the risk and the expected return for two stocks. Discuss the process you might utilize to determine which of the two stocks is a better buy. You may assume that the two stocks will be the only assets held in your portfolio?
> You may have heard the statement that you should not include your home as an asset in your investment portfolio. Assume that your house will comprise up to 75 percent of your assets in the early part of your investment life. Evaluate the implications of
> The CAPM is used to price the risk (estimate the expected return) for any asset. Our examples have focused on stocks, but we could also use CAPM to estimate the expected rate of return for bonds. Explain why?
> Which investment category included in Exhibit 7.3 has shown the greatest degree of risk in the United States since 1926? Explain why that makes sense in a world where the value of an asset in this investment category is likely to be more sensitive to cha
> The idea that we can know the return on a security for each possible outcome is overly simplistic. However, even though we cannot possibly predict all possible outcomes, this fact has little bearing on the risk-free return. Explain why?
> Megan Gaumer expects to need $50,000 for a down payment on a house in six years. How much does she need to invest today in an account paying 7.25 percent in order to have $50,000 in six years?
> The correlation between stocks A and B is 0.50, while the correlation between stocks A and C is –0.5. You already own stock A and are thinking of buying either stock B or stock C. If you want your portfolio to have the lowest possible risk, would you buy
> Explain the economic role of brokers and dealers. How does each make a profit?
> What are the three fundamental decisions the financial manager is concerned with, and how do they affect the firm’s balance sheet?
> Describe the cash flows between a firm and its stakeholders?
> Explain how compound interest differs from simple interest?
> Explain the difference between compounding and discounting?
> Explain the importance of a time line?
> You are planning to take a spring break trip to Cancun your senior year. The trip is exactly two years away, but you want to be prepared and have enough money when the time comes. Explain how you would determine the amount of money you will have to save
> Explain the phrase “a dollar today is worth more than a dollar tomorrow”?
> Why is the ROE a more appropriate proxy (for stockholder value maximization) for some firms than for other firms?
> Give an example of a capital budgeting decision and a financing decision?
> How does financial leverage help stockholders?
> What additional information does the fixed asset turnover ratio provide over the total asset turnover ratio? For which industries does it carry greater significance?
> What does a very high inventory turnover ratio signify?
> Inventory is excluded when the quick ratio or acid-test ratio is calculated because inventory is the most difficult current asset to convert to cash without loss of value. What types of inventory are likely to be most easily converted to cash without los
> Why is too much liquidity not a good thing?
> Why is it not enough for an analyst to look at just the short-term and long-term debt on a firm’s balance sheet when assessing the firm’s fixed obligations?
> Why are retained earnings not considered an asset of the firm?
> Compare and contrast depreciation expense and amortization expense?
