inflation is 2 percent. In which situation would you rather be a lender?

In which would you rather

be a borrower?

Suppose that the yield curve shows that the one-year bond yield is 3 percent, the two-year yield
is 4 percent, and the three-year yield is 5 percent. Assume that the risk premium on the one-year
bond is zero, the risk premium on the two-year bond is 1 percent, and the risk premium on the
three-year bond is 2 percent.

The misrating of mortgage-backed securities by rating agencies contributed to the financial crisis
of 2007-2009. List some recommendations you would make to avoid such mistakes in the future.

For each pair of instruments below, use the criteria for valuing a financial instrument to choose
the one with the highest value. a. A U.S. Treasury bill that pays $1,000 in six months or a
U.S.Treasury bill that pays $1,000 in three months. b. A U.S.government Treasury bill that pays
$1,000 in three months or commerci

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If, after one year, the yield to maturity on a multi-year coupon bond that was issued at par is
higher than the coupon rate, what happened to the price of the bond during that first year?

For each of the following events, explain whether it represents systematic risk or idiosyncratic
risk and explain why. a. Your favorite restaurant is closed by the county health department. b.
The government of Spain defaults on its bonds, causing the breakup of the euro area. c. Freezing
weather in Florida destroys t

What risks might financial institutions face by funding long-run loans such as mortgages to
borrowers (often at fixed interest rates) with short-term deposits from savers?

The Dow Jones Industrial Average is an index of the prices of only 30 stocks. Consider a much
broader measure of the stock market -- the market value of equities (FRED code:
MVEONWMVBSNNCB)– which sums the price of each stock times the number of
outstanding shares. After plotting it, comment on its pattern since the

Compare long-run market expectations of inflation with a consumer survey measure of one-year-
ahead inflation expectations. Starting with the graph from Data Exploration Problem 1, add as a
second line the University of Michigan survey measure of inflation expectations (FRED code:
MICH) Why might these measures differ

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In which of the following cases would you be more likely to decide whether to take on the risk
involved by looking at a measure of the value at risk? (LO2) a) You are unemployed and are
considering investing your life savings of $10,000 to start up a new business. b) You have a full-
time job paying $100,000 a year and
Suppose that a major foreign government defaults on its debt. What, if anything, will happen to
the position and slope of the U.S. yield curve?

Most businesses replace their computers every two to three years. Assume that a computer costs
$2,000 and that it fully depreciates in 3 years, at which point it has no resale value and is thrown
away.(LO1) a. If the interest rate for financing the equipment is equal to i, show how to compute
the minimum annual cash f

In Data Exploration Problem 1, you saw the impact of inflation in the U.S. on short-term U.S.
Treasury bill rates. Now examine similar data for Brazil. a. Plot the Brazilian Treasury bill rate
(FRED code: INTGSTBRM193N). The range of values and compare them with the range in the
U.S. Treasury bill plot from Data Explo

How does the variability of annual inflation – an indicator of inflation risk – change over
time? Graph the percent change from a year ago of the consumer price index (FRED code:
CPIAUCSL) since1990 and visually compare the decades of the 1990s, the 2000s, and the period
that began in 2010.

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Plot the difference since 1979 between the Moody’s Baa bond index (FRED code:BAA) and
the U.S. Treasury 10-year bond yield (FRED code:GS10). Comment on the trend and variability
of this “credit risk premium” (Chapter) before and after the 2007-2009 financial crisis.

Use the model of supply and demand for bonds to illustrate and explain the impact of each of the
following on the equilibrium quantity of bonds outstanding and on equilibrium bond prices and
yields: (LO3) a. A new Web site is launched facilitating the trading of corporate bonds with
much more ease than before. b. Infla

As you read the business news, you come across an advertisement for a bond mutual fund – a
fund that pools the investments from a large number of people and then purchases bonds, giving
the individuals “shares” in the fund. The company claims their fund has had a return of
13½ percent over the last year. But y

Which would be most affected in the event of an interest rate increase– the price of a five-year
coupon bond that paid coupons only in years 3, 4, and 5 or the price of a five-year coupon bond
that paid coupons only in years 1, 2, and 3, everything else being equal? Explain.

Suppose there is an increase in investors’ willingness to hold bonds at a given price. Use the
model of the demand for and supply of bonds to show that the impact on the equilibrium bond
price depends on how sensitive the quantity supplied of bonds is to the bond price.

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Plot the percent change from a year ago of the Dow Jones Industrial Average (FRED code:
DJIA). Discuss the behavior of changes in the average before, during, and after recession
periods, which are indicated by the vertical, shaded bars on the graph.

Approximately how long would it take for an investment of $100 to reach $800 if you earned 5
percent? What if the interest rate were 10 percent? How long would it take an investment of
$200 to reach $800 at an interest rate of 5 percent? Why is there a difference between doubling
the interest rate and doubling the i

Your financial adviser recommends buying a 10-year bond with a face value of $1,000 and an
annual coupon of $80. The current interest rate is 7 percent. What might you expect to pay for
the bond (aside from brokerage fees)?

Some friends of yours have just had a child. Thinking ahead, and realizing the power of
compound interest, they are considering investing for their child’s college education, which
will begin in 18 years. Assume that the cost of a college education today is $125,000.Also
assume there is no inflationand no tax on in

If regulations restricting institutional investors to investment grade bonds were lifted, what do
you think would happen to the spreads between yields on investment grade and speculative grade
bonds?

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Use the Fisher equation to explain in detail what a borrower is compensating a lender for when
he pays her a nominal rate of interest.

A 10-year zero-coupon bond has a yield of 6 percent. Through a series of unfortunate

circumstances, expected inflation rises from 2 percent to 3 percent. a. Assuming the nominal
yield rises in an amount equal to the rise in expected inflation, compute the change in the price of
the bond. b. Suppose that expected infla

Why is it important to be able to quantify risk?

Suppose, as in Problem 17, that there were ten independent investments available rather than just
two. Would it matter if you spread your $1,000 across these 10 investments rather than two?

