The On Demand Global Workforce - oDesk

Thursday, September 1, 2011

Principle of Finance

The Role and Environment of Finance

   2.Accrual income versus cash flow for a period Thomas Book sales,Inc,Supplies textbooks to collage and university bookstores.The books are shipped with a proviso that they must be paid for and billed titles totaling TK.7,60,000 Collections, net of return credits , during the year totaled TK.690,000 . The company spent TK.300,000 acquiring the books that it shipped.
a.Using accrual accounting and the preceding values, show the firm's net profit for the past year.
b.Using cash accounting and the preceding values,show the firm's net cash flow for the past year.
c.Which of these statements is more useful to the financial manager ? why?

Solution
a.Net profit                     =Sales-cost of goods sold
                                        =760,000-300,000
                                        =TK.460,000
b.Net Cash flow             =Cash receipts-Cost of goods sold
                                       =6,90,000-3,00,000
                                       =3,90,000
c.The cash flow statement is more useful to financial manager The accounting net income includes amounts that will not be collected and as a results,do not contribute to the wealth of the owners. 


 -------------------------------------------------------------------------------------------------------------------------------------

3.Liability comparisons Merideth Harper has invested TK.25,000 in Southwest Development Company. The firm has recently declared bankruptcy and has TK.60,000 in unpaid debts. Explain the nature of payments, if any, by Ms.Harper in each of the following situations.
a.Southwest Development Company is a sole proprietorship owned by Ms.Harper.
b.Southwest Development Company is a  50-50 partnership of Ms.Harper and Christopher Black.
c.Southwest Development Company is a corporation.
Solution
a.Ms.Harper has unlimited liability.
b.Ms.Harper has unlimited liability.
c.Ms.Harper has limited liability, which guarantees that see cannot lose more than she invested. 

Principle of Finance

The Role and Environment of Finance

                                          part-B & C

1.Marginal analysis and the goal of the firm ken allen,capital  budgeting analyst for Bally Gears,
Inc has been asked to evaluate a proposal. The manager of the automotive diviesion believes that  
replacing the robotics used on the heavy truck gear line will produce total benefits of TK. 560,000 (in today's the) over the next 5 years. The existing robotics would produce benefits of TK.400,000 (also in today's) over that same time period. An initial cash investment of TK.220,000 would be required to install the new equipment . The manager estimates that the existing robotics can be sold for TK.70,000. Show how ken will apply marginal analysis techniques to determine the following:
a.The marginal (added) cost of the proposed new robotics.
b.The marginal (added)benefits of the proposed new robotics.
c.The net benefit of the proposed new robotics.
d.What should ken Allen recommend that the company do?why?
e.What factor besides the costs and benefits should be considered before the final decision is made?

Solution:
a.Marginal benefits=(New robotics-existing robotics)
                                =(5,60,000-4,00,000)
                                =TK.1,60,000
b.Marginal costs    =(Initial cash investment-sales of old robotics)
                                =(2,20,000-70,000)
                                =TK.1,50,000.
c.Marginal benefit =Marginal costs-Net benefits
                                =1,60,000-1,50,000
                                =TK.10,000
d.Ken should recommend that the  company replace the old robotics with the new robotics.The net benefit to shareholders is positive which should make the shareholders better off.
e.Ken should consider more than just net benefit.He should in corporate the important points of timing, cash flow, and risk, three important factors to determining the true impact on shareholder's wealth.