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Essay questions Answers should be at least three paragraphs long. 1. Name at least two documents a public company would be required to file under the SEC. How often must they be file? Describe what they are and what information they would provide to the public. 2. Discuss at least two methods the controller can use to reduce costs. Discuss the pros and cons to each. 3. 4. 4. The Brock Company has decided to replace some equipment and needs 2 million dollars to do this. Discuss in detail several options the company could use to acquire this equipment and include several options of financing this equipment. 5. 6. 5. Company X has been in operation for 7 years, and a public company for 5 years. They have yet to offer a dividend to their shareholders. What are some possible reasons they haven't offered a dividend yet? If they do decide to offer a dividend, what positive and negative impact might this have on the company? Short answer questions 1. What are liquidity measures? 2. What are ratios used to measure a company's ability to make its debt payments called? 3. Name two items that should be included in an RFP for a financial systems implementation. 4. Label the following as temporary or permanent tax differences: Meals Accruals Entertainment Prepaids Penalties 5. What is a loan covenant? Essay Solutions 1. Filing the documents under SEC is the first step under the Initial Public Offering (IPO) as stipulated under the company's act. That implies that the company is transforming from a private to a public entity. There are many documents presented or filed to the SEC when a company wants to become public. Key among the information filed include the documents containing financial statements of the company and the documents containing ownership reports of the company to be listed. This is because the two documents form the basis for the formation of any company and thus are among the initial and compulsory requirements under SEC. The document containing financial information usually serves the purpose of providing past financial performance of the company. This includes a reflection of the past revenue and the net worth (asset value) before a company is placed under SEC. On the other hand, the documents containing ownership reports provides the required disclosure on the current owners of the stock of the given company[Teu17]. 2. Maintaining the desired level of expenditure or costs is one of the major roles of a controller in an organization. This is because without a proper mechanism of controlling or reducing costs, any business enterprise will likely suffer severe loss in its business undertakings. Due to the importance attached to the costs in organization, there are mechanisms put in place to help reduce costs. The most common approaches include the Variance Analysis and the Budgetary Control. Variance analysis has been a common practice in maintaining the desired level of costs by businesses. By carrying out variance analysis, the standardized costs (budgeted) and the actual, costs are compared. The variance analysis thus provides a range within which the deviation of budgetary estimates is placed. This ensures effectiveness and efficiency of doing tasks or process that gets highlighted. The variance analysis thus does not only explain differences but provide a range for the deviation. Variance analysis thus is an intuitive tool in managing costs although it creates room for financial fraud. The other method employed is the Budgetary Control. Under the budgetary control, the finance managers and the controllers put up a budget for each and every unit cost. The controller then sets up various mechanisms to monitor and control the levels of expenditure cross various divisions of the organization. This ensure that the expenditures are guided by the budget estimates and creates room for lower financial expenditures and cost reduction. Budgetary control keeps the cost within range but becomes ineffective when faced with time value of money uncertainties[Jos96]. 3. Equipment is one of the most important long term assets in any company just as in Brock Company. It forms a crucial element in the company's production activities and the process of asset utilization to earn revenue. Equipment is a depreciable asset and valued depending on how long it will serve the company or the equipment will be required. This is further determined by the specificity of the need by the company. There are various methods of acquiring and financing equipment acquisition. The most common approach employed in acquiring equipment is through leasing. Leasing can be operating or capital leases depending on the nature of equipment. However, there are other approaches that a company can employ to finance an equipment acquisition. These methods include direct purchase the equipment, hire purchase or purchasing the equipment using stock (common stock). As aforementioned, most firm prefer leasing since it is considered cheaper than the other methods used in acquiring an equipment. The direct purchase alternative is also company needs to fully own the equipment for its production activities. crucial when a Hire purchase resembles leasing but in this case the equipment belongs to the seller until the last instalment is paid. Common Stock purchase is rare although it is gaining popularity as non-cash method of exchanging a company's share of common stock with equipment. Finally, we are told that Brock Company needs to raise $2 million to acquire and replace the old equipment. Financing in a company is often achieved in three different approaches depending on their preference or financial condition. The companies can decide to use debt, equity or preferred share financing. Equity is most suitable since it emanates from within but the debt and preference shares attract interest and dividend payments in return[Pon06]. 