Consider the following income statements for Nero Company:

Income statement 1

Revenue = 1,800

Direct costs = (300)

Contribution margin = 1,500

Fixed costs = (500)

Operating income = 1,000

Income statement 2

Revenue = 1,400

Direct costs = (200)

Contribution margin = 1,200

Fixed costs = (300)

Operating income = 900

Income statement 3

Revenue = 2,000

Direct costs = (800)

Contribution margin = 1,200

Fixed costs = (400)

Operating income = 800

1. Identify which income statement is prepared using each of the following costing methods:

Absorption costing, Variable costing, and Throughput costing.

2. For each costing method, identify one assumption associated with its use
3. Explain why Nero Company might produce all three types of income statements for the same period.

Should Firms That Go Public Engage in International Offerings?

POINT: Yes. When a U.S. firm issues stock to the public for the first time in an initial public offering (IPO), it is naturally concerned about whether it can place all of its shares at a reasonable price. It will be able to issue its stock at a higher price by attracting more investors. It will increase its demand by spreading the stock across countries. The higher the price at which it can issue stock, the lower is its cost of using equity capital. It can also establish a global name by spreading stock across countries.

COUNTER-POINT: No. If a U.S. firm spreads its stock across different countries at the time of the IPO, there will be less publicly-traded stock in the U.S. Thus, it will not have as much liquidity in the secondary market. Investors desire stocks that they can easily sell in the secondary market, which means that they require that the stocks have liquidity. To the extent that a firm reduces its liquidity in the U.S. by spreading its stock across countries, it may not attract sufficient U.S. demand for the stock in the U.S. Thus, its efforts to create global name recognition may reduce its name recognition in the U.S.

WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support? Offer your own opinion on this issue.

Research Problem 2. Five years ago Bridget decided to purchase a limited partnership interest in a fast-food restaurant conveniently located near the campus of Southeast State University. The general partnerof the restaurant venture promised her that the investment would prove to be a winner. During theprocess of capitalizing the business, $2 million was borrowed from Northside Bank; however, each of thepartners was required to pledge personal assets as collateral to sa±sfy the bank loan in the event thatthe restaurant defaulted. Bridget pledged shares of publicly traded stock (worth $200,000, basis of$75,000) to sa±sfy the bank’s requirement.The restaurant did a good business un±l just recently, when ²agrant health code viola±ons werediscovered and widely publicized by the media. As a result, business has declined to a point where therestaurant’s con±nued existence is doub³ul. In addi±on, the $2 million loan is now due for payment.Because the restaurant cannot pay, the bank has called for the collateral provided by the partners to beused to sa±sfy the debt. Bridget sells the pledged stock for $200,000 and forwards the proceeds to thebank. Bridget believes that her share of the restaurant’s current and suspended passive losses can o´setthe $125,000 gain from the stock sale. As a result, aµer ne¶ng the passive losses against the gain, noneof the gain is subject to tax. How do you react to Bridget’s posi±on?

CA19-7 ETHICS (Deferred Taxes, Income Effects) Stephanie Delaney, CPA, is the newly hired director of corporate taxation for Acme Incorporated, which is a publicly traded corporation. Ms. Delaney’s first job with Acme was the review of the company’s accounting practices on deferred income taxes. In doing her review, she noted differences between tax and book depreciation methods that permitted Acme to realize a sizable deferred tax liability on its balance sheet. As a result, Acme paid very little in income taxes at that time. Delaney also discovered that Acme has an explicit policy of selling off plant assets before they reversed in the deferred tax liability account. This policy, coupled with the rapid expansion of its plant asset base, allowed Acme to “defer” all income taxes payable for several years, even though it always has reported positive earnings and an increasing EPS. Delaney checked with the legal department and found the policy to be legal, but she’s uncomfortable with the ethics of it. Instructions Answer the following questions. (a) Why would Acme have an explicit policy of selling plant assets before the temporary differences reversed in the deferred tax liability account? (b) What are the ethical implications of Acme’s “deferral” of income taxes? (c) Who could be harmed by Acme’s ability to “defer” income taxes payable for several years, despite positive earnings? (d) In a situation such as this, what are Ms. Delaney’s professional responsibilities as a CPA?

