Overview
How we account for and present debt and equity investments on the financial statements is an important part of U.S. GAAP as we move towards an asset/liability approach as to how certain transactions are recorded. The application of the principles of fair value accounting in regards to these assets can be extremely important in how investors determine a company's financial position. It is an area that has had some interesting ramifications in the financial world.
Instructions
Buckingham Company holds a large portfolio of debt securities as investments. The total fair value of the portfolio is greater than its total original cost, even though some of the individual debt securities have decreased in value. Julia, the CFO, and Sam, the Controller, are near year-end in the process of classifying, for the first time, this investment portfolio in accordance with U.S. GAAP. Julia wants to classify those securities that have increased in value during the period as trading securities in order to increase net income this year, and wants to classify those that have decreased in value as held-to-maturity. Sam, on the other hand, disagrees. He wants to classify the securities that have decreased in value as trading securities and those that have increased in value as held-to-maturity. He contends that the company is having a good earnings year and the recognizing the losses will help to smooth the income this year, and thus the company will have built-in gains for future periods when the company may not be as profitable.
Answer the following questions:
1- Will classifying the portfolio as each proposes actually have the effect on earnings that each says it will? Why or why not?
2- Is there anything unethical in what each of them proposes? Who are the stakeholders affected by their proposals? Be sure to include a solid analysis of current U.S. GAAP standards that the company should be following for debt investments, including properly cited references.
3- Assume that Julia and Sam end up properly classifying the entire portfolio into proper categories, but then each makes a different proposal just before year end: Julia wants to sell those securities with gains and Sam wants to sell only those with losses to accomplish their individual desired effects on net income. Is this unethical? Why or why not?
4- Is the financial community in the U.S. in agreement with the current U.S. GAAP standards as to how to present investments at fair value (often called mark-to-market accounting)? What impact did these standards have in the 2008 financial crisis? Research this on the internet and summarize what you find, being sure to include properly cited references.
In: Accounting
The following table contains data for the U.S. balance of payments in a prior year. Answer the question on the basis of this information. All figures are in billions of dollars. U.S. goods exports +$793 U.S. goods imports -1573 U.S. exports of service +280 U.S. imports of services -222 Net investment income +5 Net transfers -81 Capital account -5 Foreign purchases of assets in the U.S. +1198 U.S. purchases of foreign assets -395 Refer to the table above. The data indicate that Americans:
a)Earned more from their investments abroad than foreigners earned from their investments in America
b)Sold more products to buyers abroad than what foreign producers sold to buyers in America
c)Bought foreign assets abroad more than foreigners bought assets in the U.S.
d)Invested abroad more than foreigners invested in America
In: Economics
You are considering purchasing the preferred stock of a firm but are concerned about its capacity to pay the dividend. To help allay that fear, you compute the times-preferred-dividend-earned ratio for the past three years from the following data taken from the firm’s financial statements:
| Year | 20X1 | 20X2 | 20X3 | |||
| Operating income | $ | 20,000,000 | $ | 20,000,000 | $ | 16,000,000 |
| Interest | 9,100,000 | 10,700,000 | 8,100,000 | |||
| Taxes | 4,000,000 | 5,200,000 | 5,300,000 | |||
| Preferred dividends | 1,000,000 | 700,000 | 500,000 | |||
| Common dividends | 3,300,000 | 3,300,000 | — |
Round your answers to two decimal places.
20X1:
20X2:
20X3:
What does your analysis indicate about the firm’s capacity to pay preferred stock dividends?
Times preferred dividend earned has -Select-declinedincreasedItem 4 each year, which indicates the firm's capacity to pay the dividend has -Select-diminishedimprovedItem 5 .
In: Finance
Which of the following entries on Form 1099-DIV indicates long-term tax treatment, regardless of the amount of time a taxpayer actually owned shares of a mutual fund?
Cash liquidation distributions.
Noncash liquidation distributions.
Nondividend distributions.
Total capital gain distributions.
A taxpayer must make an adjustment on Schedule B, Interest and Ordinary Dividends, and attach the form to their return if they receive which of the following?
Interest from a certificate of deposit.
Nominee interest.
Tax-exempt interest.
U.S. Savings Bond interest.