4. Dividends refer to the corporate earnings that companies do pay their stockholders. Companies especially which are young in their operations like company X may or may not pay the dividends to their shareholders depending on the preference of the stockholders. There exists quite a number of beneficial factors that may make a corporation to choose whether to pass some of the earnings on as dividends or prefer to reinvest all the earnings back to the company. The reinvest is always aimed at encouraging growth of a new venture such as Company X whose operations as public company is merely 5 years. Just as aforementioned, a company that is pursuing growth may not pay its dividend since it targets to invest as much as possible of these earnings into future growth. But this is not exceptional to a young company since even mature companies that believes it may perform better by reinvesting its earnings may take the same direction. Nevertheless, some companies may not pay dividends and instead use the money to spearhead a new project. This includes acquiring new assets, repurchase share or acquire another company. Moreover, firms like company X may choose to reinvest all of their earnings, instead of issuing dividends, may also be a way of avoiding the high potential expense that is attached to issuing new stock. Thus to avoid the risk of raising money for that purpose, Company X may decide to retain its earnings. A company may further decide not to pay dividends since the decision to pay dividends since it may be viewed unfavorably and this might result in declining stock prices. But it is also advisable to pay dividends to prevent accumulating stockholder earnings which may be difficult to pay once accumulated which is a negative impact[Bak07]. Short answer solutions 1. Liquidity measures (usually ratios) evaluates a given company's ability to pay off its short-term debt obligations. This is realized by comparing the company's most liquid assets (easily converted to cash) with the short-term liabilities that it possesses. 2. Liquidity Ratios 3. The Statement of Purpose- describes the products and services the organization is looking for as well as the objectives in the contract. Nature of Project and Bidding Solicitation- details the funding needs for the particular project so that companies can place bids for the project's completion. 4. Meals-Permanent Tax Difference Accruals-Temporary Tax Difference Entertainment- Permanent Tax Difference Prepaids - Temporary Tax Difference Penalties- Permanent Tax Difference 5. Loan covenant refers to the conditions stipulated in a commercial loan (bond) issue that demands the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions. Loan covenant thus restricts certain activities as well as putting in place other conditions that needs to be met. References Baker,K., Saadi,S., Dutta,S.,& Gandhi,D., (2007). The perception of dividends by Canadian managers: new survey evidence. International Journal of Managerial Finance, 3(1),7091. Joshi, P., & Abdulla, J., (1996). Budgetary Control and Performance Evaluation Systems in Corporations in Bahrain. Asian Review of Accounting, 4(2), 125-144. Pongpech, J., Murthy, D., & Boondiskulchock, R., (2006). Maintenance strategies for used equipment under lease. Journal of Quality in Maintenance Engineering, 12 (1), 52-67. Teufel, A., & Geissler, C., (2017). SEC Approves New Continued Listing Standards for ETFs. Journal of Investment Compliance. Essay Solutions 1. Filing the documents under SEC is the first step under the Initial Public Offering (IPO) as stipulated under the company's act. That implies that the company is transforming from a private to a public entity. There are many documents presented or filed to the SEC when a company wants to become public. Key among the information filed include the documents containing financial statements of the company and the documents containing ownership reports of the company to be listed. This is because the two documents form the basis for the formation of any company and thus are among the initial and compulsory requirements under SEC. The document containing financial information usually serves the purpose of providing past financial performance of the company. This includes a reflection of the past revenue and the net worth (asset value) before a company is placed under SEC. On the other hand, the documents containing ownership reports provides the required disclosure on the current owners of the stock of the given company[Teu17]. 2. Maintaining the desired level of expenditure or costs is one of the major roles of a controller in an organization. This is because without a proper mechanism of controlling or reducing costs, any business enterprise will likely suffer severe loss in its business undertakings. Due to the importance attached to the costs in organization, there are mechanisms put in place to help reduce costs. The most common approaches include the Variance Analysis and the Budgetary Control. Variance analysis has been a common practice in maintaining the desired level of costs by businesses. By carrying out variance analysis, the standardized costs (budgeted) and the actual, costs are compared. The variance analysis thus provides a range within which the deviation of budgetary estimates is placed. This ensures effectiveness and efficiency of doing tasks or process that gets highlighted. The variance analysis thus does not only explain differences but provide a range for the deviation. Variance analysis thus is an intuitive tool in managing costs although it creates room for financial fraud. The other method employed is the Budgetary Control. Under the budgetary control, the finance managers and the controllers put up a budget for each and every unit cost. The controller then sets up various mechanisms to monitor and control the levels of expenditure cross various divisions of the organization. This ensure that the expenditures are guided by the budget estimates and creates room for lower financial expenditures and cost reduction. Budgetary control keeps the cost within range but becomes ineffective when faced with time value of money uncertainties[Jos96]. 