Questions and Answers of Managerial Of Accounting Information

use ofinformation Return to the setting of Table 4.2. The bottom two rows depict cases where choice is delayed until after an information source reveals something. Yet eaeh is described in terms of
eertain equivalents Ralph is contemplating a lottery. A fair coin will be tossed. If the coin shows"heads," Ralph will be paid 100 dollars. Ifthe coin shows "tails," Ralph will be paid nothing. So
eonsisteney Let A = {a,b,c} be a set ofthree alternatives. Imagine asking someone to rank the alternatives, as best they can. Give four possible responses to such arequest, such that the first two
The text daims the term accounting principles is a misnomer, to the extent that it refers to an ability to design or specify the accounting method without specifying the context. Carefully explain
Define and contrast the terms certain equivalent and risk premium.AppendixLO1
risk sharing Ralph owns a risky lottery. With probability .5, Ralph will receive 20,000 dollars and with probability .5 Ralph will receive nothing. Ralph's utility function is given by U(W) =
The eost eonstroction illustration in Table 5.1 treats interest but not dividends as a eost. Give one set of circumstances in whieh dividends would not be treated as a eomponent of eeonomic eost and
A so-called "step eost" arises when some factor of production is acquired in speeific, integer units. To illustrate, it might be possible to le ase machine time at the rate of $5,000 per unit, where
aeeounting versus eeonomie valuation This is a continuation of problem 7 in Chapter 2. Assume an organization is formed, by issuing common stock, to purchase and manage the asset that produces the
aeeounting ineome We often see cases where a firm's accounting income is reported and the price of the firm' s equity, traded on an organized exchange, behaves in seemingly strange fashion. Provide a
decision analysis and value of information Ralph is contemplating four possible choices, c1everly labeled one, two, three, and four. The outcome of any choice depends on the state of the economy. For
produet eosting 250 800 145,000 Ralph's Firm manufaetures and sells two produets, eode named A and B. The manufaeturing proeess is relatively simple, with eaeh produet passing through the same set of
produet eosting Ralph' s Service provides consulting expertise to not-for-profit entities. Several partners lead various consulting teams that provide the serviees on a contraet basis.Eaeh te am
aeeounting LLA Repeat the LLA eonstruetion in problem 8 above, but with the "anehoring point" at q = 12. (So you want the LLA to agree with CSR(12) and v = marginai eost at q = 12.) What is its
aeeounting LLA Retum to the above problem dealing with Ralph's eost eurve..; Now suppose Ralph's accountant approximates CSR(q) with an LLA: CSR(q) .. F + vq. Further~uppose the aeeountant does this
long-run versus short-run eeonomie eost Suppose Ralph's long-run eeonomie eost eurve is given by C(q) = 300q - 20q2 + q3.We presume an industry eharaeterized by perfect eompetition; eonsequently,
produet eosting Various nonprofit organizations report the total funds raised, the amount spent on various social services, and the amount spent on administration and fund raisingo We might think of
produet eosting and economic eost What eonneetion do you see between the exereise in problem 4 above and the eeonomie theory of eost, as portrayed in Chapter 2?AppendixLO1
produet eosting Retum to the product eost eonstruction illustration in Table 5.1. Numerous assumptions were used in the eosting exereise, reflecting period versus product eost distinctions and the
Define product and period costs. How do their accounting treatments differ?Locate the product and period eosts in Exhibit 5.1.AppendixLO1
How does information improve the quality of a decision? What is done in the absence of information? Continuing, a common colloquialism is that of "needed information." For example, accounting policy
What does it mean when we say consistency is the central feature of economic rationality? Might an individual characterized by undivided pursuit of wealth be economically rational? Might an
The chapter stresses the idea that the finn straddles input and output markets.Explain this notion. What role does the firm' s cost function play as it straddles input and output markets?AppendixLO1
sJwrt-run eost funetion Return to the setting of problems 9 and 10 above. The short-run eost eurve depicts a ease where some faetors of produetion have been fixed at their levels at the efficient
