Building and Calibrating 10-period Black-Derman-Toy model:The Black-Derman-Toy model is a famous binomial tree model used for pricing interest-rate derivatives, such as interest-rate swaps, bond options, and swaptions. It is a two-factor model that takes into account the mean reversion and volatility of interest rates in the market. We will use this model to calculate the price of a payer swaption with a notional value of $1 million that expires at time t=3 with an option strike of 0.
The BDT model has the following formula:Where r_ij is the interest rate at node i,j. In this case, we have ten periods, so the maximum i value will be 10. The BDT model requires the values of a and b to be calibrated to the market term structure. In our case, we have the following term structure:Period 1 2 3 4 5 6 7 8 9 10 Spot Rate 3.0% 3.1% 3.2% 3.3% 3.4% 3.5% 3.55% 3.6% 3.65% 3.7%To calibrate the a parameter, we will use Solver in Excel. We will minimize the difference between the market spot rates and the model spot rates by changing the a values. We will set b to 0.05 since it is a constant for all periods in the BDT model. Here are the steps to calibrate the BDT model:
1. Create an Excel sheet with the following inputs:a. A table with the market spot rates for each periodb. A formula to calculate the value of a for each periodc. A formula to calculate the model spot rates for each period
2. Use Solver to minimize the sum of squared differences between the market spot rates and the model spot rates by changing the a values. The target cell is the sum of squared differences, and the variable cells are the a values.
3. Run Solver until the final error returned is at most 10^-8.Once the model is calibrated, we can use it to calculate the price of a payer swaption with a notional value of $1 million that expires at time t=3 with an option strike of 0. The underlying swap has a fixed rate of 3.9%, and if the option is exercised, cash flows take place at times t=4,…,10. The cash flow at time t=i is based on the short rate that prevailed in the previous period. Here are the steps to calculate the price of the swaption:1. Use the BDT model to calculate the short rates for each period.
2. Calculate the discount factors for each period using the formula:(1 + r_ij)^-j
3. Calculate the value of the underlying swap using the fixed rate and the discount factors for each period.
4. Calculate the value of the swaption as the difference between the value of the underlying swap and the value of the underlying swap if the option is exercised.5. Calculate the price of the swaption as the present value of the value of the swaption using the discount factor for time t=3.
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Based on the following transactions, what dollar amount would be reported as total expenses for the month of September using accrual accounting?
Sept. 1 Paid the August balance of wages payable, $325.
Sept. 12 Paid to have a flat tire fixed on the delivery truck, $25.
Sept. 19 Purchased 6 months' of office supplies on account, $175.
Sept. 30 Received the utility bill for September, to be paid on October 10th, $275.
Sept. 30 Employees earned, but were not paid wages for the last week of September, $450.
Sept. 30 A physical count of office supplies on hand was $125.
Answers:
A. $1,125
B. $350
C. $800 CORRECT
D. $525
Option B is the correct answer but please explain why
E. $400
The answer to the given problem is that the dollar amount that would be reported as total expenses for the month of September using accrual accounting is $800.
Following is the step-by-step explanation of the problem:
Step 1: First of all, we need to calculate the expense of August that is paid in September.
We are given that: Paid the August balance of wages payable, $325. Therefore, August expenses = $325.
Step 2: Secondly, we need to find out the expenses incurred in September. Paid to have a flat tire fixed on the delivery truck, $25.Purchased 6 months' of office supplies on account, $175.
Employees earned, but were not paid wages for the last week of September, $450. A physical count of office supplies on hand was $125. Therefore, September expenses = $25 + $175 + $450 + $125 = $775.
Step 3: Lastly, we need to subtract the amount of utility bill that will be paid in October from the expenses incurred in September. Received the utility bill for September, to be paid on October 10th, $275.
Therefore, the total expenses for September using accrual accounting = August expenses + September expenses - utility bill = $325 + $775 - $275 = $800.
Thus, the correct option is C. $800.
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Consider the following scenario (the given information is the same as in the previous question): Suppose a company has 100 million common shares outstanding, and each share sells for $20. We have estimated that the shares have a beta of 1.2, the riskfree rate is 3%, and the expected market return is 8%. The marginal tax rate for this company is 21%. The company also has $2 billion of bonds outstanding and the yield to maturity on these bonds is 5%. The company has a target capital structure of 60% equity and 40% debt. It does not and will not issue preferred stocks in the future. What is the before-tax cost of debt for this company? A) 4.50% B) 3.95% C) 3.00% D) 5.00%
Number of shares = 100 million Price per share = $20 Beta = 1.2 Risk-free rate = 3% Expected market return = 8% Marginal tax rate = 21% Total bonds outstanding = $2 billion Yield to maturity on bonds = 5% Target capital structure = 60% equity and 40% debt. The correct option is (B).
The before-tax cost of debt for the company can be calculated using the formula given below:
Before-tax cost of debt = yield to maturity on bonds × (1 - marginal tax rate)
Calculation: Given that yield to maturity on bonds = 5%
And, marginal tax rate = 21%
Before-tax cost of debt = 5% × (1 - 0.21)
Before-tax cost of debt = 5% × 0.79
Before-tax cost of debt = 3.95%
Therefore, the before-tax cost of debt for this company is 3.95%.
Hence the correct option is (B).
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Which of the following equations would NOT be appropriate to use in a firm with risky debt?
A) rE=rU+(D/E) x (rU-rD)
B) rU=rD+(D/E) x (rU-rD)
C) rE= rU+(D/E) x rU
D) rU=[E/(E+D)]rE + [D/(E+D)]rD
C) rE= rU+(D/E) x rU would NOT be appropriate to use in a firm with risky debt.
Option C assumes that the cost of equity (rE) is equal to the risk-free rate (rU) plus the debt-to-equity ratio (D/E) multiplied by the risk-free rate. However, in a firm with risky debt, the cost of equity is influenced not only by the risk-free rate but also by the additional risk associated with the firm's debt. Therefore, Option C does not adequately account for the additional risk from the firm's debt and is not appropriate for a firm with risky debt. Options A, B, and D consider the impact of both risk-free and risk-adjusted rates in a more suitable manner.
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where can a customer find out more information about ec2 billing activity that happened 3 months ago?
You can also use the AWS Cost Explorer API to programmatically retrieve billing information for a specific time range. This allows you to access the data directly without going through the console.
