Questions and Answers of Accounting and Finance

List and describe two methods of depreciation. For each, provide an example of an asset where it might be appropriate to use that method.
(a) The income statement shows:(b) The statement of financial position shows: Income-Expenditure=Profit Can you provide examples for each of these categories? Examples of income Examples of
Continuing the worked exercise above, make the necessary adjustments for the following transactions:(a) On day 3, Mobius Inc invests $500 of cash by acquiring a new computer.(b) On day 4, Mobius Inc
For a long time, you have been wondering how to convert your passion for rock climbing into a business opportunity. During a recent climbing trip you met Chris, a climbing-gear designer. He agreed to
State which of the following items could appear as an asset on the statement of financial position of Goblin Combe plc, a leading premium drinks business:• $$150,000$ of product sold during the
Trading continues apace for your new business Climb On! The products have proved to be popular and, seeing this as your opportunity to seize the day, you decided to expand and grow the business.Here
Choose a crop or livestock enterprise. What imputs must be purchased before the production process begins? What (if any) inputs must be purchased after the production process begins?
Compare the sources of capital used in a farming enterprise (owner equity, debt, lease, etc.). Which of these sources of capital are considered “at risk”and why?
Compare the inputs financed by the supplier (i.e., trade credit) with the use of third-party credit (i.e., obtaining an operating loan from the bank to purchase inputs). Which mechanism is likely to
What is meant by “barren money”?
How do the legal instruments for agricultural credit change with the length of the debt repayment period?
What is financial intermediation and how does financial intermediation add value to the economy?
Compare and contrast real capital and monetary capital.
Assume that Robinson Crusoe is willing to trade 0.895 potatoes tomorrow for 1 potato today. What is the implied intertemporal preference (discount rate)? If the natives on the next island are willing
Using the data in Example 2.3 and assuming that all the bank’s capital is Tier 1 capital, does the bank meet the capital adequacy requirements?
Given the lending returns presented in Table 2.13 compute the average and variance of the returns on the bank’s portfolio. What is the probability that the interest rate on the bank’s loan
Assume that a bank in North Florida has cash of $12,987, real estate loans of $110,246, agricultural loans of $14,410, loans to individuals of $10,077 and an allowance for loan loss of $1,336. In
How does the use of common sized income statements and balance sheets compare with the use of the DuPont system?
Which capital budget technique always yields the correct result and why?
You have a dairy cow that produces $3,200 of milk per year for 10 years (realized at the end of the year). In the 11th she becomes infertile so you sell her for $1,000. What is the present value of
Assume that the producer is considering planting an alfalfa meadow which will pay $600 over the next 7 years. If the net investment (machinery and planting cost) will cost $1,450, is this investment
The data presented in Table 5.21 depict the replacment decision for an asset. The question is whether to continue to use the old asset or to replace it with a new asset. Assuming a weighted average
Assuming an weighted average cost of capital of 7.5 percent, which investment in Table 5.22 is more profitable?Table 5.22 Year 0 1 A -15,000 2,000 B -25,000 7,000 234 69 3,000 6,000 4,000 5,000 5,000
Consider the cash flows for the purchase of a new tractor in Table 5.23. Assuming that the new tractor costs $150,000, is it better to trade the tractor in year 22 or year 23?Table 5.23 Repair
Graphically depict: (1) the expected value of a two-outcome investment under risk assuming risk aversion, (2) the expected utility of that investment alternative, (3) the certainty equivalent of the
What can the Black-Scholes formula be used to value?
Assume an investment opportunity that pays $100,000 with probability 0.75 and $125,000 with probability 0.25. Given a risk aversion coefficient of 0.35 and a power utility function, what is the
Compare the risk premium from Exercise 6-1E with the risk premium computed assuming a negative exponential distribution function with a risk aversion of 0.003.Exercise 6-1EAssume an investment
Returns on crops per acre are presented in Table 6.17. Assume the variable cost per acre is $92 for crop 1, $45 for crop 2, $147 for crop 3, $60 for crop 4, and $80 for crop 5; further assume that
Using the data in Table 6.18 estimate the capital asset pricing model “betas.” Using these estimates, compute the risk adjusted discount rate.Table 6.18 Year Stock returns Market 1 2 3 1995
Assume that each of the returns in Table 6.18 represent stocks with a value of $100. Assuming a discount rate of 4 percent compute the price of the call option using the Black-Scholes formula at time
What is the principle of increasing risk?