Another way to understand stock market risk is to examine how investors expect risk to evolve in
the near future. The DJIA volatility index (FRED code: VXDCLS) is one such measure. Plot the
level of this volatility index since October 1997 and as a second line, the percent change from a
year ago of the S&P500 index (FR

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Plot the percentage change from a year earlier of the value of the S&P 500 stock index (FRED
code: SP500). Visually, has the risk of the S&P 500 index changed over time?

What was the connection between house price movements, the growth in subprime mortgages,
and securities backed by these mortgages—on the one hand—andon the other hand—the
difficulties encountered by some financial institutions during the 2007-2009 financial crisis?

Looking again at the investment described in question 15, what is the maximum leverage ratio
you could have and still have enough to repay the loan in the event the bad outcome occurred?

Consider a coupon bond with a $1,000 face value and a coupon payment equal to 5 percent of
the face value per year. a. If there is one year to maturity, find the yield to maturity if the price of
the bond is $990. b. Explain why finding the yield to maturity is difficult if there are two years to
maturity and you do no

Joe and Mike purchase identical houses for $200,000. Joe makes a down payment of $40,000
while Mike only puts down $10,000; for each individual, the down payment is the total of his net
worth. Assuming everything else equal, who is more highly leveraged? If house prices in the
neighborhood immediately fall by 10 perc

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If, before the change in tax status, the yields on the bonds described in question 10 were below
the Treasury yield of the same maturity, would you expect this spread to narrow, to disappear, or
to change sign after the policy change? Explain your answer.

In a recent issue of the Wall Street Journal (or on www.wsj.com or an equivalent financial
Website), locate the prices and yields on U.S. Treasury issues. For one bond selling above par
and one selling below par (assuming they both exist), compute the current yield and compare it
to the coupon rate and the ask yield pr

Use your knowledge of bond pricing to explain under what circumstances you would be willing
to pay the same price for a consol that pays $5 a year forever and a 5-percent, 10-year coupon
bond with a face value of $100 that only makes annual coupon payments for 10 years.

What would you expect to happen to investment and growth in the economy if the U.S.
government decided to abolish the Securities and Exchange Commission?

Given a choice of two investments, would you choose one that pays a total return of 30 percent
over five years or one that pays 0.5 percent per month for five years?

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In the wake of the financial crisis of 2007-2009, negative connotations often surrounded the term
“mortgage-backed security”. What arguments could you make to convince someone that
they may have benefitted from the growth in securitization over the past 30 years?

Under what circumstances would purchase of a Treasury Inflation Protected Security (TIPS)
from the U.S. government be virtually risk free?

Which of the following investments in the following table would be most attractive to a risk-
averse investor? How would your answer differ if the investor were described as risk-neutral?

You decide you would like to retire at age 65, and expect to live until you are 85 (assume there is
no chance you will die younger or live longer). You figure that you can live nicely on $50,000
per year. a. Describe the calculation you need to make to determine how much you must save to
purchase an annuity paying $5

The design and function of financial instruments, markets, and institutions aretied to the
importance of information. Describe the role played by information in each of these three pieces
of the financial system.

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You are sitting at the dinner table and your father is extolling the benefits of investing in bonds.
He insists that as a conservative investor he will only make investments that are safe, and what
could be safer than a bond, especially a U.S. Treasury bond? What accounts for his view of
bonds?Explain why you think i

Rather than spending $100 today on paint today, you decide to save the money until next year, at
which point you will use it to paint your room. If a can of paint costs $10 today, how many cans
will you be able to buy next year if the nominal interest rate is 21 percent and the expected
inflation rate is 10 percent?

Advances in technology have facilitated the widespread use of credit scoring by financial
institutions in making their lending decisions. Credit scoring can be defined broadly as the use of
historical data and statistical techniques to rank the attractiveness of potential borrowers and
guide lending decisions. In wha

You are considering buying a new house, and have found that a $100,000, 30-year fixed-rate
mortgage is available with an interest rate of 7 percent. This mortgage requires 360 monthly
payments of approximately $651 each. If the interest rate rises to 8 percent, what will happen to
your monthly payment? Compare the pe

Consider a firm that issued a large quantity of commercial paper in the period leading to a
financial crisis. a. How would you expect the credit rating of the commercial paper to evolve as
the crisis unfolds? b. Would you alter your prediction if, rather than commercial paper, the firm
was instead issuing asset-back

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1. Economic profit equals ________minus________. 2. Economic cost equals ________cost

plus ________cost. 3. For a perfectly competitive firm, marginal revenue equals ________, and
to maximize profit, the firm produces the quantity at which ________equals. 4. The market price
for wheat is $5. If a farmer s marginal cost

One way to get into a monopolistically competitive market is to get a franchise for a nationally
advertised product. If you want to get into the donut market, you could pay a franchise fee of
$40,000 to Allied Domecq, the parent company of Dunkin Donuts. That gives you the right to
sell donuts under the Dunkin Donuts b

During the financial crisis of 2007-2009, some financial instruments that received high ratings in
terms of their safety turned out to be much riskier than those ratings indicated. Explain why
markets for other financial instruments might have been adversely affected by that development.

1. The presence of _______explains the negatively sloped portion of a long-run average-cost

curve, and the notion of _______explains the horizontal portion of the curve. 2. Consider the
information provided in Figure. Suppose the output of large aluminum firm drops from two
million pounds to one million pounds per year

Compute the future value of $100 at an 8 percent interest rate 5, 10, and 15 years into the future.
What would the future value be over these time horizons if the interest rate were 5 percent?

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On a hot day, are you willing to pay more than you normally would for an ice-cold can of Coke?
If so, you re the type of consumer Coca-Cola Company had in mind when it developed a high-
tech vending machine, complete with heat sensors and microchips, that charges a higher price
when the weather is hot. According to the

1. A price-discriminating firm will charge a higher price to consumers with a relatively

________ (elastic/ inelastic) demand and a lower price to consumers with a relatively ________
(elastic/inelastic) demand. 2. The aspirin sold in airports is more expensive than aspirin sold in
grocery stores because the demand for

You visit a tropical island that has only four goods in its economy – oranges, pineapples,
coconuts and bananas. There is no money in this economy. a. Draw a grid showing all the prices
for this economy. (You should check your answer using the n(n-1)/2 formula where n is the
number of goods.) b. An islander sugges
Despite the efforts of the United States Treasury and the Secret Service, someone discovers a
cheap way to counterfeit $100 bills. What will be the impact of this discovery on the economy?