To find out more information about EC2 billing activity that happened 3 months ago, a customer can follow these steps:
1. Sign in to the AWS Management Console.
2. Open the Amazon EC2 console.
3. In the navigation pane, choose "Billing."
4. On the "Billing" page, you can see an overview of your account's usage and costs.
5. Under "Cost Explorer," click on "Launch Cost Explorer."
6. In the "Cost Explorer" dashboard, click on "Create a new report."
7. Select "Monthly" as the report type.
8. Set the time range to the specific month you are interested in, three months ago.
9. In the "Group by" section, choose "Service" and then select "Amazon EC2."
10. Click on "Apply" to generate the report.
This report will provide you with detailed information about your EC2 billing activity from three months ago. It will include metrics such as usage, costs, and other relevant data that can help you analyze and understand your EC2 expenses during that time period.
Alternatively, you can also use the AWS Cost Explorer API to programmatically retrieve billing information for a specific time range. This allows you to access the data directly without going through the console.
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On March 1. Year 1. ABC Company received $40,000 cash from the issue of a two-year, 6% note. What is ABC's Interest Expense for Year 2 ? 52400 51,200 $2,000 so On March 1. Year 1, ABC Company received $40.000 cash from the issue of a one-year, 6% note. What is ABC% Interest Expense for Year 1? 51,200 $2,000 $2,400 $0 Previous Next
The required answer to this question is the interest expense for Year 1 is $2,400.
Scenario 1:
On March 1, Year 1, ABC Company received $40,000 cash from the issue of a two-year, 6% note. To calculate the interest expense for Year 2, we need to determine the interest accrued on the note for Year 2.
The formula to calculate interest expense is: Interest Expense = Principal × Interest Rate
In Year 1, the interest expense would be $40,000 × 6% = $2,400. However, for Year 2, we need to calculate the interest expense based on the remaining principal amount.
Since it is a two-year note, the principal amount is $40,000, and the interest rate is 6% per year. The interest expense for Year 2 would be $40,000 × 6% = $2,400.
Therefore, the interest expense for Year 2 is $2,400.
Scenario 2:
On March 1, Year 1, ABC Company received $40,000 cash from the issue of a one-year, 6% note. In this case, we only have one year of interest to calculate.
Using the same formula as before, the interest expense for Year 1 would be $40,000 × 6% = $2,400.
Therefore, the interest expense for Year 1 is $2,400.
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On January 1, 2021, Empresas Morosas issued bonds payable for a par value of $3,400,000. The bonds mature in 20 years. The interest rate on the contract is 9% payable semi-annually on 30 June and 31 December. As the market rate of similar bonds is at 8%, the bonds were sold at a premium at 102% of their maturity value (par value).
1. Make the daily entry to record the first interest payment on June 30, 2021 assuming that the premium is amortized by the straight line method. Remember that you must compute the premium first.
On January 1, 2021, Empresas Morosas issued bonds payable for a par value of $3,400,000. The bonds mature in 20 years. The interest rate on the contract is 9% payable semi-annually on 30 June and 31 December. As the market rate of similar bonds is at 8%, the bonds were sold at a premium at 102% of their maturity value (par value).
Journal entries are used to record transactions on a company's financial statements. These transactions are posted to accounts in a journal entry in order to keep a chronological record of the transactions. For each transaction, debits and credits must be equal.1. To determine the bond's premium, we must first compute the present value of the bond's interest and principal payments.
The present value of the bond's interest and principal payments is $4,146,621. Bond Premium is $746,621 ($4,146,621-$3,400,000).2. Bond Premium can be amortized using the straight-line method by dividing the bond premium by the bond's total interest payments.
Bond Premium Amortized is $18,731 per interest period ($746,621/40).3. The journal entry for the first semi-annual interest payment of $153,000 on June 30, 2021, with bond premium amortized by the straight-line method, would be as follows:DateAccountTitleDebitCredit30-JunInterest expense149,269 Premium on bonds.
payable4,731Cash153,000(To record semi-annual interest payment) Therefore, the journal entry to record the first interest payment on June 30, 2021, assuming that the premium is amortized by the straight-line method is:DateAccountTitlesDebitCredit30-JunInterest Expense (9% of $3,400,000) 153,000Bond Premium Amortization 18,731Cash 153,000Bond Premium on Payable 4,731 Interest Payable 149,269(To record semi-annual interest payment on bond payable)
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Over the past 50 years, the U.S. poverty rate was at its lowest level in a. 1973. b. 1990. C. 2008. d. 1980.
Over the past 50 years, the U.S. poverty rate was at its lowest level in (option c) 2008.
To determine the correct answer, let's analyze the given options and review the historical context of the U.S. poverty rate over the past 50 years.
a. 1973: In 1973, the United States experienced an economic recession known as the "oil crisis." This led to a spike in inflation and unemployment rates, which likely had a negative impact on the poverty rate. Therefore, it is unlikely that the poverty rate was at its lowest level in 1973.
b. 1990: The 1990s marked a period of economic growth and prosperity in the United States, commonly referred to as the "dot-com boom." However, despite this economic growth, poverty rates remained relatively stable throughout the decade. Thus, it is unlikely that the poverty rate was at its lowest level in 1990.
c. 2008: The year 2008 is significant because it marks the beginning of the global financial crisis, also known as the "Great Recession." The crisis resulted in a severe economic downturn, high unemployment rates, and a substantial increase in poverty levels. Therefore, it is highly unlikely that the poverty rate was at its lowest level in 2008.
d. 1980: The 1980s were a time of economic expansion in the United States. However, despite this growth, poverty rates remained relatively steady, and there were no significant policies or events that would suggest the poverty rate reached its lowest level in 1980.
Considering the information provided, the most plausible option is c. 2008. However, it's important to note that poverty rates can vary annually, and the lowest level may have occurred in a different year within the 50-year timeframe.
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Maria owns 75% and Christopher owns 25% of Cockatoo Corporation, a calendar year taxpayer. Cockatoo makes a $600,000 distribution to Maria on April 1 and a $200,000 distribution to Christopher on May 1. Cockatoo's current E & P is $120,000 and its accumulated E & P is $500,000. What are the tax implications of the distributions to Maria and Christopher?
Maria owns 75% and Christopher owns 25% of Cockatoo Corporation, a calendar year taxpayer. Cockatoo makes a $600,000 distribution to Maria on April 1 and a $200,000 distribution to Christopher on May 1. Cockatoo's current E & P is $120,000 and its accumulated E & P is $500,000.
The tax implications of the distributions to Maria and Christopher are as follows:
Tax implications of the distribution of $600,000 to Maria: It is first considered as a dividend for tax purposes. The amount of the dividend is $500,000 (accumulated E&P), and the rest is a return of capital, which reduces Maria's tax basis in Cockatoo Corporation.
The $500,000 dividend is treated as ordinary income for tax purposes. It will be taxed at the ordinary income tax rate. Therefore, it will be taxed at the tax rate of Maria.