short-run eost junetion This is a eontinuation of problem 9 above. Ralph's short-run eost eurve is given by CSR(q) = 1,200 + 860q - 45q2 + 1.2q3.aJ Detennine Ralph's fixed, total variable and average
long-run eost Junetion Ralph's firm produces a single produet. Its long-run eost funetion is given by C(q) = 900q - 40q2 + q3.a] Determine Ralph' s total eost, average eost, marginaI eost and
eonstruetion of eost Junetion Ralph must seleet the best eombination of four faetors of produetion, denoted Zb Z2, ZJ, and Z4, to produee q units of output. Technieal requirements are defined by the
For example, the present value at the start of year t = 6 will be 6200/(1.11) + 125/(1.11)2.AppendixLO1
present value Ralph is praeticing present value mechanies. For this purpose, the following eash infIows are assumed. Eaeh eash inflow occurs at the end of the indieated year.Whatever interest rate is
prices and present value Suppose the interest rate is r = 10%. What is the eurrent price, at time t = 0, of a promise to deliver $1,000 at the end of period 3? What would the price of this promise be
The accounting library uses aggregation and LLAs in assembling and presenting eost information. CarefulIy discuss the eonnection between these building blocks and the product eost terminology of
multiperiod [irm is a multiproduct [irm Suppose a finn produees two products. This might be two distinet produets, produced in a one-period setting. It also might be the same commodity produeed in
Why, in general, is average cost not defined, not meaningful, in a multiproduct setting?AppendixLO1
Define average, marginaI, and ineremental cost. Expand Table 2.1 to indude all integer values of q between 0 and 20. Explain your use of these definitions as you expanded the table.AppendixLO1
Expressions [1 ] and [2] in the text provide equivalent descriptions of the profit maximizing finn' s behavior. Why is a eost funetion present in expression [2] but not in expression [1]? What
monopolist's output This is a eontinuation of problem 9 above, where we focused on the long-run eost curve. Suppose Ralph is a monopolist. The market price, as a funetion of the quantity placed on
eost in a multiproduet firm23 Ralph is toying with eoncepts of eost. A two produet finn, with quantities denoted q1 and
periodie ineome in a multiperiod firm Retum to the setting at the end of the ehapter where we had periodic ineomes of 20 and 11. Suppose the eurrent prices remain the same, but the interest rate is
inferring cash flow from economic measurements Ralph restores finaneial reeords for organizations that have experieneed disasters, such as fires, floods, and hurricanes, and lost their finaneial
economic valuation and disaggregation23 Ralph's firm operates in a world of complete and perfect markets. The prevailing interest rate is 10%. Ralph's firm pays out eaeh year's eash flow in
economic valuation and dividend timing This is a continuation of problem 9 above.a] Assume Ralph's discount rate is 9%. Prepare periodie ineome statements and end-of-period balanee sheets for Ralph
cash versus accruai recognition Ralph has designed a consumer product, and launched a manufaeturing and sales organization. To keep the problem uncluttered, the organization has a life of exactly
balance sheets and income statements under different valuation rules Ralph manages a two-product firm. The major events, in terms of cash flow, are as follows.a. Just before the start of period t = 1
aeeounting versus eeonomie history Ralph forms a firm by investing 1,000 dollaes. This cash is immediately paid for a machine with a usefullife of 3 yeaes. The net cash inflow from this maehine will
aeeounting expense versus eeonomie eost Paton states " ... the accountant's 'expense' for the partieular business and the economist' s' cost of produetion' are two quite differentthings ... [The]
the accountant's task"Accounting ... might best be defined as the art which attempts to break up the finaneial history of a business into speeifie units, a year or less in length. In other words, it
accounting versus economic valuation Ralph is pondering the difference between economic and accounting descriptions of financiallife. Provide three explicit examples, one where a good guess is
Carefully contrast the concepts of economic income, economic rent, and accounting income.AppendixLO1
Define period and product costs. When is a period cost expensed? When is a product cost expensed? What does the economic theory of the firm say about the distinction between period and product
1. What is the distinction between (i) a large and a small decision and between (ii) a short-run and a long-run decision? Give an example where a short-run decision is small, another where a