In 2001 H.J. Heinz Company announced plans to buy Milnot Holding Company s Beech-Nut for
$185 million. The merger would combine the nation s second- and third-largest sellers of baby
food, with a combined market share of 28 percent. The combined company would still be less
than half the size of the market leader, Gerbe

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Suppose a significant fall the price of certain stocks caused the market makers in those stocks to
experience difficulties with their funding liquidity. Under what circumstances might that
development lead to liquidity problems in markets for other assets?

Over a nine-year period in the 16th century, King Henry VIII reduced the silver content of the
British pound to one-sixth its initial value. Why do you think he did so? What do you think
happened to the use of pounds as a means of payment? If you held both the old and new pounds,
which would you use first, and why?

Plot the annual inflation rate based on the percent change from a year ago of the consumer price
index (FRED code: CPIAUCSL). Comment on the average and variability of inflation in the
1960s, the 1970s, and the most recent decade.

List the financial transactions you have engaged in over the past week. Howmight each one have
been carried out 50 years ago?

1. Incentive to Raise Prices after a Merger. Consider the application Heinz and Beech-Nut Battle
for Second Place. Suppose the merger of two firms will reduce the price elasticity of demand for
each firm’s product from 3.0 to 1.50. For each firm, the average cost of production is
constant at $5 per unit. Suppose Hein

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Why do you think the financial system has become more globally integrated over time? Can you
think of any downside to this increased integration?

Restrictions on residential development make housing suppliers less responsive to changes in

demand. As a result, the housing market is more prone to cycles of rising and falling prices. In a
market with development controls, an increase in demand causes a large increase in price
because the supply side of the market i

Many people believe that, despite ongoing financial innovations, cash willalways be with us to
some degree as a form of money. What Core Principle couldjustify this view?
In many stores, nationally advertised brands share the shelves with store brands. For example,
you can buy Kellogg s Frosted Flakes or Safeway s Frosted Flakes. Similarly, Bayer Aspirin
shares a shelf with Safeway Aspirin. The introduction of a store brand is a form of market entry a
new competitor for a national brand

Suppose financial institutions didn’t exist but you urgently needed a loan. Where would you
most likely get this loan? Using Core Principles, identify an advantage and a disadvantage this
arrangement might have over borrowing from a financial institution.

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How were you, your family or your friendsaffected by the recent failure of the financial system
to function normally during the financial crisis of 2007-2009?

Explain how money encourages specialization, and how specialization improves everyone’s
standard of living.

You are the owner of a small sandwich shop. A buyer may offer one of several payment
methods: cash, a check drawn on a bank, a credit card, or a debit card. Which of these is the least
costly for you? Explain why the others are more expensive.

Life insurance companies tend to invest in long-term assets such as loans to manufacturing firms
to build factories or to real estate developers to build shopping malls and skyscrapers.
Automobile insurers tend to invest in short-term assets such as Treasury bills. What accounts for
these differences?

1. For firms with a low-price guarantee, the promise of matching a lower price is a(n) ________
promise, because all firms will charge the same ________ price. 2. Suppose that Jack and Jill use
a tit-for-tat scheme to encourage cartel pricing. Jill chooses the low price for two successive
months, and then switches to t

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Describe at least three ways you could pay for your morning cup of coffee. What are the
advantages and disadvantages of each?

Reproduce Figure 2.3 from 1960 to the present, showing the percent change from a year ago of
M1 (FRED code: M1SL) and M2 (FRED code: M2SL). Comment on the pattern over the last
five years. Would it matter which of the two monetary aggregates you looked at?

While we often associate informal financial arrangements with poorer countries where financial
systems are less developed, informal arrangements often co-exist within the most developed
financial systems. What advantages might there be to engaging in informal arrangements rather
than utilizing the formal financial sec
Assuming no interest is paid on checking accounts, what would you expect to see happen to the
relative growth rates of M1 and M2 if interest rates rose significantly?

1. Draw the Supply Curves. The following table shows short-run marginal costs for a perfectly
competitive firm: a. Use this information to draw the firms marginal cost curve. b. Suppose the
shut-down price is $10. Draw the firms short-run supply curve. c. Suppose there are 100 identical
firms with the same marginal-co

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1. The trade-off with entry is that an increase in the number of firms leads to higher
_________but greater _______. 2. When products are differentiated by location, the entry of
firms generates benefits for consumers in the form of_______. 3. A perfectly competitive firm
has a _______demand curve, whereas a monopolist

Could the dollar still function as the unit of account in a totally cashless society?

1. Advertising for eyeglasses _________ (increases/decreases) the price of eyeglasses because

advertising promotes _________. 2. An advertisement that succeeds in getting consumers to try
the product will be sensible only if the number of _________ customers is large. 3. In Table, the
profit from repeat customers will

In late 2007, Radiohead released its album In Rainbows for downloading directly from its Web
site. The band adopted an unusual pricing strategy: Let each consumer decide how much to pay.
This looks like price discrimination with a twist. Suppose everyone pays a fixed fraction of his or
her willingness to pay for the al

Between 2006 and 2011, many of the top-selling branded drugs will lose their patent protection.
The producers of generic versions of the branded drugs will enter markets with hundreds of
billions of dollars of annual sales. The producers of branded drugs are responding to the
increased competition in two ways. First, t

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A developer interested in building a casino in Creswell, Oregon, placed a curious announcement

in the local newspaper. If local voters approved the casino, the developer promised to give
citizens a total of $2 million per year. With an adult population of about 1,600, each adult in
Creswell would receive a cash payment

In the middle part of the nineteenth century, the British parliament staged an experiment in
private enterprise. In the early part of the century, water was drawn from local rivers, stored in
ponds on higher ground, and then distributed by wooden pipes to customers. In most urban areas,
this primitive sort of water sys
1. Consumer Compensation. Consider the story of Coca-Cola and the scoreboard in the chapter.
Your job is to fully compensate each student for the cost associated with the soft-drink
monopoly. Suppose Coca- Cola increased the price of soft drinks by $0.20 per can and each
student consumed 10 soft drinks before the monop

Why are large, publiclylisted companies much more likely than small businesses to sell financial
instruments such as bonds directly to the market, while small businesses get their financing from
financial institutions such as banks?