3. Equipment is one of the most important long term assets in any company just as in Brock Company. It forms a crucial element in the company's production activities and the process of asset utilization to earn revenue. Equipment is a depreciable asset and valued depending on how long it will serve the company or the equipment will be required. This is further determined by the specificity of the need by the company. There are various methods of acquiring and financing equipment acquisition. The most common approach employed in acquiring equipment is through leasing. Leasing can be operating or capital leases depending on the nature of equipment. However, there are other approaches that a company can employ to finance an equipment acquisition. These methods include direct purchase the equipment, hire purchase or purchasing the equipment using stock (common stock). As aforementioned, most firm prefer leasing since it is considered cheaper than the other methods used in acquiring an equipment. The direct purchase alternative is also company needs to fully own the equipment for its production activities. crucial when a Hire purchase resembles leasing but in this case the equipment belongs to the seller until the last instalment is paid. Common Stock purchase is rare although it is gaining popularity as non-cash method of exchanging a company's share of common stock with equipment. Finally, we are told that Brock Company needs to raise $2 million to acquire and replace the old equipment. Financing in a company is often achieved in three different approaches depending on their preference or financial condition. The companies can decide to use debt, equity or preferred share financing. Equity is most suitable since it emanates from within but the debt and preference shares attract interest and dividend payments in return[Pon06]. 4. Dividends refer to the corporate earnings that companies do pay their stockholders. Companies especially which are young in their operations like company X may or may not pay the dividends to their shareholders depending on the preference of the stockholders. There exists quite a number of beneficial factors that may make a corporation to choose whether to pass some of the earnings on as dividends or prefer to reinvest all the earnings back to the company. The reinvest is always aimed at encouraging growth of a new venture such as Company X whose operations as public company is merely 5 years. Just as aforementioned, a company that is pursuing growth may not pay its dividend since it targets to invest as much as possible of these earnings into future growth. But this is not exceptional to a young company since even mature companies that believes it may perform better by reinvesting its earnings may take the same direction. Nevertheless, some companies may not pay dividends and instead use the money to spearhead a new project. This includes acquiring new assets, repurchase share or acquire another company. Moreover, firms like company X may choose to reinvest all of their earnings, instead of issuing dividends, may also be a way of avoiding the high potential expense that is attached to issuing new stock. Thus to avoid the risk of raising money for that purpose, Company X may decide to retain its earnings. A company may further decide not to pay dividends since the decision to pay dividends since it may be viewed unfavorably and this might result in declining stock prices. But it is also advisable to pay dividends to prevent accumulating stockholder earnings which may be difficult to pay once accumulated which is a negative impact[Bak07]. Short answer solutions 1. Liquidity measures (usually ratios) evaluates a given company's ability to pay off its short-term debt obligations. This is realized by comparing the company's most liquid assets (easily converted to cash) with the short-term liabilities that it possesses. 2. Liquidity Ratios 3. The Statement of Purpose- describes the products and services the organization is looking for as well as the objectives in the contract. Nature of Project and Bidding Solicitation- details the funding needs for the particular project so that companies can place bids for the project's completion. 4. Meals-Permanent Tax Difference Accruals-Temporary Tax Difference Entertainment- Permanent Tax Difference Prepaids - Temporary Tax Difference Penalties- Permanent Tax Difference 5. Loan covenant refers to the conditions stipulated in a commercial loan (bond) issue that demands the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions. Loan covenant thus restricts certain activities as well as putting in place other conditions that needs to be met. References Baker,K., Saadi,S., Dutta,S.,& Gandhi,D., (2007). The perception of dividends by Canadian managers: new survey evidence. International Journal of Managerial Finance, 3(1),7091. Joshi, P., & Abdulla, J., (1996). Budgetary Control and Performance Evaluation Systems in Corporations in Bahrain. Asian Review of Accounting, 4(2), 125-144. Pongpech, J., Murthy, D., & Boondiskulchock, R., (2006). Maintenance strategies for used equipment under lease. Journal of Quality in Maintenance Engineering, 12 (1), 52-67. Teufel, A., & Geissler, C., (2017). SEC Approves New Continued Listing Standards for ETFs. Journal of Investment Compliance