This chapter mentioned that investors require managers to provide financial information so that they can (1) assess the levels of risk and potential returns offered by alternative investments and (2) control the actions of managers through the creation of contracts. Refer to the list below and explain how each of the following items relates to this statement.

a. The managers of many U.S. companies receive bonuses at the end of each year that are determined by a percentage of that year’s net income.

b. The profits of XYZ company over the past five years have far exceeded the average profit of the companies in the industry in which XYZ is a member.

c. Leverage, Inc., has recently borrowed $1 million from First National Bank. The loan contract states that the dividends Leverage pays to its shareholders in any one year cannot exceed 50 percent of that year’s net income. It also specifies that Leverage’s ratio of total liabilities to total assets cannot exceed .75 at any time during the period of the loan. Net income, total liabilities, and total assets must be measured in con¬ formance with generally accepted accounting principles.

d. Tarpley and Sons has doubled its outstanding debt in the past year.

e. Dun and Bradstreet, a financial rating service, determines GE’s credit rating to be AAA.