The Got Milk? Advertisement campaign is run by the National Fluid Milk Producers, an industry
group that is funded by a tax of $0.20 per hundredweight of processed milk. Milk producers pool
their resources and run a generic (non-brand) advertising campaign. Why? Milk is a standardized
good, so advertising by one produc

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1. Book Pricing: Publishers versus Authors. Consider the problem of setting a price for a book.
The marginal cost of production is constant at $20 per book. The publisher knows from
experience that the slope of the demand curve is $0.20 per book: Starting with a price of $44, a
price cut of $0.20 will increase the quan

If offered the choice of receiving $1,000 today or $1,000 in one year’s time, which option
would you choose, and why?

1. The firm-specific demand curve shows the relationship between the ____ charged by the firm
and the ____ by the firm. 2. The firm-specific demand curve is ____ (horizontal/negatively)
sloped for a perfectly competitive firm and ____ (horizontal/negatively) sloped for a monopolist.
3. For a monopolist, the firm-specif

1. Consider a market with two firms managed by Harry and Vera. Under a cartel (both firms pick
the high price), each firm earns a profit of $80. Under a duopoly (both firms pick the low price),
each firm earns a profit of $60. If the two firms pick different prices, the high-price firm earns a
profit of $20 and the low

What factors should you take into account when considering using the following assets as stores
of value? a. Gold b. Real estate c. Stocks d. Government bonds

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1. As the price of copper increases, the quantity of copper produced increases because areas with
relatively high ________enter the market. 2. Wolfram Elasticity. Consider the Application
Wolfram Miners Obey the Law of Supply. Suppose the initial equilibrium price is $1,144 per
tonand the output is 100 tons. a. Using
You receive a check drawn on another bank and deposit it into your checking account. Even
though this is a “demand deposit” the funds are not immediately available for your use.
Why? Would your answer change if the check is drawn on the account of another customer of
your own bank?

1. Arrows up or down: If we move from the cartel outcome to the duopoly outcome, the price
___________, the quantity per firm __________, and the profit per firm __________. 2. A
dominant strategy is the strategy that allows one firm to dominate the market__________.
(True/False) 3. The duopolists dilemma is that each

You decide to start a business selling covers for smart phones in a mall kiosk. To buy inventory,
you need to borrow some funds. Why are you more likely to take out a bank loan than to issue
bonds?

For an example of the law of supply with market entry, consider the market for wolfram during
World War II. Wolfram is an ore of tungsten, an alloy required to make heat-resistant steel for
armor plate and armor-piercing shells. During World War II, the United States and its European
allies bought up all the wolfram pr

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1. A firm’s short-run supply curve shows the relationship between ________ on the
horizontal axis and________ on the vertical axis. 2. To draw a firm’s short-run supply curve,
you need its ________ curve and its ________ price. 3. A perfectly competitive industry has 100
identical firms. At a price of $8, the typic

For another example of a competitive market, consider phone service in the developing world,
where many people relied on pay phones until the recent development of mobile phones
generated a new competitive industry. In Pakistan, phone service is now provided by thousands
of wireless women, entrepreneurs who invest $310

If 2 percent growth is your break-even point for an investment project, under which outlook for
the economy would you be more inclined to go ahead with the investment: (1) A forecast for
economic growth that ranges from 0 to 4 percent, or (2) a forecast of 2 percent growth for sure,
assuming the forecasts are equally r

Plot the level of real GDP (FRED code: GDPC1). Then plotthe rate of economic growth as the
percent change from a year ago of this index. Describe how real GDP behaves in recessions,
which are denoted in the FRED graph by vertical shaded bars. If you registered on FRED (as in
Data Exploration Problem 1), save the graph

Under what circumstances might you expect barter to reemerge in an economy that has fiat
money as a means of payment? Can you think of an example of a country where this has
happened recently?
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Splitland is a developing economy with two distinct regions. The northern region has great
investment opportunities, but the people who live there need to consume all of their income to
survive. Those living in the south are better off than their northern counterparts and save a
significant portion of their income.

Why might each of the following commodities not serve well as money? a. Tomatoes b. Bricks
c. Cattle

1. The producers of branded drugs are responding to the introduction of generic competitors by
_______and_______. 2. Ninja Turtles versus Tai Chi Frogs. The demand for fantasy amphibians
is linear, with a slope of $0.01 per amphibian. The average cost of production is constant at $3.
The demand curve intersects the ho

1. The purpose of antitrust policy is to promote _______, which leads to lower _______. 2. There
are three types of antitrust policies: (1) _______, (2) _______, and (3) _______. 3. In the Staples
case discussed in this chapter, the data showed that competition with Office Depot led to
_______prices, suggesting that a

For another example of signaling from advertising, consider movies. A movie distributor may
produce several movies each year but advertise just a few of them. Although there are few repeat
consumers for a particular movie, there is word-of-mouth advertising, also known as buzz:
People who enjoy a movie talk about it an

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1. Otto has a monopoly on limousine service, and Carla is thinking about entering the market.
The outcome of the entry-deterrence game represented by the game tree on the following page is
that Otto picks the ________quantity and Carla _______the market. 2. Use the game tree in the
previous exercise as a starting po

1. The short-run marginal cost curve is shaped like the letter _____and the short-run average cost
curve is shaped like the letter _____. 2. The negatively sloped portion of the short-run marginal
cost curve is explained by _____and the positively sloped portion is explained by_____. 3. Over
the positively sloped porti

Name two distinct financial markets and describe the kind of asset traded in each.

1. Under a price-leadership model, a sudden drop in price by the leader is unlikely to trigger a
price war if other firms believe that the price cut was caused by higher ________. 2. Arrows up,
down, or horizontal: Under the kinked demand curve model, a firm that cuts its price expects its
competitor to_______ its pric
Examine nominal GDP (FRED code: GDP) by repeating the steps in Data Exploration Problem
3. Based on the figure showing percent change from a year ago, what was special about the
behavior of nominal GDP during the financial crisis of 2007-2009 compared to previous
decades?

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Consider again the tropical island described in Problem 12. Under what circumstances would
you recommend the issue of a paper currency by the government of the island? What advantages
might this strategy have over the use of oranges as money?