Tax implications of the distribution of $200,000 to Christopher: It is also considered as a dividend for tax purposes. The amount of the dividend is $120,000 (current E&P), and the rest is a return of capital, which reduces Christopher's tax basis in Cockatoo Corporation.
The $120,000 dividend is treated as ordinary income for tax purposes. It will be taxed at the ordinary income tax rate. Therefore, it will be taxed at the tax rate of Christopher.
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As you have learned throughout the course, salespeople need to be ethical in their conduct in order to be successful long-term. Choose either the concept of "business ethics" or the concept of "corporate social responsibility" and write one paragraph (minimum 300 words) on what this concept means to you as a future sales professional and how you will apply this to your future career. If you utilise any external references, please cite them in APA format and use in-text citations as required.
As a future sales professional, I believe that corporate social responsibility is an essential concept to understand and apply to my future career. Corporate social responsibility (CSR) refers to a company's efforts to operate in an economically, socially, and environmentally responsible manner.
In other words, CSR requires companies to consider the impact of their actions on various stakeholders, including employees, customers, communities, and the environment.
To me, CSR means that businesses have a responsibility to make a positive impact on society beyond just their bottom line. As a sales professional, I believe that it is important to work for companies that prioritize CSR and to help communicate those efforts to customers.
This includes ensuring that the products or services being sold are produced ethically and sustainably, and that the company is actively working to minimize its impact on the environment.
Additionally, I believe that it is important for salespeople to be transparent with their customers about the company's CSR efforts. This includes sharing information about the company's supply chain, the materials used in production, and any certifications or labels that indicate sustainable or ethical practices. Salespeople should also be prepared to answer any questions that customers may have about the company's CSR efforts.
In order to apply the concept of CSR to my future career, I plan to seek out companies that prioritize this concept and are committed to making a positive impact on society.
I will also strive to be a knowledgeable and transparent sales professional, providing customers with accurate information about the company's CSR efforts. Additionally, I plan to stay up-to-date on industry trends and best practices related to CSR, so that I can provide the best possible service to my customers.
In conclusion, I believe that corporate social responsibility is an important concept for sales professionals to understand and apply to their future careers. By working for companies that prioritize CSR and being transparent with customers about these efforts, sales professionals can help make a positive impact on society and the environment.
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Which statement is true about billable expenses?A default markup dollar amount can be addedInvoicing for a billable expense must always be posted to an income accountThe purchase transaction related to a billable expense can be posted to an income accountThe purchase transaction related to a billable expense can be posted to another asset account
The statement "The purchase transaction related to a billable expense can be posted to another asset account" is true. The correct statement is d).
When recording a purchase transaction for a billable expense, it is common to post it to an asset account, such as an accounts payable or a specific expense account.
This allows for proper tracking of the expense until it is billed to the customer. Once the billable expense is invoiced to the customer, it can then be posted to an income account to recognize the revenue and offset the expense.
Additionally, a default markup dollar amount can be added when invoicing for billable expenses, but it is not required. The correct answer is d).
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--The given question is incomplete, the complete question is given below " Which statement is true about billable expenses?
a default markup dollar amount can be added
b invoicing for a billable expense must always be posted to an income account
c The purchase transaction related to a billable expense can be posted to an income account
d The purchase transaction related to a billable expense can be posted to another asset account"--
You are the CFO of "Magic Candles Inc." a public company with stocks traded at TSX. You are located in New Westminster, BC. The marketing team of your company has just come up with a new product strategy where the company needs to start producing candles from eco-friendly materials. The estimated investment into this new production is $1,000,000. The company has 1.0 debt/equity ratio. The book value of assets is $9,000,000. The CEO is very excited about this new endeavour and asked you to decide how you are going to finance it. The company does not have internal funds available and needs to use debt or equity financing. The financing should be attractive for investors and at the same time be the best option for the company. The options you are thinking about are 1. Issue bonds. 1,000 bonds with a face value of $1,000 and 8% semi-annual coupon with 5 years to maturity. You think that the bond can be priced in the market for $980. 2. Issue shares and place them at TSX. To finance the new product line, the company can issue 9,000 shares. The last dividend paid was $4.50, and the dividends are growing at a constant rate of 2.8%. 3. Take a loan for 5 years at 7% compounded semi-annually. Questions: 1. What is more attractive for investors: bonds or stocks? Provide calculations for each of the options. Additionally, discuss risk and reward in relation to these options as well as other advantages and disadvantages of debt and equity for an investor. 2. What is the best financing for the company? Remember that debt costs are expenses and are deducted before taxation. The company tax rate is 30%. Additionally, discuss the advantages and disadvantages of debt and equity for this company (capital structure and impact on cash flows). Provide calculations to support your argument.
1. What is more attractive for investors: bonds or stocks? Provide calculations for each of the options. Additionally, discuss risk and reward in relation to these options as well as other advantages and disadvantages of debt and equity for an investor.
Bond:Current Yield = (Coupon Payment / Market Price of Bond) × 1000 = (80 / 980) × 1000 = 8.16%Yield to Maturity = 8.72% (calculated using Excel's RATE function: RATE(10, 40, -980, 1000) x 2)Stock:Dividend yield = Last Dividend Paid / Current Market Price = 4.5 / x = 0.045 x = $100Dividend in Year 1 = 4.5 x (1 + 2.8%) = 4.632Dividend in Year 2 = 4.632 x (1 + 2.8%) = 4.765Dividend in Year 3 = 4.765 x (1 + 2.8%) = 4.900Dividend in Year 4 = 4.900 x (1 + 2.8%) = 5.037Dividend in Year 5 = 5.037 x (1 + 2.8%) = 5.177Pricing of shares would depend on market conditions and supply and demand for the shares.
The current market price is assumed to be the same as the par value. The estimated dividend growth rate of 2.8% is also an assumption based on past trends. The dividend growth rate may or may not continue at the same rate in the future. Therefore, a combination of debt and equity financing would be appropriate for the company. The company could issue bonds to finance part of the investment and use the proceeds to pay for part of the new product line. The company could issue shares to finance the remaining part of the investment. The use of a combination of debt and equity financing would reduce the financial risk of the company while keeping the cost of capital reasonable.
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to help get the most money possible when you sell a car, disconnect the odometer after the first year of ownership.true or false?
The given statement is false because Disconnecting the odometer after the first year of ownership in an attempt to get the most money possible when selling a car is illegal and unethical.
The odometer is a vital component of a vehicle that measures and records the distance it has traveled. It provides crucial information about the car's usage and overall condition. When selling a used car, potential buyers rely on the odometer reading to assess the vehicle's value, determine its wear and tear, and make informed decisions.
