Your elder brother Kazim has been hired as CFO in Sohar Power Company SAOG. Sohar Power
company SAOG owns and operates the largest power generation and water desalination plant in
the Sultanate. Sohar Power is incorporated in 2004. Since then, the company has built and owns
the 585 MW electricity generation and 33 MIGD seawater desalination plant. Sohar Power has a
history of research and development in the field of power generation and water purification. It has
a long established policy for the treatment of expenditure on research and development, on which
it spends huge amount annually.
Recently, Kazim becomes aware that an investment of OMR 100,000 which was made last year
for research and development programme, has not been properly evaluated. Although in aggregate
OMR 1 million has been spent, but Kazim thinks that the criteria for the investment was not fair
and clear. The director for the research committee did not assess properly and the output of the
investment was poor. Kazim enquires Mr. Abid, the director of research committee to justify the
investment. Abid replies by saying that they will satisfy the auditors in any way.
However, the financial year end is only two months away and OMR 1 million in write-off at this
late stage in the financial year would cause Kazim and his team in difficulties. The company has
to finalize the year-end report. Kazim called the meeting of directors and discussed the issue.
During the meeting they have serious reservations on research committee. One of the directors
suggested that this amount will be considered as an asset and it will be presented on the financial
statement for this year and it would be write off in the next financial year.
a. In your opinion, what decisions will be taken by Kazim to satisfy the auditors and board of
directors of the company? How this transaction would be reflected on financial statement of Sohar
Power?
b. Abid, working on a high position in a company thinks that auditors can be satisfied in an
unethical manner. How could such an unethical behavior be a learning experience for the rest of
the employees? In your opinion, who is to be blamed for this incident in Sohar Power and why?

2. If a company uses the direct write off method of accounting for bad debts
   1. It will record bad debt expense only when an account is determined to be uncollected
   2. It will establish an estimate for the allowance for doubtful debts
   3. It will reduce the accounts receivable account at the end of the accounting period for uncollected accounts
   4. When an account is written off, total assets will stay the same.
   5. None of the above

3. Cost behaviour refers to:
   1. Manufacturing overheads
   2. Costs in a business that remain fixed when production volume increases
   3. How costs react to changes in production volume or other levels of activity
   4. Costs that stay the same per unit.
   5. Only costs that fall into the relevant range for a business.

4. What should a company do to improve its accounts receivable turnover ratio
   1. Give customers credit terms of 2/10, n/30 rather then 1/10, n/30
   2. Reduce the number of employees working in the credit department
   3. Increase its sales force
   4. Lower its selling prices
   5. None of the above

5. Which of the following effects on the accounting equation is not correct as a result of a journal entry?
   1. Decrease shareholders' equity and decrease an asset.
   2. Increase an asset and decrease an asset.
   3. Increase shareholders' equity and increase an asset.
   4. Increase an asset and decrease a liability.
   5. All of the above are not possible

6. Assume that in one accounting period liabilities increased by $8,000, assets increased by $55,000, and net profit was $29,000. The owner must therefore have:
   1. Contributed $18,000
   2. Received dividend $18,000
   3. Contributed $12,000
   4. Received dividend $12,000
   5. Cannot be calculated from the above limited information.

7. The Allowance for Bad Debts represents:
   1. Bad debt losses incurred in the current period
   2. The amount of uncollected accounts written off to date
   3. The difference between total sales made on credit and the amount collected from those credit sales
   4. The difference between the recorded value of accounts receivable and the net realisable value of accounts receivable****
   5. Fees paid to debt collection agencies

8. Two basic accounting principles determine when revenues and expenses are to be recorded under accrual basis accounting. They are:
   1. Cost and matching principles.
   2. Prudence principle.
   3. Relevance and reliability principles.
   4. Revenue recognition and matching principles.
   5. Revenue recognition and measurement principles.

9. On the last day of its financial year, Nelson Pty Ltd paid $2,150 cash for a one-year insurance policy. What is the appropriate journal entry ignoring GST, assuming the insurance policy becomes effective (starts) on the first day of the next financial year (i.e. the next day)?
   1. Unearned Insurance Revenue                 2,150

Cash 2,150

1. 2. Cash                                                     2,150

Prepaid Insurance    2,150

1. 3. Prepaid Insurance                                  2,150

Cash                                                          2,150

1. 4. Prepaid Insurance                                  2,150

Insurance Expense                                      2,150

1. 5. Cash                                                     2,150

Unearned Insurance Revenue                      2,150

10. Carin’s Corporation purchased inventory for $4,000. Due to an error in recording the journal entry for this transaction, the inventory account was debited for only $400 while accounts payable was credited for $4,000. During which phase of the accounting cycle would this error be discovered?
    1. Recording the transaction in the journal.
    2. Preparation of the financial statements.
    3. Analysis of each transaction.
    4. Preparation of the trial balance.
    5. Preparation of the consolidated analysis.