James (31) is a single taxpayer. In addition to earned income of $192,000 from his job as a technical consultant, James earned $15,000 in taxable interest income in 2019. Assuming he does not have any other income or adjustments for the tax year, what is James' net investment income tax?
$0
$266
$570
$836
In: Accounting
John and Peter started their retirement savings at age 21. Since John is a very conservative person, he chose a very safe mutual fund. However, Peter chose an aggressive mutual fund. They have saved monthly the same amount for 40 years. John earned 10% annual return from his mutual fund but Peter earned 5% annual return from his mutual fund. Choose which one is correct about their account balance when they retired.
A) John’s retirement account balance is exactly 50% of Peter’s balance
b) John’s retirement account balance is more than 50% of Peter’s balance
c) John’s retirement account balance is a little less than 50% of Peter’s balance
d) John’s retirement account balance is much less than 50% of Peter’s balance
In: Finance
Unauthorized Immigrant Workers at Chipotle Mexican Grill Restaurants
In 2015, Chipotle Mexican Grill acknowledged that it was still under investigation by the Securities and Exchange Commission and the U.S. attorney for the District of Columbia for possible failure to comply with laws on employee work eligibility. “It is not possible to know at this time,” the company stated in its annual report to shareholders, “whether the company will incur, or to reasonably estimate the amount of, any fines, penalties or further liabilities in connection with these matters.”
Chipotle’s troubles with immigration had begun four years earlier, when federal agents had descended on dozens of Chipotle Mexican Grill restaurants around the country, from Los Angeles to Atlanta, interviewing employees and managers. Their purpose was to determine whether—and to what extent—the fast-food chain was hiring unauthorized immigrant workers in violation of U.S. law.
Chipotle was a fast-growing chain of restaurants specializing in burritos, tacos, and salads made on premises from fresh ingredients. Founded in Colorado in 1993 by chef Steve Ells, at the time of the immigration raids the company owned more than 1,200 restaurants in 41 states, Ontario, London, and Paris. Chipotle employed 31,000 people, 92 percent of whom were hourly employees. Operating under the slogan “Food with Integrity,” the chain reported $2.27 billion in revenue and 11 percent sales growth in 2011, despite the struggling economy. Some analysts believed that one of the reasons for Chipotle’s strong performance was, as the news service Reuters put it, its “uncanny ability to hold down labor costs.”
Page 369Under government rules, foreign-born individuals are permitted to work legally in the United States under some conditions. They can obtain a green card, a work permit issued to permanent residents (most of whom are close relatives of U.S. citizens). Highly skilled workers in short supply can apply for an H-1 visa. Low-skilled workers can apply for an H-2 visa for temporary, seasonal work; however, these are available to only about 1 percent of the unauthorized population. When hiring, employers are required to fill out and keep on file an I-9 form, documenting a person’s eligibility to work, and present it to government investigators if asked.
About half a million undocumented immigrants entered the United States every year during the past decade, two-thirds by crossing the Mexican–U.S. border and the rest by overstaying temporary visas. The Pew Research Center estimates there are 8.1 undocumented immigrants in the U.S. workforce, about 5 percent of the total. Three-quarters of them are Hispanic, mostly from Mexico but also from Central and South America. The main reason they immigrate is for economic opportunity; studies show, for example, that a Mexican man with a high school education can make two and a half times as much in the United States as in his home country, even after taking into account differences in the cost of living.
Most take low-skilled jobs in a small number of occupations and industries. Fully a quarter of farmworkers in the United States—and about a fifth of building and grounds maintenance workers—are undocumented immigrants. In the restaurant industry, they make up 12 percent of food-preparation workers and servers nationally—and much more in some regions, such as southern California. A study by the Food Chain Workers’ Alliance found that undocumented workers earned a median hourly wage of $7.60 (compared with about $10 for other workers in the food industry) and were more than twice as likely to experience some kind of wage theft, such as unpaid hours. Forty-four percent of undocumented workers in the food industry were actually earning less than minimum wage.
Over the past decade, government policy toward people working in the United States illegally has undergone a sharp about-face. Under President George W. Bush, Immigration and Customs Enforcement (ICE), a division of the Department of Homeland Security, conducted a series of high-profile raids of factories, targeting foreign workers who were unable to produce authentic work papers. For example, in 2008, ICE agents arrested and deported hundreds of workers at a meatpacking plant in Iowa.