Using the risk balancing formulation, when is debt profitable?
Compute the average return on assets and average margin over borrowing cost using the income statements in Table 7.13 and balance sheets in 7.14. Base on these values is borrowing profitable?Table
Using the data in Tables 7.13 and 7.14, does this farm qualify for debt (i.e., is the farm profitable, liquid, and solvent)?Table 7.13Table 7.14 Item 2006 2007 2008 2009 2010 2011 2012 Gross cash
What are the two largest sources of capital for agriculture?
What is a collateralized loan?
What is monitoring cost and how does it affect the firm’s choice of capital structure?
What advantages do financial intermediaries provide depositors (savers)? What advantages do financial intermediaries provide borrowers?
What are the two components of banking regulations in the United States?
What is a “bank run”? How does the current regulation prevent a run? What was the traditional mechanism for preventing a bank run?
Which regulator charters national banks?
What is the role of the Federal Deposit Insurance Corporation?
What type of accounting information is demanded by:a. Creditors and investors?b. Managers of the firm?c. Taxing authorities?d. Regulatory authorities?
When is information for one user either useful or required by another user?
What is the advantage of the historical cost principle?
How would the revenue realization and matching principles affect accounting standards for the farm firm?
Which accounting statement details the relative ownership positions of the firm?
Which accounting statement measures the profitability of the farm firm?
What is the difference between the income statement, statement of cash flow, and statement of changes in financial position?
What is the objective of the Farm Financial Accounting Standards Council?
What four methods for asset valuation are described by the Farm Financial Accounting Standards Council. What method do they prescribe?
What is the role of pro forma accounting statements? Who are these statements prepared for?
Assume that a farmer has current assets including cash of $5,000, $7,174 in livestock inventory, $56,997 in crop inventory, purchased inputs of $8,377, cash invested in growing crops of $2,834, and
Assume that the firm has gross cash income of $141,214, variable cash expenses of $74,279 (including livestock purchases, feed, other livestock related expenses, seed and plants, fertilizer and
Assume an interest rate of 5.0 percent on real estate debt with 10 years remaining, 6.5 percent on the non-real estate debt with 3 years remaining, and an interest rate of 7.25 percent on the
Explain how the DuPont system can be used to diagnose operating difficulties in a farm firm.
Why is leverage a “double-edged sword” in the operation of the firm?
Using the data from Tables 4.2 and 4.3, computea. the operating profit margin,b. the asset turnover ratio,c. the operating return on assets, andd. the leverage ratio for Indiana farmers over 55 to 64
Compute the DuPont expansion for the dairy farm presented in Table 4.4 and Table 4.5.Table 4.4Table 4.5 Item 2010 2009 Total assets 1,584,053 1,464,040 Current assets 152,465 153,140 Cash 24,541
Compute the common sized balance sheet for the states presented in Table 3.6. Are these states significantly different?Table 3.6 Category Farms - numbers Farm assets Current assets Arkansas Florida
Compute the common sized income statements for the states presented in Table 3.10. What do the differences have to say about differences in profitability?Table 3.10 Category Gross cash income
Why would the term structure of the interest rate be increasing?
Demonstrate how net present value depicts changes in the decision maker’s wealth.
Based on the expressionwhat is the net present value? What does this expression imply about the term structure of the interest rate? 25 50 65 NPV=-100+ + (5.53) 1.06 1.12625 1.197767'
Your superior, the general manager of Plastics Manufacturers Limited, has recently been talking to the chief buyer of Plastic Toys Limited, which manufactures a wide range of toys for young children.
