Communication Case 19–2 Stock options; basic concepts; prepare a memo

You are assistant controller of Stamos & Company, a medium-size manufacturer of machine parts. On October 22, 2017, the board of directors approved a stock option plan for key executives. On January 1, 2018, a specific number of stock options were granted. The options were exercisable between January 1, 2020, and December 31, 2024, at 100% of the quoted market price at the grant date. The service period is for 2018 through 2020.

Your boss, the controller, is one of the executives to receive options. Neither he nor you have had occasion to deal with GAAP on accounting for stock options. He and you are aware of the traditional approach your company used years ago but do not know the newer method. Your boss understands how options might benefit him personally but wants to be aware also of how the options will be reported in the financial statements. He has asked you for a one-page synopsis of accounting for stock options under the fair value approach. He instructed you, “I don’t care about the effect on taxes or earnings per share—just the basics, please.”

Required:

Prepare such a report that includes the following:

1.   At what point should the compensation cost be measured? How should it be measured?

2.   How should compensation expense be measured for the stock option plan in 2018 and later?

3.   If options are forfeited because an executive resigns before vesting, what is the effect of that forfeiture of the stock options on the financial statements?

4.   If options are allowed to lapse after vesting, what is the effect on the financial statements?

Waterways Corporation is preparing its budget for the coming year, 2020. The first step is to plan for the first quarter of that coming year. The company has gathered information from its managers in preparation of the budgeting process.

Waterways likes to keep 10% of the next month’s unit sales in ending inventory. All sales are on account. 85% of the Accounts Receivable are collected in the month of sale, and 15% of the Accounts Receivable are collected in the month after sale. Accounts receivable on December 31, 2019, totaled $181,800.

Direct Materials

Direct materials cost 80 cents per pound. Two pounds of direct materials are required to produce each unit.

Waterways likes to keep 5% of the materials needed for the next month in its ending inventory. Raw Materials on December 31, 2019, totaled 11,370 pounds. Payment for materials is made within 15 days. 50% is paid in the month of purchase, and 50% is paid in the month after purchase. Accounts Payable on December 31, 2019, totaled $102,870.

Other Information

The Cash balance on December 31, 2019, totaled $100,000, but management has decided it would like to maintain a cash balance of at least $700,000 beginning on January 31, 2020. Dividends are paid each month at the rate of $2.30 per share for 4,910 shares outstanding. The company has an open line of credit with Romney’s Bank. The terms of the agreement requires borrowing to be in $1,000 increments at 9% interest. Waterways borrows on the first day of the month and repays on the last day of the month. A $500,000 equipment purchase is planned for February.

For the first quarter of 2020, prepare a cash budget. (Round answers to 0 decimal places, e.g. 2,520.)

Waterways Corporation is preparing its budget for the coming year, 2020. The first step is to plan for the first quarter of that coming year. The company has gathered information from its managers in preparation of the budgeting process.

Waterways likes to keep 10% of the next month’s unit sales in ending inventory. All sales are on account. 85% of the Accounts Receivable are collected in the month of sale, and 15% of the Accounts Receivable are collected in the month after sale. Accounts receivable on December 31, 2019, totaled $181,800.

Direct Materials

Direct materials cost 80 cents per pound. Two pounds of direct materials are required to produce each unit.

Waterways likes to keep 5% of the materials needed for the next month in its ending inventory. Raw Materials on December 31, 2019, totaled 11,380 pounds. Payment for materials is made within 15 days. 50% is paid in the month of purchase, and 50% is paid in the month after purchase. Accounts Payable on December 31, 2019, totaled $102,875.

Other Information

The Cash balance on December 31, 2019, totaled $101,000, but management has decided it would like to maintain a cash balance of at least $800,000 beginning on January 31, 2020. Dividends are paid each month at the rate of $2.40 per share for 5,340 shares outstanding. The company has an open line of credit with Romney’s Bank. The terms of the agreement requires borrowing to be in $1,000 increments at 9% interest. Waterways borrows on the first day of the month and repays on the last day of the month. A $460,000 equipment purchase is planned for February.

For the first quarter of 2020, prepare a cash budget. (Round answers to 0 decimal places, e.g. 2,520.

Different types of cities emerge under different circumstances. For each of the following cases explain the axioms of urban economics and the economic market forces, which cause a city of a particular type to develop.

Backyard production - no cities.

Trading city.

Factory city.

Processing city

Innovation city.

Technology plays an important part in the innovation process. "Technology permits us to develop a form that provides the benefits

Research a product and by using the diagram, The New Product Concept, write an essay about how this product uses technology.

• What is the benefit?
• What is the need?
• How is the form influenced?

Entrepreneurial thinking is described as one of the most relevant skills for the 21st-century workforce (Bacigalupo, Kampylis, Punie, & Brande, 2016).There are key differences in entrepreneurial thinking which are often drawn to making decision in highly uncertain environment, pursuing opportunities, innovation and new value creation. Explain.

Benjamin Franklin created many useful inventions without any desire to receive financial reward. Is intellectual property protection needed in order to promote innovation? Is it hopeless to try to protect intellectual property in digital media? Post a thoughtful response and explain why you agree or disagree.

explore how motivation might be related to creativity within an organisation and the wider implications for organisational success.

• How encouraging of creativity are most workplaces? Please provide two (2) examples of organisations that you believe to be encouraging of creativity and why.
• What does that suggest for the firm’s approach to innovation?

Coca-Cola Revenues ($ millions), 2005–2010 Quarter 2005 2006 2007 2008 2009 2010

Qtr1 5,206 5,131 6,090 7,410 7,180 7,516

Qtr2 6,310 6,480 7,720 9,060 8,232 8,665

Qtr3 6,037 6,422 7,677 8,314 8,040 8,417

Qtr4 5,551 5,920 7,318 7,100 7,498 10,485

Click here for the Excel Data File (a-1) Use MegaStat or Minitab to deseasonalize Coca-Cola’s quarterly data.

(Round your answers to 3 decimal places.)

1 2 3 4 2005 2006 2007 2008 2009 2010 mean

(a-2) State the adjusted four quarterly indexes. (Round your answers to 3 decimal places.)

Q1 Q2 Q3 Q4 (a-3) What is the trend model for the deseasonalized time series? (Round your answers to 2 decimal places.)

yt = xt + (b) State the model found when performing a regression using seasonal binaries. (A negative value should be indicated by a minus sign. Round your answers to 4 decimal places.) yt = + t + Q1 + Q2 + Q3

(c) Use the regression equation to make a prediction for each quarter in 2011. (Enter your answers in millions rounded to 3 decimal places.) Quarter Predicted Q1 Q2 Q3 Q4