The Obama administration took a different approach, focusing its enforcement efforts on employers. ICE began conducting I-9 audits, checking businesses to make sure their employees’ papers were in order. The Social Security Administration also began investigating situations where Social Security numbers provided by employees did not match their records (in the case of illegal workers, these numbers were often fictitious). If the agents found evidence of problems, they ordered that employers comply with the law—and in some cases imposed fines or even brought criminal charges against managers.
Chipotle was not the only employer targeted by these investigations. For example, American Apparel, a garment company based in Los Angeles, terminated 1,800 undocumented workers after an ICE audit found widespread irregularities. At L.E. Cooke Company, a family-owned nursery in California’s Central Valley, the owner was forced to fire 26 of his 99 employees who had entered the country illegally. Many had worked for the nursery for many years and had specialized skills. “Telling them was probably the worst day of my life,” the owner said. “I don’t just sit at a desk here, I’m actually out in the fields harvesting with them.”
Page 370As it awaited resolution of the government investigations, Chipotle’s management took steps to tighten up its employment procedures. In addition to terminating workers it found to be undocumented, Chipotle ordered all its restaurants to use the federal E-Verify system, even in states where this was not required. (E-Verify is an online system that compares information from a new employee’s Form I-9 to social security and homeland security data to confirm work eligibility.) It also adopted an electronic Form I-9 to reduce errors. But the company’s CEO acknowledged that its systems were not foolproof. “Whatever systems you have for anything really, there are always going to be people who try to game the system,” he said. “But I think that we are going above and beyond . . . to ensure that we are complying with the immigration [laws].”
Questions
1.Do you consider being an unauthorized immigrant a form of workplace diversity? How is it similar to and different from other kinds of workplace diversity discussed in this chapter?
2. Do you agree with Chipotle’s response to the government’s enforcement effort? What else should Chipotle’s managers do now, and why?
In: Operations Management
Please answer the correct answer and explain it.
1. In the 1980s, one often-heard explanation for the
low levels of net investment in the US and UK was that
a) developed economies had no incentives for acquiring
new capital
b) investment opportunities were limited because the
already large capital stock was inducing a low marginal product of
capital
c) depreciation and obsolescence were so rapid that
firms could barely keep up with demands for replacing existing
capital
d) stock market participants sought short-term capital
gains from market appreciations rather than long term dividends
from investment
e) rapid price inflation was creating excessive
investor uncertainty
Explain your Answer:
2. Comparing State economies to that of the US as a
whole shows that
a) about half the States are in recession at any point
in time
b) when the US enters a recession, about 20% of the
States experience economic expansion, and vice versa
c) there is very little correlation between the
national and regional economies
d) there is a highly positive correlation between the
national economy and most State economies
e) the 12 Federal Reserve districts experience business
cycles independently of each other
Explain your Answer:
3. Inflation is primarily a problem
a) because even low inflation rates severely hamper GDP
growth
b) for those who are heavily indebted
c) when it is volatile and thus unpredictable
d) because it is severely underestimated, especially
when products are improving in quality
e) for accounting and record-keeping, but it does not
affect the actual trading of goods and services
Explain your Answer:
The next two questions refer to the following.
Consider the following hypothetical annual growth rates of real GDP:
Long run trend 1996
1997 1998 1999 2000
2001 2002 2003
2.5% 3.0% 2.5%
2.0% -1% 0.5% 2.0%
2.5% 3.0%
1. 1998 appears to have been a year of
a) economic expansion
b) recession
c) depression
d) growth recession
e) stagflation
Explain your Answer:
2. Economic recovery from recession appears to have
begun in
a) 1999
b) 2000
c) 2001
d) 2002
e) 2003
Explain your Answer:
In: Economics
BOR CPAs, Inc. is a closely held corporation owned by three stockholders who used the initials of their last names to form the corporation’s name: Cyrus Bailey, John Ogden, and Samuel Rogers. The firm’s Certified Public Accountants (CPAs) perform audits of both public companies and privately owned companies. BOR’s CPAs also provide tax services to both individuals and businesses.
The corporation is divided into two profit centers: the Audit Division and the Tax Division. Each division is composed of two cost centers. The Audit Division is composed of two cost-center departments: Public Company Audits and Private Company Audits. The Tax Division is composed of two cost-center departments also: Individual Tax and Business Tax.