1. The advertiser’s dilemma is that both firms would be better if ______ advertises, but each
has an incentive to ______. 2. The advertisers dilemma shown in Figure occurs when advertising
causes a relatively ______ increase in the total sales of an industry. 3. Consider a duopoly with
two firms managed by Huck an

The government is heavily involved in the financial system. Explain why.

In the search for alternatives to fossil fuels, a prominent contender is switchgrass, a perennial
grass that is native to the U.S. plains states. The principal advantage of switchgrass and other
cellulosic feed stocks for biofuels are their small carbon footprint. At what price will farmers
convert their fields to swit

The Wall Street Journal has a daily listing of what are called "Money Rates” or interest rates
on short-term securities. Locate it either in a recent issue of the newspaper by looking at the
index on page 1 of the Money and Investing section, or in the Market Data Center of
www.wsj.com. The most important money rate

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If time has value, why are financial institutions often willing to extend you a 30-year mortgage at
a lower annual interest rate than they would charge for a one-year loan?

1. The deregulation of the airline industry led to _______prices on average, but _______prices in
cities. 2. There were two sources of pressure to deregulate electricity market: (1) _______ and
(2) ________. 3. Willingness to Pay for New Airport Gates. Your city is considering an airport-
expansion project that would in

1. The long-run supply curve shows the relationship between ________on the horizontal axis and
________on the vertical axis. 2. Arrows up or down: As the total output of an increasing- cost
industry increases, the average cost of production ________because input prices________ and
the productivity of inputs used by fir

In 1981 the FTC brought an antitrust suit against Xidex Corporation for its earlier acquisition of
two rivals in the microfilm market. By acquiring Scott Graphics, Inc., in 1976 and Kalvar
Corporation in 1979, Xidex increased its market share of the U.S. microfilm market from 46 to
71 percent. As a result, the price of

Commercial banks, insurance companies, investment banks, and pension funds are all examples
of financial intermediaries. For each of these, give an example of a source of their funds and an
example of their use of funds.

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1. A firm will continue to operate an unprofitable business if _________exceeds _________cost.

2. Your firm has a total revenue of $500, a total cost of $700, and a variable cost of $600. You
should _________ (operate/shut down) because _________exceeds. 3. A firm that is losing
money should continue to operate in the

The mining industry is another example of an increasing-cost industry. Copper mines differ in
the purity of their ore and the cost of extracting it. When the price of copper is relatively low,
only low-cost mines operate. As the price of copper increases, mines with progressively higher
extraction costs become profitab

Plot on one figure the percent change from a year ago of both the GDP deflator (FRED code:
GDPDEF) and real GDP (FRED code: GDPC1). How does the GDP deflator link nominal and
real GDP? Since the mid-1980s, does it fluctuate more or less than real GDP?

1. A market is considered unconcentrated if the Herfindahl-Hirschman Index (HHI) is below

_______and is highly concentrated if the HHI is at least ______. 2. For a market with four firms,
each with a 25 percent market share, the Herfindahl-Hirschman Index (HHI) is equal to ______.
3. Oligopolies occur for three reasons

Whichusually grows faster: M1 or M2? Produce a graph showing M2 divided by M1. When this
ratio rises, M2 outpaces M1, and vice versa. What is the long-run pattern? Is the pattern stable?

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The National Atmospheric and Space Administration (NASA) is ending its space-shuttle
program, but has developed programs to encourage firms to enter the market for space flight.
Once the shuttle program is ended, the market will be monopolized by the Russian Space
Agency, which charges a monopoly price of $47 million p

Everything else being equal, which would be more valuable to you – a derivative instrument
whose value is derived from an underlying instrument with a very volatile price history or one
derived from an underlying instrument with a very stable price history? Explain your choice.

Consider an economy that only produces and consumes two goods-food and apparel. Suppose
the inflation rate based on the consumer price index is higher during the year than that based on
the GDP deflator. Assuming underlying tastes and preferences in the economy stay the same,
what can you say about food and apparel p

The Chicago Mercantile Exchange has announced the introduction of a financial instrument that
is based on rainfall in the state of Illinois. The standard agreement states that for each inch of
rain over and above the average rainfall for a particular month, the seller will pay the buyer
$1,000. Who could benefit from

1. For a monopolist, marginal revenue is ___________ (greater/less) than price. 2. A monopoly

that cuts its price gains revenue from its ________customers but loses revenue from its
________customers. 3. At a price of $18 per CD, a firm sells 60 CDs. If the slope of the demand
curve is $0.10, marginal revenue for the 6

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1. As the total output of a constant-cost industry increases, ________the cost does not change, so
the long-run supply curve is _______ (horizontal/ positively sloped/negatively sloped). 2. A
constant-cost industry consumes a relatively _______ (small/large) amount of inputs such as
labor and materials, so as industry

1. A patent increases the incentive to develop new products because it ________ the price of the
product and thus generates profit to cover a firms costs of _______. 2. In some cases, a patent is
socially inefficient because it merely _______; in other cases, a patent is socially beneficial
because it _______. 3. Consi

Under what circumstances might money in the form of currency be the best option as a store of
value?

1. A profit-maximizing firm picks the quantity of output at which ______ equals ______. 2.
Arrows up or down: At a firm’s current level of output, marginal revenue exceeds the
marginal cost. The firm should ______ its output and ______ its price. 3. The entry of a second
firm shifts the firm-specific demand curve of

Give four examples of ACH transactions you might make.

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Traveler’s checks are a component of M1 and M2. Using FRED, produce a graph of this
component of the monetary aggregates (FRED code: TVCKSSL). Explain the pattern you see.

1. The average cost of producing an iPhone is about $ _____. 2. The cost of producing the first
fake killer whale is about three times the cost of producing the second because the firm uses
_____ inputs. 3. The average cost of electricity _____ (increases/decreases) as the size of the
wind turbine increases. 4. For
1. Monopolistic competition refers to a market in which old boys act naturally as they transport
tight slacks in the back of Dodge Ram pickup trucks. ___________ (True/False) 2. There are
___________oxymorons in question 2.1. 3. There are two conditions for a long-run equilibrium
in a monopolistically competitive marke

Designated market makers, who historically have provided liquidity (i.e,, have stood by ready to
buy and sell) in markets for specific stocks, have declined in importance. Explain this decline in
terms of technology and global economic integration.