How might each of the following affect the level of inventories held by a business?(a) An increase in the number of production bottlenecks experienced by the business.(b) Arise in the business’s
Tariq is the credit manager of Heltex plc. He is concerned that the pattern of monthly cash receipts from credit sales shows that credit collection is poor compared with budget. Heltex’s sales
Carpets Direct plc wishes to increase the number of its retail outlets in the south of England.The board of directors has decided to finance this expansion programme by raising the funds from
‘An asset is similar to an expense.’ In what ways in this true or untrue?
Devonian plc has the following equity as at 30 November Year 4:......................................................................£mOrdinary shares 25p fully paid ..............50.0General
Provide reasons why a business may decide to(a) lease rather than buy an asset which is to be held for long-term use.(b) use retained earnings to finance growth rather than issue new shares.(c) repay
Distinguish between invoice discounting and factoring.
Distinguish between an offer for sale and a public issue of shares.
What are the potential disadvantages of raising finance through a sale-and-leaseback arrangement?
Simtex Ltd has invested £120,000 to date in developing a new type of shaving foam. The shaving foam is now ready for production and it has been estimated that the business will sell 160,000 cans a
Newton Electronics Ltd has incurred expenditure of ?5 million over the past three years researching and developing a miniature hearing aid. The hearing aid is now fully developed. The directors are
Dirk plc has recently created a new male fragrance ?Sirocco? at a total development cost of ?0.4 million. The business is now considering producing the fragrance, which will require an immediate
The directors of Mylo Ltd are currently considering two mutually exclusive investment projects. Both projects are concerned with the purchase of new plant. The following data are available for each
Research indicates that the IRR method is extremely popular even though it has shortcomings when compared to the NPV method. Why might managers prefer to use IRR rather than NPV when carrying out
Bradley-Allen Ltd makes one standard product. Its budgeted operating statement for May is as follows: The standard costs were as follows: During May, the following occurred:1 950 units were sold
Pilot Ltd makes a standard product, which is budgeted to sell at £5.00 a unit. It is made by taking a budgeted 0.5 kg of material, budgeted to cost £3.00 a kilogram and working on it by hand by an
You have recently overheard the following remarks:(a) ‘When calculating variances, we ignore differences of volume of output, between original budget and actual, by flexing the budget. If there
You have recently overheard the following remarks:(a) ‘A favourable direct labour rate variance can only be caused by staff working more efficiently than budgeted.’(b) ‘Selling more units than
Should all variances be investigated to find their cause? Explain your answer.
What is the point in flexing the budget in the context of variance analysis? Does flexing imply that differences between budget and actual in the volume of output are ignored in variance analysis?
What is meant by a variance? What is the point in analysing variances?
Explain what is meant by feedforward control and distinguish it from feedback control.
Lewisham Ltd manufactures one product line – the Zenith. Plans over the next few months are as follows:1 Sales demand...................................UnitsJuly
Linpet Ltd is to be incorporated on 1 June. The opening statement of financial position of the business will then be as follows:Assets ..............................£Cash at bank
A nursing home, which is linked to a large hospital, has been examining its budgetary control procedures, with particular reference to overhead costs.The level of activity in the facility is measured
Prolog Ltd is a small wholesaler of high-specification personal computers. It has in recent months been selling 50 machines a month at a price of ?2,000 each. These machines cost ?1,600 each. A new
What is a budget committee? What purpose does it serve?
What do budgets have to do with control?
What were the five uses of budgets that were identified in the chapter?
Define a budget. How is a budget different from a forecast?
Badger Ltd (Badger) manufactures plastic building materials. After a recent analysis Badger has decided to classify its products into two varieties: Largeflo and Smallflo. There are several products
Kaplan plc makes a range of suitcases of various sizes and shapes. There are 10 different models of suitcase produced by the business. To keep inventories of finished suitcases to a minimum, each
Comment critically on the following statements that you have overheard:(a) ‘The balanced scorecard is another name for the statement of financial position.’(b) ‘The financial area of the
Aires plc was recently formed and issued 80 million £0.50 shares at nominal value and loan notes totalling £24 million. The business used the proceeds from the capital issues to purchase the

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