Disconnecting the odometer or tampering with its readings is a dishonest practice that deceives potential buyers. It misrepresents the true mileage of the vehicle, leading to an inaccurate understanding of its actual condition and potentially inflating its value.
Engaging in odometer fraud can result in legal consequences, including fines and imprisonment, as well as severe damage to one's reputation. Additionally, it can lead to legal disputes and financial losses for the seller, as the buyer may take legal action to seek recourse.
When selling a car, it is important to maintain honesty and transparency. Providing accurate and complete information about the vehicle's history, including its mileage, helps build trust with potential buyers and ensures a fair transaction.
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Total Cost Concept of Product Pricing Vike Com, Inc, produces and sells celfuar phone. The costs of producing and seling 5,500 units of cellular phones are as follows: Wice Coen deslres a profit equal to a 15% rate of retum on invested assets of $776,870. Assume that Voice Com, Ine, uses the total cost concept of applying the cost-plus approach to product pridng. a. Determine the total costs and the totat cost amount per unit for the production and sale of 5,500 units of cellular phones. Round the cost per unt to two decimg b. Determine the total cost asarkop percentape (rounded to two decimal places) for cellular phones. c. Dotemine the seleng price of cellilar phones, found to the nearest cent. jer phone
Without the specific cost figures or the profit amount, it is not possible to provide the total costs, total cost per unit, total cost markup percentage, or the selling price of the cellular phones.
Vike Com, Inc, produces and sells cellular phones. To determine the pricing of their products, Vike Com, Inc uses the total cost concept, specifically the cost-plus approach. The company aims to achieve a profit of 15% on their invested assets of $776,870.
a. The total costs for producing and selling 5,500 units of cellular phones need to be calculated. However, the costs associated with production and sale are not provided in the question. Once those costs are determined, they can be summed up to obtain the total costs. Dividing the total costs by the number of units (5,500) will give us the total cost per unit.
b. The total cost markup percentage can be calculated by dividing the profit amount by the total costs. However, the profit amount is not given in the question. Without this information, it is not possible to calculate the total cost markup percentage.
c. The selling price of the cellular phones can be determined by adding the total cost per unit to the cost markup amount. However, since we do not have the cost markup percentage, we cannot calculate the selling price.
In summary, without the specific cost figures or the profit amount, it is not possible to provide the total costs, total cost per unit, total cost markup percentage, or the selling price of the cellular phones.
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Without the specific cost figures or the profit amount, it is not possible to provide the total costs, total cost per unit, total cost markup percentage, or the selling price of the cellular phones.
Vike Com, Inc, produces and sells cellular phones. To determine the pricing of their products, Vike Com, Inc uses the total cost concept, specifically the cost-plus approach. The company aims to achieve a profit of 15% on their invested assets of $776,870.
a. The total costs for producing and selling 5,500 units of cellular phones need to be calculated. However, the costs associated with production and sale are not provided in the question. Once those costs are determined, they can be summed up to obtain the total costs. Dividing the total costs by the number of units (5,500) will give us the total cost per unit.
b. The total cost markup percentage can be calculated by dividing the profit amount by the total costs. However, the profit amount is not given in the question. Without this information, it is not possible to calculate the total cost markup percentage.
c. The selling price of the cellular phones can be determined by adding the total cost per unit to the cost markup amount. However, since we do not have the cost markup percentage, we cannot calculate the selling price.
In summary, without the specific cost figures or the profit amount, it is not possible to provide the total costs, total cost per unit, total cost markup percentage, or the selling price of the cellular phones.
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You read in BusinessWeek that a panel of economists has estimated that the long-run real growth rate of the U.S. economy over the next five-year period will average 5 percent. In addition, a bank newsletter estimates that the average annual rate of inflation during this five-year period will be about 7 percent. What nominal rate of return would you expect on U.S. government T-bills during this period? Round your answer to two decimal places.
Real growth rate = 5%Inflation rate
= 7%Nominal growth rate = (1 + real growth rate) × (1 + inflation rate) - 1
= (1 + 0.05) × (1 + 0.07) - 1
= 0.1260 or 12.36% Therefore, the nominal rate of return on U.S. government T-bills is estimated to be 12.36% during this period.
The nominal rate of return on U.S. government T-bills is estimated to be 12.36% during this period.
T-bills (Treasury bills) are short-term securities issued by the U.S. Treasury.
The primary reason for issuing these securities is to manage the U.S. government's short-term borrowing needs. They are also used as a risk-free benchmark for other money markets instruments, such as certificates of deposit and commercial paper, and are regarded as risk-free investments.
A nominal rate of return is the total rate of return prior to the impact of inflation. The real rate of return, on the other hand, takes inflation into account and represents the rate of return in terms of purchasing power. T-bills are no exception to the nominal rate of return.
The real interest rate equals the nominal interest rate minus the inflation rate. If the nominal rate of return on T-bills is R, and the inflation rate is I, then:
The real rate of return = (1 + R) / (1 + i) - 1 We may use the data given to calculate the nominal interest rate on T-bills as follows:
Real growth rate = 5%Inflation rate
= 7%Nominal growth rate = (1 + real growth rate) × (1 + inflation rate) - 1
= (1 + 0.05) × (1 + 0.07) - 1
= 0.1260 or 12.36% Therefore, the nominal rate of return on U.S. government T-bills is estimated to be 12.36% during this period.
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The nominal rate of return expected on US government T-bills during the next five-year period with a long-run real growth rate of the US economy of 5% and an average annual rate of inflation of 7% will be -2%.This is because the nominal rate of return is equal to the sum of the real rate of return and the inflation rate.
Thus: N = R + I Where N = nominal rate of return, R = real rate of return, and I = inflation rate. R = N - IN = R - I
Since the real rate of return is the rate at which the economy is expected to grow, the real rate of return is 5%. Therefore, R = 5%. The inflation rate is given as 7%. Thus, I = 7%.
Therefore, N = R + I = 5% + 7% = 12%.
However, we are looking for the nominal rate of return on US government T-bills. T-bills are considered risk-free investments, so they have a lower nominal rate of return than other investments with higher risks.To find the nominal rate of return on US government T-bills, we need to subtract the risk premium, which is the difference between the expected rate of return on T-bills and the expected rate of return on other investments with higher risks. Suppose the expected rate of return on T-bills is 2%.
Then the risk premium would be 12% - 2% = 10%.Thus, the nominal rate of return expected on US government T-bills during the next five-year period would be 2% - 10% = -8%. Since the question asks for the answer to be rounded to two decimal places, the nominal rate of return expected on US government T-bills during the next five-year period would be -2%.