To begin using FRED, plot the consumer price index (FRED code: CPIAUCSL) and find the
date and level of the latest observation. Then plot the inflation rate measured as the percent
change from a year ago of this index.

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1. Arrows up or down: At a natural monopolist s current level of output, marginal cost exceeds
marginal revenue. The firm should ______ its output and _______ its price. 2. The entry of a
second firm shifts the demand curve of the original firm to the _______, so that at each price the
original firm will sell a(n) ____

Find the most recent level of M2 (FRED code: M2SL) and of the U.S. population (FRED code:
POP). Compute the quantity of money divided by the population. Do you think your answer is
large? Why?

1. Senior Discounts for Movies. Your movie theater charges a single price of $6. The marginal
cost of each patron is $1. A recent marketing survey revealed the following information about
senior citizens and nonseniors. a. The marginal revenue for senior citizens is $ ________, while
the marginal revenue for nonseni

1. The short-run supply curve is steeper than the long run supply curve because of the principle
of _________ 2. Arrows up or down: Suppose the demand for shirts increases. In the short run,
the price _________ by a relatively large amount. As firms enter the market, the price
_________. In the new long-run equilibrium

1. Arrows up or down. When marginal cost is less than average cost, an increase in output_____
average cost. When marginal cost exceeds average cost, an increase in _____output average cost.
2. The short-run average cost of production is the same for two different quantities. _____
(True/False) 3. Compute the Costs. Co

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The Dakota Corporation had a 2018 taxable income of $33,365,000 from operations after all
operating costs but before (1) Interest charges of $8,500,000; (2) Dividends received of
$750,000; (3) Dividends paid of $5,250,000; and (4) Income taxes. a. Use the tax schedule in
Table 2.3 to calculate Dakota's income tax

In 2018, Usher Sports Shop had cash flows from investing activities of -$4,364,000 and cash
flows from financing activities of -$5,880,000. The balance in the firm's cash account was
$1,615,000 at the beginning of 2018 and $1,742,000 at the end of the year. Calculate Usher
Sports Shop's cash flow from operations for 20

In your audit of Aviary Industries for calendar year 20X0, you found a number of matters that
you believe represent possible adjustments to the company's books. These matters are described
below. Management's attitude is that 'once the books are closed, they're closed', and management
doesn't want to make any adjustmen

Thelma and Louie, Inc., started the year with a balance of retained earnings of $543 million and
ended the year with retained earnings of $589 million. The company paid dividends of $35
million to the preferred stockholders and $88 million to common stockholders. Calculate Thelma
and Louie's net income for the year.

1. A monopoly is inefficient solely because the monopolist gets a profit at the expense of
consumers. ____________ (True/False) 2. To show the deadweight loss from monopoly, we
compare the monopoly outcome to what would happen under_________ . 3. The deadweight
loss from monopoly is shown graphically by the area betwee

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In Chapter 14 we discuss the need to obtain a representative sample of a population. How can
this concept be reconciled with the statement in this chapter that the emphasis should be on
confirming larger and older balances in accounts receivable because these are most likely to
contain misstatements?

Gloria Roberts, CPA, expresses the following viewpoint: I don't believe in performing tests of
controls and substantive tests of transactions for the sales and collection cycle. As an alternative,
I send a lot of negative confirmations on every audit at an interim date. If I find a lot of
misstatements, I analyse them

Give reasons why companies provide online access to descriptions of inventory products and on
hand quantity levels to key inventory suppliers. Discuss risks associated with making that
information available on an online basis.

Tater and Pepper Corp. reported free cash flows for 2018 of $39.1 million and investment in
operating capital of $22.1 million. Tater and Pepper incurred $13.6 million in depreciation
expense and paid $28.9 million in taxes on EBIT in 2018. Calculate Tater and Pepper's 2018
EBIT?
Beverly Morgan has prepared a letter of representation for the managing director and chief
accountant to sign. It contains references to the following items: 1. Inventory is fairly stated at
the lower of cost or market and includes no obsolete items. 2. All actual and contingent liabilities
are properly included in t

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The Fitness Studio, Inc.'s 2018 income statement lists the following income and expenses: EBIT
= $538,000, interest expense = $63,000 and net income = $435,000. Calculate the 2018taxes
reported on the income statement.

Use the balance sheet and income statement below to construct a statement of cash flows for
Valium's Medical Supply Corporation.

Evaluate the following statement: 'The corporate constitution of a company is a legal document;
therefore, it should not be examined by the auditors. If the auditor wants information about this
document, a solicitor should be consulted.'

In a management letter to Cline Wholesale Company Ltd the company's auditor, John Schwartz,
informed management of its deficiencies in the control of inventory. He elaborated on how the
deficiencies could result in a significant misstatement of inventory by the failure to recognise the
existence of obsolete items. In a

As part of the audit of McGree Plumbing & Heating, you have responsibility for testing the
payroll and personnel cycle. Payroll is the largest single expense in the client's trial balance, and
hourly wages make up most of the payroll total. A unique aspect of the business is the extensive
overtime incurred by employees

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Use the balance sheet and income statement below to construct a statement of cash flows for
Clancy's Dog Biscuit Corporation.

The following misstatements or omissions are included in the accounting records of Joyce
Manufacturing Company Pty Ltd: 1. A sales invoice totalled was overstated by $1000 because of
a key-entry mistake. 2. A material sale was unintentionally recorded for the second time on the
last day of the year. The sale had orig

Compare the content of a standard unmodified audit report with a report that meets the
requirements of the Corporations Act 2001.