2. Discuss the relationship between break-even analysis and our earlier study of variable costing.
3. Why are the graphs in Figure 14.1 truncated?
4. break-even calculations Ralph is planning a visit to the bank to solicit a small business loan.Ralph’s business plan, in summary form, is given by the following LLAs:revenue TR = 240q
5. large break-even and output calculations17 Ralph’s cost curve is piece-wise linear. For output of 0 ≤ q ≤ 1, 000 units it is given by C(q; P) = 1, 000 + 6q; for 1, 000 ≤ q ≤ 2, 000 it is
6. cost versus expenditure It is often claimed that arranging a long term supplier contract for materials will insulate you from price changes in the materials market.Coase [1968] contends this is
7. cost versus expenditure The material cost illustration in Table 11.1 stresses the difference between an appropriate measure of cost for some purpose and the expenditure on the factor in question.
8. cost versus expenditure Return to the two period inventory setting of Tables 11.1 and 11.2, where we framed a new product opportunity in terms of incremental revenue less incremental cost.(a)
9. accounting library and decision frame Ralph’s Library is a two product firm. Quantities of the two products are denoted q1 and q2. Ralph has studied the situation, and decided to rely on the
10. accounting library and decision frame Ralph produces two products, with respective quantities denoted q1 and q2. Product costs are aggregated into direct material (DM), direct labor (DL), and
11. statistical analysis Return to the outsourcing illustration in Tables 11.3 and 11.4. Everything remains as specified, and the prices of the products are P1 = 600 and P2 = 1, 100. The new
5. large break-even and output calculations17 Ralph’s cost curve is piece-wise linear. For output of 0 ≤ q ≤ 1, 000 units it is given by C(q; P) = 1, 000 + 6q; for 1, 000 ≤ q ≤ 2, 000 it is
6. cost versus expenditure It is often claimed that arranging a long term supplier contract for materials will insulate you from price changes in the materials market.Coase [1968] contends this is
7. cost versus expenditure The material cost illustration in Table 11.1 stresses the difference between an appropriate measure of cost for some purpose and the expenditure on the factor in question.
8. cost versus expenditure Return to the two period inventory setting of Tables 11.1 and 11.2, where we framed a new product opportunity in terms of incremental revenue less incremental cost.(a)
9. accounting library and decision frame Ralph’s Library is a two product firm. Quantities of the two products are denoted q1 and q2. Ralph has studied the situation, and decided to rely on the
10. accounting library and decision frame Ralph produces two products, with respective quantities denoted q1 and q2. Product costs are aggregated into direct material (DM), direct labor (DL), and
11. statistical analysis Return to the outsourcing illustration in Tables 11.3 and 11.4. Everything remains as specified, and the prices of the products are P1 = 600 and P2 = 1, 100. The new
12. more of the same Return to problem 11 above but now assume prices of P1 = 600 and P2 = 1, 150. What happens to the optimal solution as you move among the three possible specifications of the
13. interactions in customer evaluation Return to the product evaluation discussion in the text, where a potential third product, with quantity q3, was under consideration. Presuming limited market
14. possible misspecification of overhead LLA Empire Electronics (EE) is an assembler of custom electronic components.It faces an opportunity to bid on a particular assembly. Direct material is
14. possible misspecification of overhead LLA Empire Electronics (EE) is an assembler of custom electronic components.It faces an opportunity to bid on a particular assembly. Direct material is
15. inferring competitor’s cost Ralph is considering entering the custom E-mail device market. His device is customizable and will operate across a variety of systems.Before proceeding, Ralph
16. diagnosis of competitive position18 Ralph’s Packaging, Inc. (RP) designs and produces specialized packages for a variety of industrial product firms. Most jobs are won on a competitive bid. The
17. option value of capacity Ralph’s Custom Products (RCP) is a custom manufacturer of material handling equipment. Various just-in-time manufacturing systems require parts from suppliers that
18. certainty equivalents Determine the CE0 and CE1 certainty equivalents for each of the cases and utility measures in Tables 11.5 and 11.6.