Case 5.0: Incentives in the Firm – Compensating the CEO

Let’s work through an incentive concept and problem. “Moral hazard” problems arise when someone – the “principal” – hires an agent to do something, but the agent has an incentive to do something else. For example, firm owners may want their management team to maximize profits, but maximizing profits is hard, time-consuming work that could interfere with the management team’s preference for playing golf. If top management simply receives a salary, the problem is aggravated because the managers may not be motivated to satisfy the owners, and the owners can’t easily monitor management activity to know if they’re really doing a good job. The problem is resolved in large part if the owners tie most or all of management compensation to firm profits, as income is often a pretty good motivator (although some golf nuts will still pause for a while over this one.) We can set up a scenario to explore this incentive issue further, and this problem will also help fix in our minds the difference between maximizing revenue and maximizing profit.

A small firm faces an inverse demand function of P = 100 - Q. Its total cost function is given by TC = .5Q².   (You should see right away that marginal revenue is thus MR = 100 – 2Q, and it also happens that marginal cost is just MC = Q. Both MR and MC are the first derivatives of total revenue and total cost. And a quick comment on MC: unlike some marginal cost functions we’ve seen, this one is not constant, because marginal cost is getting $1 higher with each additional unit of output.)

The Chief Executive Officer will manage the firm, choosing output and price. Currently, the CEO is negotiating an incentive-based contract with the shareholders of the company. The CEO has proposed that she get 20% of the total revenue brought in by the firm. The shareholders' representative has counter-offered that 10% of total revenue be given to the CEO. (Hint: basing compensation on revenue will motivate revenue maximization rather than profit maximization!)

1.    How much income will each plan generate for the CEO and for the shareholders, respectively? (Hint: since both plans create incentives for the CEO to maximize revenue rather than profit, you should not set MR = MC at this point. BIG hint: revenue is maximized when selling an additional unit won’t increase your revenue, or in math terms, when MR = 0.)

CEO’s proposal: she keeps 20% of TR.

Owners’ proposal: CEO keeps 10% of TR.

2.    Suppose you are asked to mediate in the negotiations. Can you propose an incentive-based compensation scheme for the CEO that both parties are likely to accept, assuming everyone would like to maximize their income?

Your proposal:

Demonstration that everyone is better off than under their own proposal and thus should accept your proposal:

3.    Now thinking even more shrewdly: what’s the maximum price you could charge for your consulting services and still leave everyone better off?

1. List the functions of audit documentation.

2. Explain the Concept of Audit Sampling?

3. Explain the major class of transactions in the Revenue process

A firm in a perfectly competitive industry faces the following cost and revenue conditions: ATC = $6; AVC = $3; MR = MC = $5. The firm is

A company has a single zero coupon bond outstanding that matures in five years with a face value of $34 million. The current value of the company’s assets is $27 million and the standard deviation of the return on the firm’s assets is 44 percent per year. The risk-free rate is 3 percent per year, compounded continuously. a. What is the current market value of the company’s equity? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) b. What is the current market value of the company’s debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) c. What is the company’s continuously compounded cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) d. The company has a new project available. The project has an NPV of $2,300,000. If the company undertakes the project, what will be the new market value of equity? Assume volatility is unchanged. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) e. Assuming the company undertakes the new project and does not borrow any additional funds, what is the new continuously compounded cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Neptune Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come onto the market that the company is anxious to produce and sell. The new toy will sell for $3.20 per unit. Enough capacity exists in the company’s plant to produce 30,900 units of the toy each month. Variable expenses to manufacture and sell one unit would be $2.02, and fixed expenses associated with the toy would total $54,193 per month.

The company's Marketing Department predicts that demand for the new toy will exceed the 30,900 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed expense of $2,710 per month. Variable expenses in the rented facility would total $2.24 per unit, due to somewhat less efficient operations than in the main plant.

2. From a sample of size 250, number of females is 173. What is the point estimate of population proportion? Provide an answer with 3 decimal points.

3. Which one is the point estimate of population mean? a. sample mean b. sample proportion c. sample median d. sample maximum

4. A survey of 1,206 people asked: “What would you do with an unexpected tax refund?” Forty-seven percent responded that they would pay off debts (Vanity Fair, June 2010). if the population size is 5000, then write down the upper bound of 95% confidence interval of the population proportion.

5. An article in the National Geographic News (“U.S. Racking Up Huge Sleep Debt,” February 24, 2005) argues that Americans are increasingly skimping on their sleep. A researcher in a small Midwestern town wants to estimate the mean weekday sleep time of its adult residents. He takes a random sample of 80 adult residents and records their weekday mean sleep time as 6.4 hours. Assume that the population standard deviation is fairly stable at 1.8 hours. Write down the upper bound of 95% confidence interval.