Cell Phone Inc. is a private cellular firm that reported net income of $5 million in the current financial year. The firm has borrowed $10 million at a rate of 15%, on which it reported interest expenses of $1.5 million in the current financial year. Cell Phone’s debt has an estimated current market value of $8.5 million. The firm has depreciation of $0.1 million for the current year, and capital expenditures equal to 200% of depreciation. The firm’s sales and capital expenditures are expected to grow at 5% annually during the next five years, while depreciation and interest expenses will remain constant. The firm has estimated that COGS (excluding depreciation) over Sales is 35% and that SG&A/Sales is 15%. The following information was also obtained from peer publicly traded firms:

Firm Asset Beta P/E M/B (Equity)

A 0.65 8.2 1.6

B 0.70 9.5 1.3

C 0.55 7.3 0.9

D 0.63 10.5 1.2

E 0.58 15.2 1.4

The firm’s book value of equity is $7.5 million and the firm’s owners hold 750,000 shares. The yield on 10 year Treasuries is 6.5% and the historic market risk premium is assumed to be 5.5%. Assuming that there is no working capital requirement and a constant growth rate of FCFF of 4% beyond the forecast period of five years, estimate a range for the firm’s intrinsic value per share at the end of the current year (tax rate = 50%).

Describe the study Pozzulo and Dempsey (2006) conducted on lineup instructions and the conclusions that can be drawn from this study.

Question 2 (1 point)

The owner of a local phone store wanted to determine how much customers are willing to spend on the purchase of a new phone. In a random sample of 15 phones purchased that day, the sample mean was $302.071 and the standard deviation was $27.9396. Calculate a 99% confidence interval to estimate the average price customers are willing to pay per phone.

Question 2 options:

Question 3 (1 point)

You own a small storefront retail business and are interested in determining the average amount of money a typical customer spends per visit to your store. You take a random sample over the course of a month for 12 customers and find that the average dollar amount spent per transaction per customer is $102.028 with a standard deviation of $15.1769. Create a 99% confidence interval for the true average spent for all customers per transaction.

Question 3 options:

Question 4 (1 point)

The owner of a local golf course wanted to determine the average age (in years) of the golfers that played on the course. In a random sample of 27 golfers that visited his course, the sample mean was 41.1 years old and the standard deviation was 5.19 years. Using this information, the owner calculated the confidence interval of (39, 43.2) with a confidence level of 95% for the average age. Which of the following is an appropriate interpretation of this confidence interval?

Question 4 options:

A researcher was interested in investigating a relationship between the age (independent variable) of a driver and the distance the driver can see. For this purpose, he collected data on some drives. The data is provided in Appendix ‘1”.

To help you, partial summary analysis is provided below: SSxx= 13,752 SSxy=- 41,350 SSyy=193,667 ∑ x = ∑ Age = 1,530; ∑ y = ∑(Distance the driver can see)=12,700

Age Distance
18 510
20 590
22 560
23 510
23 460
25 490
27 560
28 510
29 460
32 410
37 420
41 460
46 450
49 380
53 460
55 420
63 350
65 420
66 300
67 410
68 300
70 390
71 320
72 370
73 280
74 420
75 460
77 360
79 310
82 360

a) Write the estimated regression line

b) Is the relationship meaningful (significant at α=0.05)? (3 pts) – make sure to state the null and alternative hypothesis first.

c) What is the strength of the relation? It is significant? (3 pts)

d) What is the coefficient of determination? (2 pts)

e) John is 61 years old. What is the expected driving distance for him? What is the 95% prediction interval for John? (4 pts)