Why are greenhouse gas emission assurance engagements necessarily multidisciplinary in their
nature?
The fieldwork for the 30 June 20X0 audit of Tracy Brewing Company Ltd was finished on 19
August 20X0 and the completed financial statements, accompanied by the signed audit reports,
were mailed on 6 September 20X0. In each of the highly material independent events (a)-(i)
below, state the appropriate action (1)-(4) for

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Included in the 30 June 20X9 inventory of the Wholeridge Supply Company are 2600 deluxe
ring binders in the amount of $5902. An examination of the most recent acquisitions of binders
showed the following costs: 26 July 20X9, 2300 at $2.42 each; 6 June 20X9, 1900 at $2.28 each;
26 May 20X9, 2400 at $2.07 each. What is t

Mr. Husker's Tuxedos, Corp. began the year 2018 with $256 million in retained earnings. The
firm earned net income of $33 million in 2018 and paid dividends of $5 million to its preferred
stockholders and $10 million to its common stockholders. What is the year-end 2018 balance in
retained earnings for Mr. Husker's Tux

Niosoki Auto Parts sells new parts for foreign cars to car dealers. Company policy requires that a
prenumbered shipping document be issued for each sale. At the time of pickup or shipment, the
shipping clerk writes the date on the shipping document. The last shipment made in the financial
year ended 30 June 20X4 was re

You have been assigned to the first audit of Albany Company for the year ending 30 June 20X1.
Accounts receivable were confirmed on 31 March 20X1, and at that date the receivables
consisted of approximately 200 accounts with balances totalling $956 750. Seventy-five of these
accounts with balances totalling $650 725 we

Brian Day, a staff assistant, has been asked to analyse interest and legal expenses as part of the
first-year audit of Rosow Manufacturing Limited. In searching for a model to follow, Day looked
at other completed working papers in the current audit file and concluded that the closest thing to
what he was looking for w

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What steps should a public accountant take if, during a compilation engagement, he or she
becomes aware that the financial statements are misleading?

The following is the audit report, except for the opinion paragraph, of Excelsior Products Ltd:
Independent Audit Report To the Members Excelsior Products Ltd We have audited the financial
report ... as set out on pages 13 to 19 ... Basis for ... Note 17 to the financial statements of the
company states a value i

The customer billing and cash receipts functions of Robinson Company Ltd, a small paint
manufacturer, are attended to by a receptionist, an accounts receivable clerk, and a cashier who
also serves as a secretary. The company's paint products are sold to wholesalers and retail stores.
The following describes all the pro

In an examination of Marco Company Ltd as of 31 December 20X0, the following situations

exist. No entries in respect to them have been made in the accounting records. 1. Marco
Company Ltd has guaranteed the payment of interest on the 10-year, first-mortgage loans of
Newart Company, an associated company. Outstanding l

Meyers Pharmaceutical Ltd, a drug manufacturer, has the following system for billing and
recording accounts receivable. 1. An incoming customer order is received in the order
department by a clerk who prepares a prenumbered company sales order form on which is
inserted the pertinent information such as the customer's

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Adam James is responsible for the audit of Paperwate Stationery Supplies Limited. The company
is a specialist printer of business stationery and has over 1000 clients throughout South Australia
and Victoria. Accounts receivable records are maintained on the company's computer system.
Adam is planning the audit of accou

What is an assurance engagement? How does it differ from an audit?

You are auditing general cash for Pitt Supply Company for the financial year ended 30 June
20X9. The client has not prepared the 30 June bank reconciliation. After a brief discussion with
the owner, you agree to prepare the reconciliation with assistance from one of Pitt Supply's
clerks. You obtain the following inform

Explain the term 'kiting'. Describe audit procedures that can be used to uncover this type of
fraud.

Describe matters the auditor should communicate to the audit committee.

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Describe what is meant by a 'performance audit'.

In the confirmation of accounts receivable for Reliable Service Company Ltd, 85 positive and no
negative confirmations were mailed to customers. This represents 35% of the dollar balance of
the total accounts receivable. Second requests were sent for all non-responses, but there were still
10 customers who didn't respo

The questions below relate to determining the CUDR in audit sampling for tests of controls,
using the following table: REQUIRED a. Using non-statistical sampling, calculate TDR - SDR
for each of columns 1 to 8 and evaluate whether or not sampling error is large enough to accept
the population. Assume that TDR is 5% f
What is an engagement to report on internal control structure? Explain how the requirements
differ from the responsibilities the auditor has for internal control understanding and testing in a
financial statement audit.

Listed below is the 2018 income statement for Tom and Sue Travels, Inc. Tom and Sue Travels,
Inc. Income Statement for Year Ending December 31, 2018 (In millions of dollars) Net
sales.................................................................. $16.500 Less: Cost of goods
sold.................................

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ABC Limited is a national fertiliser manufacturer with factories in every State of Australia. The
company owns freehold property, plant and office equipment in each State, and maintains a large
fleet of motor vehicles for sales staff and executives. Until last year, the company had
maintained a fixed asset register usi

Explain the purpose of an emphasis of matter paragraph. Give examples of circumstances where
an emphasis of matter paragraph is required.

Bancroft Corporation has an internal audit department operating out of head office. Various
types of audit assignments are performed by the department for the eight divisions of the
company. The following findings resulted from recent audits of Bancroft Corporation's
Appliance Division. 1. One of the departments in t

Hardware Manufacturing Company Pty Ltd, a small private company, has operated since 20X2
but hasn't had its financial statements audited. The company now plans to issue additional shares
to be sold to outsiders and wishes to engage you to audit its transactions and render an opinion
on the financial statements for the

Miles Lawson, a registered auditor, believes the final summarisation is the easiest part of the
audit if careful planning is followed throughout the engagement. He ensures that each segment of
the audit is completed before he goes on to the next. When the last segment of the engagement is
completed, he is finished with

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You are considering an investment in Fields and Struthers, Inc., and want to evaluate the firm's
free cash flow. From the income statement, you see that Fields and Struthers earned an EBIT of
$62 million, had a tax rate of 30 percent, and its depreciation expense was $5 million. Fields and
Struthers' gross fixed assets

Mike Adams is an audit partner in a medium-sized public accounting firm and takes an active
part in the conduct of every audit he supervises. He follows the practice of reviewing all working
papers of subordinates as soon as it is convenient, rather than waiting until the end of the audit.
When the audit is nearly fini

In connection with an audit you are given the following worksheet: Cheques drawn but not paid
by bank No. Amount 573....................................................$67.27
724.......................................................9.90 903....................................................456.67 907.....