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which step in the appraisal process involves communication of the appraiser's opinions and conclusions?
The step in the appraisal process that involves communication of the appraiser's opinions and conclusions is the Reconciliation Step. This is the last step in the appraisal process, where an appraiser presents their opinion of value derived from their research and analysis.
Appraisal process-
An appraisal process is a methodical approach of determining an estimate of value. It involves research, analysis, and communication of the appraiser's opinions and conclusions.
It can be broken down into different steps, including:
Step 1: Define the problem
Step 2: Preliminary survey and property description
Step 3: Determine the appraisal approach
Step 4: Data collection and analysis
Step 5: Reconciliation of value indications
Step 6: Final appraisal report
Communication of the appraiser's opinions and conclusions happens in the last step of the appraisal process, known as the reconciliation step. In this step, the appraiser presents their opinion of value that is derived from the research and analysis done in the previous steps. The appraiser also needs to explain how they arrived at the opinion of value, describe the scope of work, and provide supporting documentation.
The final report should be clear, concise, and complete. It should be able to support the opinion of value and provide credible evidence to support it. The report should also be in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP). This will ensure that the appraisal report is reliable, accurate, and professional.
To summarize, the step in the appraisal process that involves communication of the appraiser's opinions and conclusions is the Reconciliation Step, which is the last step of the appraisal process.
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QS 5-18 Markups LO6 Assume it costs a manufacturer $80 to produce a pair of sunglasses. The manufacturer sells the sunglasses to a fashion designer for $100. The fashion designer puts its brand name on the sunglasses and sells them to optical retail stores for $160. The optical retail stores then sell the sunglasses to the end customers at $320. Required 1. What is the markup percentage between the following: a. Manufacturer and fashion designer? b. Fashion designer and optical retail store? c. Optical retail store and end customer? 2. What is the total markup from the manufacturer to the end customer?
Manufacturer and fashion designer The cost of the sunglasses to the manufacturer is $80 and the selling price to the fashion designer is $100. The markup is $100 - $80 = $20 Markup percentage = (Markup / Cost price) × 100% = (20 / 80) × 100% = 25% Markup percentage between the manufacturer and the fashion designer is 25%.b) Fashion designer and optical retail store The selling price of the sunglasses by the fashion designer is $160 and the selling price of the sunglasses by the optical retail store is $320.
The markup is $320 - $160 = $160Markup percentage = (Markup / Cost price) × 100% = (160 / 160) × 100% = 100%Markup percentage between the fashion designer and the optical retail store is 100%.c) Optical retail store and end customer The selling price of the sunglasses by the optical retail store is $320 and the selling price of the sunglasses to the end customer is $320.
The markup is $320 - $160 = $160 Markup percentage = (Markup / Cost price) × 100% = (160 / 320) × 100% = 50%Markup percentage between the optical retail store and the end customer is 50%.2.
Total markup from the manufacturer to the end customer Markup percentage between the manufacturer and fashion designer = 25%Markup percentage between the fashion designer and optical retail store = 100% Markup percentage between the optical retail store and end customer = 50% Markup percentage from the manufacturer to the end customer = (25% + 100% + 50%) = 175%.
Therefore, total markup from the manufacturer to the end customer = (Markup percentage / 100) × Cost price= (175 / 100) × $80 = $140Hence, the total markup from the manufacturer to the end customer is $140.
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An engineer with Accenture Middle East BV in Dubai was asked by her client to help him understand the difference between 150% DB and DDB depreciation. Answer these questions if B = $180,000, n = 12 years, and S =$30,000. (a) What are the book values after 12 years for both methods? (b) How do the estimated salvage and these book values compare in value after 12 years? (c) Which of the two methods, when calculated correctly considering S = $30,000, writes off more of the first cost over 12 years?
(a) The book values after 12 years for both methods are:
150% DB: $30,000
DDB: $0
(b) The estimated salvage value of $30,000 is greater than the book value of $0 for both methods after 12 years.
(c) The 150% DB method writes off more of the first cost over 12 years than the DDB method.
The 150% DB depreciation rate is calculated as follows:
150% / 12 years = 12.5%
How to calculate the valueThe book value of the asset after each year is calculated as follows:
Year 1: $180,000 * 12.5% = $22,500
Year 2: $157,500 * 12.5% = $19,687.50
Year 3: $137,812.50 * 12.5% = $17,181.25
Year 4: $119,625 * 12.5% = $14,953.125
Year 5: $104,671.875 * 12.5% = $13,168.44
Year 6: $91,503.4375 * 12.5% = $11,437.8125
Year 7: $79,065.625 * 12.5% = $9,881.875
Year 8: $69,183.75 * 12.5% = $8,646.875
Year 9: $59,536.875 * 12.5% = $7,316.875
Year 10: $52,220 * 12.5% = $6,530.00
Year 11: $45,690 * 12.5% = $5,665.625
Year 12: $39,024.375 * 12.5% = $4,903.125
As you can see, the book value of the asset decreases by $22,500 in the first year, and then by a decreasing amount each year. After 12 years, the book value of the asset is $0.
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Explain more detail about Interviewing and Use Case Diagram
Interviewing and Use Case Diagram are important concepts that are used in the field of software engineering and system analysis. Interviewing refers to the process of asking questions to stakeholders or end-users to obtain information and requirements that can help to create an effective system. A use case diagram is a graphical representation that is used to describe the interactions between a system and its users.
Interviewing: Interviewing is a vital tool in the field of system analysis. It is used to extract information about the system, its users, and their requirements. The interviewer asks questions that can help to identify the goals and objectives of the system. The interviewer can also use the information obtained from the interviews to create use cases and use case diagrams.
Use Case Diagram: A use case diagram is a graphical representation of the interactions between a system and its users. It is a high-level view of the system that shows the functionality of the system and its users. The diagram consists of actors, use cases, and relationships.
Actors are the entities that interact with the system. They can be users or other systems. Actors are represented by stick figures in the diagram.
Use cases represent the functionality of the system. They are the actions that the system performs to achieve its goals. Use cases are represented by ovals in the diagram.
Relationships represent the interactions between actors and use cases. They show the flow of information between the system and its users. Relationships are represented by arrows in the diagram.
In conclusion, Interviewing and Use Case Diagram are important concepts that are used in the field of software engineering and system analysis. Interviewing is the process of asking questions to stakeholders or end-users to obtain information and requirements that can help to create an effective system. A use case diagram is a graphical representation that is used to describe the interactions between a system and its users.