19. risk premia Return to the setting of Table 11.5, and the constant risk aversion story of U(w) = −exp(−ρ ·w), ρ = .00001. Why is the risk premium 3, 093 when the risks are independent but
20. taxes and risk aversion Ralph has been offered an interesting gamble. With probability .5, Ralph will gain $500 and with probability .5 Ralph will gain $100.The gain is net of the purchase price;
1. What is the relationship between present value analysis of investment proposals and economic income?
2. The project analyzed throughout most of the chapter, Table 12.1, leads to a strictly positive present value. Yet the accounting library is slow to recognize this value, as in Table 12.4. Do the
3. economic versus accounting valuation Below are some projected end of period cash flows. Each potential project requires an initial investment of 10,000. For each project determine the value of x
4. economic versus accounting valuation Ralph is contemplating a capital investment project. No taxes are present, the initial outlay will be 10,000, followed by end of year inflows for the next 3
5. cash flow and accrual estimation The data presented in Tables 12.3 and 12.4 are rounded to the nearest thousand. Using the various assumptions noted in their development determine the exact
6. more of the same Following up on problem 5 above, determine the exact amounts for the economic stock and flow calculations in Table 12.5.
7. polynomial roots Return to the cash flow sequence in Table 12.1. Write out the equation for the present value, as a function of r. Multiply both sides by(1 + r)6, as we did in the text. Notice
8. polynomial roots17 Consider a two period investment project with cash flow vector denoted[x0, x1, x2]. Determine a cash flow vector such that we have two strictly positive internal rates of return.
9. cash flow estimation We now find Ralph managing a two product firm, Ralph’s LP, with constrained capacity. The production process consists of fabrication and assembly departments. A service
10. present value versus accounting renderings This is a continuation of problem 9 above. Assume, for book purposes, that Ralph uses straight line depreciation. Also assume the 5,000 modification and
11. present value versus accounting renderings Verify the claim in note 16.
12. consistent framing Return to the illustration in Figure 12.2, where the cash flow sequence is -100, 290 and -208. Assume r = 10% is the correct discount rate.Suppose we take the initial
13. new product with investment and inventory Ralph is now trying to decide whether to accept a customer’s proposal to sign a long-term supplier contract. The customer will require 1,000 or 3,000
14. make or buy Ralph’s Enterprise (RE) manufactures hydraulic components for the aircraft industry. One element common to a variety of products is a specialized valve that RE manufactures. The
1. The central idea in this chapter is that some productive inputs are not acquired in perfect markets, are not necessarily delivered in the quality and quantity intended. In turn, this creates an
2. Goal congruence is said to exist when members of the management team (or more broadly the work force) share the same goals; and in this perspective goal congruence is seen as an essential
3. The contracting story developed here results in a cost to the firm of input H that we denoted C(H). Without any contracting frictions, the manager would be paid the sum of reservation price plus
4. certainty equivalents Verify the certainty equivalent calculations summarized in Example 13.4. Notice, in this case, the certainty equivalents can be calculated in two ways. One method calculates
5. manager’s opportunity cost Return to Example 13.5, and focus on the noted optimal pay-forperformance arrangement. Recall we assume M = 3, 000.(a) Locate an optimal contract for the following
6. insurance and incentives The contracting model presented here is called a "hidden action" or"moral hazard" model. The latter term comes from the insurance phenomenon where an insured subject has
7. optimal contract Return to the setting of Example 13.5. Now assume the probability of output x1 under input L is .9 instead of 1.0. Determine the optimal pay-for-performance arrangement. Carefully
8. optimal contract Ralph owns a production function. Randomness in the environment plus labor input from a manager combine to produce output. The output can be one of two quantities: x1 < x2. The
9. shape of optimal incentives This is a continuation of problem 8 above. Now assume there are three possible outputs, x1 < x2 < x3. The probability structure is listed below, and input H is again

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