BOR, a decentralized organization, is interested in evaluating the performance of the two divisions. The stockholders are responsible for deciding on investment in the two divisions. Cyrus Bailey is in charge of the performance evaluation, and turns to you for assistance. Mr. Bailey is only interested in evaluating operations at the profit center (division) level, and not at the cost center (department) level.
Mr. Bailey is considering temporarily using some of the staff from the Tax Division to assist the Audit Division during the upcoming busy audit season, and would like to evaluate the effect of this on net income. The Tax Division is estimated to have 800 hours of excess capacity.
The unit for determining sales revenue in both divisions is the "engagement", which means the total agreed-upon work for a given client in either audit or tax for a given year. The company charges on average a fee of $75,000 per audit engagement, and $15,750 per tax engagement.
The company has its own Payroll Office, which provides payroll services to both divisions and will allocate its total expenses to the two divisions as service department charges.
The following chart shows some basic data for the company:
| Hourly market rate for staff (the price the company would have to pay from an outside contractor for staff services) | $110.00 |
| Average hourly cost rate for staff (the average price the company pays to its staff) | $50.00 |
| Number of paychecks issued by Audit Division | 110 |
| Number of paychecks issued by Tax Division | 340 |
| Total expense for Payroll Office | $29,250 |
| Amount of assets invested in Audit Division by BOR CPAs, Inc. | $10,000,000 |
| Amount of assets invested in Tax Division by BOR CPAs, Inc. | $4,000,000 |
Mr. Bailey asks that you prepare Divisional Income Statements showing what 20Y1 results would have been had the Audit Division purchased all the excess capacity of the Tax Division, using a negotiated transfer price. The divisional managers tell you that, with the excess capacity of the Tax Division of 800 hours, the Audit Division can perform 4 more audits during the year, and the Audit Division would agree to a negotiated rate of $80.00 per hour to be paid to the Tax Division for the additional hours required, with the Tax Division selling all its excess capacity to the Audit Division. The Tax Division would still be responsible for paying the salaries of their employees.
Complete the following Income Statements. Enter all amounts as positive numbers. If there is no amount or an amount is zero, enter “0”.
|
BOR CPAs, Inc. |
|
Income Statements |
|
For the Year Ended December 31, 20Y1 |
|
1 |
Audit Division |
Tax Division |
Total Company |
|
|
2 |
Fees earned: |
|||
|
3 |
Audit fees (16 engagements) |
$1,200,000.00 |
$1,200,000.00 |
|
|
4 |
Tax fees (45 engagements) |
$708,750.00 |
708,750.00 |
|
|
5 |
Transfer-pricing fees |
|||
|
6 |
Expenses: |
|||
|
7 |
Variable: |
|||
|
8 |
Audit hours provided by Audit Division |
180,000.00 |
180,000.00 |
|
|
9 |
Tax hours provided by Tax Division |
236,250.00 |
236,250.00 |
|
|
10 |
Excess capacity hours paid to salaried staff |
|||
|
11 |
Audit hours provided by Tax Division |
|||
|
12 |
Fixed expenses |
50,000.00 |
65,500.00 |
115,500.00 |
|
13 |
Income from operations before service department charges |
|||
|
14 |
Service department charges for payroll |
|||
|
15 |
Income from operations |
You are now able to put together all the information you’ve collected and analyze the data. In the following table, “ROI” stands for “Return on Investment.”
Complete the following tables using the information from the other panels and selection lists provided.
|
Audit Division |
|||||
|---|---|---|---|---|---|
| Profit Margin | x | Investment Turnover | = | ROI | |
| No Transfer | x | = | |||
| Market Price | x | = | |||
| Negotiated Price | x | = | |||
| Cost Price | x | = | |||
|
Tax Division |
|||||
|---|---|---|---|---|---|
| Profit Margin | x | Investment Turnover | = | ROI | |
| No Transfer | x | = | |||
| Market Price | x | = | |||
| Negotiated Price | x | = | |||
| Cost Price | x | = | |||
|
BOR CPAs, Inc. |
|||||
|---|---|---|---|---|---|
| Profit Margin | x | Investment Turnover | = | ROI | |
| No Transfer | x | = | |||
| Market Price | x | = | |||
| Negotiated Price | x | = | |||
| Cost Price | x | = | |||
In: Accounting