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your firm is selling a 3-year old machine that has a 5-year class life. the machine originally cost $580,000 and required an investment in net working capital of $10,000 at the time of installation, recoverable when the machine is terminated. your firm is selling the asset for $180,000. your firm's marginal tax rate is 34%. what is the cash flow effect from selling this machine?
G!aspen ine coerates a chan of doughnut shops. The company is considering two possele expansion plans. Plan A would open eight smallor shops at a cost of S8,740, cco. Expected anfual net cashinfown are $1,450,000 with zano residual vilue at the end of ten years. Under Plan B, Glascoe would open throe larger shops at a cost of $8,440,000. This plan is expected to generafe net cosh infiows of 51,300,000 per year for ten years, the estimated sle of the properties. Estimated residual value is $925,000. Glascoe uses atraight-fine depreciasion and requires an anrital return of Bर in (Clck the icon to vow the present value factor table] (Cick the icon to view the presert value annuity tactor tablis) (Click tre ionn bo vow the future value factor table.) (Cick the icon to viow the future valien arnuly factor tatio? Read the ceakiterneras. Requirement 1. Compute the paptack period, the AFR, and the NPV of these two ptans. What are the theoghs and weaknesses of these capital budgeting modes? Hegen by computing the payback seriod for both plans. (Rnund your antwers to one decitar phace) Plon A (in youm) Plan 8 (in yaars) Requirements 1. Compule the paytsck period, the ARR, and the NPV of these two plans. What at the ufbengts and weaknesses of these captal budgering models? 2. Which expansion puan sheuld ciancoe choose? Why? 3. Estimash Plar A's IRR. How does the IRR compare with the conpany's requized rate of return?
This is higher than the company's required rate of return of 8%. As a result, Plan A would be considered a good investment.
Compute the payback period, the AFR, and the NPV of these two plans.
What are the strengths and weaknesses of these capital budgeting modes? Begin by computing the payback period for both plans.
Payback period for Plan A:
Since Glascoe needs to earn $8,740,000 on the initial investment of $8,740,000, payback period is obtained by adding the inflows until they are equal to the outflow:
$8,740,000 ÷ $1,450,000 per year = 5.97 years
Payback period for Plan B:
Since Glascoe needs to earn $8,440,000 on the initial investment of $8,440,000, payback period is obtained by adding the inflows until they are equal to the outflow:
$8,440,000 ÷ $1,300,000 per year = 6.49 years
ARR for Plan A:
ARR is computed by dividing the average net income by the average book value of the investment.
(average annual net income ÷ average investment) × 100% or
(average annual net income ÷ average annual net income + average annual depreciation) × 100%(1,450,000 ÷ (8,740,000 ÷ 2)) × 100% = 16.67%ARR for Plan B:(1,300,000 ÷ (8,440,000 ÷ 2)) × 100% = 15.42%NPV for Plan A:
NPV is computed by finding the present value of all cash inflows and outflows.
$1,450,000 (PVIFAn-10, 8%) + $1,450,000 (PVIFAn-9, 8%) + ... + $1,450,000 (PVIFAn-1, 8%) - $8,740,000 = $22,739.68NPV for Plan B:
$1,300,000 (PVIFA10, 8%) + $925,000 (PVIF10, 8%) - $8,440,000 = $1,331,712.12Strengths of payback period method:
It's easy to calculate and understand.
It emphasizes liquidity and reduces the risk of loss from uncertain future cash flows.
It's useful for assessing risk and uncertainty of future cash flows.
Weaknesses of payback period method:
It ignores the time value of money and the profitability of a project.
It ignores cash flows beyond the payback period.
It doesn't measure value or wealth creation.
A strength of the ARR method is that it accounts for time value of money, profitability, and risk.
The method is simple to use and understand.
Weaknesses of the ARR method include its emphasis on accounting earnings, which may not be reliable indicators of value or wealth creation. It is also difficult to assess risk and uncertainty under the ARR method.
NPV is the most reliable method because it takes into account the time value of money, profitability, and risk. The weakness of the NPV method is that it is difficult to understand, calculate, and interpret.
Which expansion plan should Glascoe choose? Why?
The expansion plan that Glascoe should choose is Plan B, the expansion of three larger shops at a cost of $8,440,000. It has a positive NPV of $1,331,712.12, which is higher than the NPV of Plan A. It also has a lower payback period of 6.49 years, which is less than the payback period of Plan A.
The ARR for Plan A is 16.67%, while the ARR for Plan B is 15.42%.
Therefore, Plan B is the most profitable investment.3. Estimate Plan A's IRR. How does the IRR compare with the company's required rate of return?
IRR for Plan A is approximately 18%.
This is higher than the company's required rate of return of 8%. As a result, Plan A would be considered a good investment.
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How portfolio management service is useful? (400
words)
Portfolio management services are beneficial to both individuals and businesses with investment portfolios. Portfolio management services aid investors in achieving their long-term financial goals by providing them with an investment strategy that is tailored to their needs and objectives.
Portfolio managers assist investors in the selection of investments, monitoring their investments on a regular basis, and making investment decisions on their behalf. They aid in the development of a diversified investment portfolio, which reduces investment risk while still generating returns.
Professional portfolio management is a valuable service for investors who require assistance in making investment decisions. A portfolio manager may be able to assess an investor's investment objectives, risk tolerance, and time horizon, among other things, to create a personalized investment plan.
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Audra Smith, President and owner of All-Pro Real Estate Professionals is seeking your assistance in designing a database for her business. One of her employees has experience in developing and implementing Accessbased systems but has no experience in conceptual or logical data modeling. So, at this point Audra only wants you to develop a conceptual data model for her system. You are to use the entity-data diagramming notation with Crows foot symbols. Audra has some very specific needs for her system. There are several aspects of the business that need to be represented in the data model. Of central interest are properties that are listed or sold by the company. Note that a separate division of All-Pro handles raw land, so your system only has to deal with developed property. For all types of properties, Audra wants to keep track of the owner (client), the listing and selling dates, the asking and selling prices, the address of the property, the Multiple Listing Service (MLS) number, and any general comments. In addition, the database should store the client that purchases a property. There are some specialized data that need to be stored, depending on the type of property. For single family houses she wants to store the area (for example UCF or Conway), the size of the house in square feet, the number of bedrooms and baths, the size of the garage (for example, 2 car), and the number of stories. For condominiums, the database should track the name of the complex, the unit number, the size in square feet, the number of bedrooms and baths, and the type of community (coop or condo). For commercial properties, she needs to know the zoning, size in square feet, type (industrial, retail, or office), and the general condition of the property. You will want to use the Supertype/Subtype notation for Property to Property-Type (Single-Family, Condo, Commercial). Audra also wants the database to store information about her real estate agents, such as their name, home address, home phone number, mobile phone number, email address, and their real estate license number. Also, the database should track which agent lists and sells each piece of property. Note that she has a separate system that tracks selling agents and listings from outside brokerages, so you don't have to worry about external agents. However, sometimes a property will be listed and sold by the same All-Pro agent, but other times one All-Pro agent will list a property, and another will sell it. Of course, Audra thinks that it would be good to have the database track information about All-Pro's clients, such as their name, phone number, and street and email addresses. Also, she wants to be able to record comments about the client. AllPro offers referral fees to clients who refer potential customers to the brokerage. The database should store these referral relationships between clients, including the amount and date of the referral payment. Note that only one client can be paid for a referral. In other words, it is not possible for two clients to be paid for referring the same client. Finally, Audra wants to be able to use the database to examine the effectiveness of various advertising outlets. For each outlet, the database should store the name of the outlet (for example, realestate.com or the Orlando Sentinel), the main contact person and their phone number. She also wants to know how much it cost to advertise each property on any outlet used, and when a property was advertised on each outlet used for that property. Keep in mind that a property may be advertised on multiple outlets, and that the cost of advertising on an outlet might vary from property to property. Create an entity relationship diagram that captures Audra's database requirements. The ERD should indicate all entities, attributes, and relationships (including maximum and minimum cardinalities). Also, be sure to indicate primary key attributes. You must draw the ERD using computer software such as Visio, Draw.IO, etc. In addition, you must resolve all M: N (many-to-many) relationships and multi-valued attributes. State any assumptions you make. Remember that your assumptions must be reasonable and must not violate any stated requirements. Think through the entities, and attributes for each entity. Hint: You will have around 7 entities (maybe more).
The conceptual data model is created to fulfill the requirements of All-Pro Real Estate Professionals. Audra Smith is seeking help from the designer to develop the database model.
There are multiple aspects of the business, but the central interest is the properties that are listed or sold by the company. A separate division of All-Pro handles raw land; thus, the system only has to deal with developed property. The database will also store information about real estate agents, their names, home addresses, home phone numbers, mobile phone numbers, email addresses, and real estate license numbers.
All-Pro's clients' information will be recorded, such as their names, phone numbers, street, and email addresses. The database should be able to keep track of referral fees and referral relationships between clients. The advertising outlets' effectiveness will be examined, and for each outlet, the database will store the name of the outlet, the main contact person and their phone number, how much it cost to advertise each property on any outlet used, and when a property was advertised on each outlet used for that property. The ERD should capture all entities, attributes, and relationships, including maximum and minimum cardinalities, and indicate primary key attributes.
The following assumptions were made while creating the entity-relationship diagram for All-Pro Real Estate Professionals:
Each real estate agent has only one license number.Clients can be individuals or legal entities.All referral relationships are between clients.Only one client can be paid for a referral.The maximum number of bedrooms for single-family homes is eight.The maximum number of stories for single-family homes is four. The maximum number of bedrooms for a condo is eight.The maximum number of stories for a condo is three.Learn more about primary key attributes: https://brainly.com/question/32896108
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True or False: Every finite extensive-form game of imperfect
information admits at least one pure-strategy Nash equilibrium.
Justify if true or give a counter-example if not
The statement that "Every finite extensive-form game of imperfect information admits at least one pure-strategy Nash equilibrium" is true. A pure strategy Nash equilibrium is a situation in a game where each player has made their best choice and no player has an incentive to change their strategy given the other player's choices.
The Nash equilibrium is named after Nobel Prize-winning economist John Nash. This principle is used in game theory, which is a branch of mathematics and economics that models decision-making in situations where multiple players interact with each other and have competing interests. In a finite extensive-form game of imperfect information, there exists at least one Nash equilibrium that is in pure strategy.
The proof of the theorem relies on backward induction. It states that for each subgame of the original game, we can identify the Nash equilibria of that subgame. This is true because, in the subgame, each player knows the strategies of the other players. Therefore, they can predict each other's moves and choose their own strategies accordingly. From this, we can work backwards until we reach the root of the game tree, where the Nash equilibrium of the entire game can be found. Therefore, we can conclude that the statement is true.
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Suppose you want to enter a forward contract on soybeans, where you agree to buy 10,000 bushels (about 272,000 kg) of soybeans in six months. Suppose it costs $0.50 per bushel (in present value terms) to store soybeans for six months, and suppose that the current market price for soybeans is $12.50 per bushel. Suppose the six-month zero rate is 1.0% per annum with continuous compounding. As a reminder, soybeans are consumed and used in production.
(a) What can you say about the forward price Fo for such a contract? Either give me an exact value, or lower/upper bounds for the price. Express your value(s) per bushel.
(b) Suppose you observe that the market price for such a forward contract is $12.20 per bushel. Is this an arbitrage opportunity? If so, describe the arbitrage strategy. If not, explain why this is not an arbitrage. Either way, keep your explanation short: 2 sentences maximum.
(a) Forward price for such a contract can be computed as follows: Forward price (Fo)
= Spot price × e^(Rf × T), where Rf is the risk-free rate and T is the time to maturity. Here,Spot price
= $12.50 per bushel, Rf
= 1.0% per annum with continuous compounding,
T = 6/12
= 0.5 (as six months
= 0.5 year)
= $12.50 × e^(0.01 × 0.5)
= $12.5665 (rounded off to four decimal places).The cost of storage is $0.50 per bushel (in present value terms).
= $13.00 per bushel. The lower bound on the forward price is equal to the spot price because the seller can store the soybeans for six months and then deliver them in the forward contract.
Therefore, the lower bound on Fo is $12.50 per bushel. Hence, the bounds on the forward price Fo are:$12.50 ≤ Fo ≤ $13.00 per bushel.(b) Yes, this is an arbitrage opportunity because the market price of $12.20 per bushel is less than the lower bound of $12.50 per bushel computed in part (a). Hence, an arbitrageur can buy soybeans at the current market price of $12.20
= $0.80 per bushel. Therefore, the arbitrage strategy is to buy soybeans at the current market price, store them for six months, and then sell them in the forward market at the lower bound price.
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g true or false:the conceptual framework for financial reporting includes the standards of gaap.
The conceptual framework for financial reporting serves as a foundation for developing accounting standards. It provides guidance on the objectives, qualities, elements, and recognition criteria of financial statements.
The framework helps standard-setting bodies, like the Financial Accounting Standards Board (FASB) in the United States, to establish consistent and reliable accounting principles. GAAP, which stands for Generally Accepted Accounting Principles, is a set of accounting standards and guidelines used in the United States. These standards are derived from the conceptual framework and provide specific rules and procedures for preparing financial statements.
The conceptual framework and GAAP work together to ensure that financial reporting is consistent, transparent, and reliable. They provide a common language and framework for accountants and stakeholders to communicate and interpret financial information accurately In conclusion, the conceptual framework for financial reporting includes the standards of GAAP, which are essential for ensuring consistency and reliability in financial reporting.
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an employee whose primary task is to use the internet in the recruitment process is best known as a(n)
An employee whose primary task is to use the internet in the recruitment process is best known as an "Internet Recruiter" or "Online Recruiter."
Internet recruiters specialize in utilizing online platforms and tools to attract, source, and screen potential candidates for job openings. They leverage the internet's vast resources, including job boards, social media platforms, professional networking sites, and online applicant tracking systems, to identify and engage with potential candidates.
The role of an internet recruiter typically involves tasks such as posting job advertisements online, searching for qualified candidates through various online channels, reviewing resumes and applications received through online platforms, conducting initial screenings via video or phone interviews, and coordinating the recruitment process with hiring managers or recruitment teams.
Internet recruiters play a vital role in modern recruitment strategies, as online platforms have become integral to job searching and talent acquisition. Their expertise lies in effectively navigating and leveraging the digital landscape to identify and attract suitable candidates, optimizing the recruitment process, and utilizing technology tools to streamline candidate selection and evaluation.
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Provide a brief answer of one to three sentences to the following questions: a. Portfolio A contains stocks A and B. Stock A and B are perfectly positively correlated. Portfolio B contains stocks D and E. Stocks Dand E are perfectly negatively correlated. If you were a risk adverse investor, which portfolio would you prefer to own and why? (4 marks) b. Does an investor holding a portfolio of stocks expect to be rewarded for systematic or unsystematic risk? Briefly explain why and the difference between systematic and unsystematic risk, ( 3 marks)
As a risk adverse investor, I would prefer to own Portfolio A because it contains positively correlated stocks which have a higher expected return as compared to the negatively correlated stocks in Portfolio.
An investor holding a portfolio of stocks expects to be rewarded for the systematic risk they have taken as it is the risk that cannot be diversified away. The systematic risk is the risk of the overall market and is uncontrollable, whereas unsystematic risk is specific to a particular company or industry and can be diversified away by investing in a portfolio of stocks.
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what distributes goods and services to customers? group of answer choices outbound logistics inbound logistics logistics cradle to grave
Outbound logistics refers to the process of distributing goods and services from the company to the customers. The correct answer is a) Outbound logistics
Outbound logistics is the part of the supply chain management process that involves the distribution of goods and services to customers. It encompasses various activities such as order fulfillment, warehousing, packaging, transportation, and delivery.
The goal of outbound logistics is to ensure that products are efficiently and effectively delivered to customers in a timely manner. This involves coordinating logistics operations, managing inventory, and optimizing transportation routes to minimize costs and meet customer expectations.
Outbound logistics plays a crucial role in customer satisfaction as it directly impacts the timely availability of products and services, ensuring that they reach the intended customers in the right condition and at the right place. The correct option is a).
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--The given question is incomplete, the complete question is given below " what distributes goods and services to customers? group of answer choices a, outbound logistics b, inbound logistics c, logistics cradle to grave "--
If good 1 is a Giffen good, then it follows that
a. The elasticity of demand of good 1 with respect to its own price is negative
b. The elasticity of demand of good 1 with respect to its own price is positive
c. The Engel curve for good 1 is negatively sloped
d. The demand curve for good 1 is negatively sloped
e. The elasticity of demand of good 1 with respect to income is positive
If good 1 is a Giffen good, then it follows that the elasticity of demand of good 1 with respect to its own price is positive. The answer is letter b.
A Giffen good is a product that, as its price rises, consumers' demand for it increases. Unlike ordinary goods, which experience a decline in demand as their prices rise, Giffen goods experience a rise in demand as their prices rise.The demand curve for a Giffen good slopes upward, and as the price of the good rises, the quantity demanded rises as well.
When the price of a Giffen good rises, people must reduce their consumption of other goods. As a result, they have less income available to spend on the Giffen good. Because the income effect outweighs the substitution effect, the quantity demanded rises despite the higher price of the Giffen good. Thus, the elasticity of demand of good 1 with respect to its own price is positive.
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Income statements under absorption costing and variable costing
Gallatin County Motors Inc. assembles and sells snowmobile engines. The company began operations on July 1 and operated at 100% of capacity during the first month. The following data summarize the results for July:
Sales (3,500 units) $2,135,000 Production costs (4,000 units): Direct materials $1,049,200 Direct labor 451,200 Variable factory overhead 73,600 Fixed factory overhead 115,600 1,689,600 Selling and administrative expenses: Variable selling and administrative expenses $52,400 Fixed selling and administrative expenses 22,000 74,400 This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.
Open spreadsheet
a. Prepare an income statement according to the absorption costing concept.
Gallatin County Motors Inc.
Absorption Costing Income Statement
For the Month Ended July 31
Sales $
Cost of goods sold Gross profit $
Selling and administrative expenses Operating income $
b. Prepare an income statement according to the variable costing concept.
Gallatin County Motors Inc.
Variable Costing Income Statement
For the Month Ended July 31
Sales $
Variable cost of goods sold Manufacturing margin $
Variable selling and administrative expenses Contribution margin $
Fixed costs:
Fixed factory overhead costs $
Fixed selling and administrative expenses Total fixed costs Operating income $
c. What is the reason for the difference in the amount of Operating income reported in (a) and (b)?
Under the absorption costing method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under variable costing , all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory increases, the absorption costing income statement will have a higher Operating income than will the variable costing income statement.
Because of how fixed manufacturing costs are handled, the amount of operating income reported using the absorption costing approach (statement a) and the variable costing method (statement b) differs.
Fixed manufacturing expenses are divided among units of production and accounted for in the cost of products sold in absorption costing. This means that some of the fixed manufacturing expenses are postponed to later periods and are not expensed in the current period as inventory increases. Because certain fixed manufacturing costs are carried forward in inventories, the absorption costing income statement will display higher operating income. Variable costing, on the other hand, views fixed production costs as period expenses and fully deducts them during the period in which they are paid for. The entire amount of fixed production expenses is expensed in the current quarter, regardless of changes in inventory levels. As a result, the income statement for variable costing will show a smaller operating income because no fixed manufacturing expenses are deferred to later periods. In conclusion, the way fixed manufacturing costs are accounted for and allocated between periods depending on inventory levels is what causes the difference in operating income between the absorption costing and variable costing approaches.
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