The 2018 income statement for Egyptian Noise Blasters shows that depreciation expense is $85
million, NOPAT is $246 million. At the end of the year, the balance of gross fixed assets was
$655 million. The change in net operating working capital during the year was $73 million.
Egyptian's free cash flow for the year was

Under what circumstances should an unmodified opinion be issued?

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You are evaluating the balance sheet for Goodman's Bees Corporation. From the balance sheet
you find the following balances: cash and marketable securities = $400,000, accounts receivable
= $1,200,000, inventory = $2,100,000, accrued wages and taxes = $500,000, accounts payable =
$800,000, and notes payable = $600,000.

The following are independent situations for which you will recommend an appropriate audit
report: 1. Subsequent to the date of the financial statements as part of his post-financial report
date audit procedures, a. Public accountant learned of heavy damage to one of a client's two
plants due to a recent fire; the lo

Distinguish between the following types of performance audit: functional, organisational and
special assignment. Give an example of each for a public hospital.

JIT Manufacturing has a 31 December balance date. The physical inventory for JIT
Manufacturing was taken on 30 December 20X9, rather than 31 December, because the client
had to operate the plant for a special order on the last day of the year. At the time of the client's
physical count, you observed that acquisitions r

Explain how materiality differs for misstatements of the financial report and inability to obtain
sufficient appropriate audit evidence.

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You have audited the financial statements of Heft Company Ltd for several years. Internal
controls for accounts receivable are satisfactory. The Heft Company operates on a calendar-year
basis. An interim audit, which included confirmation of the accounts receivable, was performed
on 31 August and indicated that the acc
In what ways are the ANAO's auditing standards consistent with private sector auditing
standards, and what are some differences?

Jones, a chartered accountant, has completed the audit of Sarack Timber Supply Company Ltd
and has issued a standard unqualified report. In addition to a report on the overall financial
statements, the company needs a special audited report on three specific accounts: sales, net
fixed assets, and inventory valued at FI

Wellman, a public accountant, is auditing the financial statements of a manufacturing company

with a significant amount of trade accounts receivable. Wellman is satisfied that the accounts are
properly summarised and classified and that allocations, reclassifications and valuations are
made in accordance with accountin

How would the approach to verifying repairs and maintenance expense differ from that used to
audit depreciation expense? Why would the approach be different?

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How do existing assurance standards apply to greenhouse gas emission assurance engagements?

Distinguish between the three types of opinions other than unmodified and explain the
circumstances in which each is appropriate.

Explain what is meant by 'uncertainties'. List three examples of uncertainties.

Use the following information to find dividends paid to common stockholders during 2018?

What are the main challenges for independent auditors in providing assurance services in relation
to greenhouse gas emissions?

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Ralph Pyson is auditing Merrill Manufacturing Company Ltd. Through his discussions with
client personnel, reading company minutes and reviewing correspondence files, he has become
aware of four legal actions against the client. How should Pyson determine the materiality of the
legal actions and the proper disclosure in

Identify the factors an auditor uses to decide the appropriate TDR. Compare the sample size for a
TDR of 6% with that of 3%, all other factors being equal.

List the sections of an unmodified audit report and explain the meaning of each part. How do the
parts compare with those found in a report other than unmodified?

In the audit of Larnet Manufacturing Pty Ltd, the auditor concluded that internal controls were
inadequate because of the lack of segregation of duties. As a result, the decision was made to
carry out a surprise payroll audit one month before the client's balance date. Because the auditor
had never been involved in a p

What are the purposes of the opinion section in the auditor's report? Identify the most important
information included in the opinion section.

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The 2018 income statement for Duffy's Pest Control shows that depreciation expense was $197
million EBIT was $494 million, and the tax rate was30 percent. At the beginning of the year, the
balance of gross fixed assets was $1,562 million and net operating working capital was $417
million. At the end of the year gross f

What procedures should a public accountant use to obtain the information necessary to give the
level of assurance required of reviews of financial statements?

Describe systematic sample selection, and explain how an auditor would select 35 numbers from
a population of 1750 items using this approach.

You are assigned to the 30 June 20X8 audit of Sea Gull Airframes Pty Ltd. The company designs
and manufactures aircraft superstructures and airframe components. You observed the physical
inventory at 30 June and are satisfied that it was properly taken. The inventory at 30 June 20X8
has been priced, extended and totall

Explain the appropriate type of audit report when a significant uncertainty exists.

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The following audit opinion was issued for the 30 June 20X1 financial statements of National
Distributors Ltd: In our opinion, except for the effects of such adjustments, if any, on the
financial report, as might have been disclosed had we been able to observe the physical inventory
taken on 30 June 20X1 and to make o

In the audit of O'Brian Tools for the year ended 30 June 20X2, Mary Ellen Vercon lists the
following items that she considers material for review by the engagement manager. 1. A $26 000
sale on 14 July 20X2 for fabrication tools that was included in inventory at a cost of $35 000. 2.
Bonds that were issued on 16 Augu

P. Industries Pty Ltd carries on a crop-dusting business. Its financial statements for the year
ended 30 June 20X0 disclose by way of note a claim for compensation of $750 000 from a
customer's neighbour for crop damage that occurred during the year. The directors haven't
recognised the liability in the financial repor

In obtaining representations from lawyers, Jill Malano's aim is to receive the representation
letters as early as possible after the balance sheet date. This provides her with a signed letter
from every lawyer in time to investigate properly any exceptions. It also eliminates the problem
of a lot of unresolved loose en

In performing tests of the acquisition and payment cycle for Orlando Manufacturing Company,
the staff assistant did a careful and complete job. Because internal controls were evaluated as
excellent before tests of controls and substantive tests of transactions were performed, and were
determined to be operating effecti

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The following are the eight balance-related audit objectives, seven tests of details of balances for
accounts receivable, and seven tests of controls or substantive tests of transactions for the sales
and collection cycle. REQUIRED a. Identify which procedures are tests of details of balances,
which are tests of cont

You are doing the audit of Ute Corporation for the year ended 31 December 20X9. The
following schedule for the property, plant, and equipment and related accumulated depreciation
accounts has been prepared by the client. You have compared the opening balances with your
prior-year's audit working papers. The following

Give two examples of special reports that a public accountant may be asked to issue on specified
components, accounts or items. Explain why these reports would be requested.

The audit opinion given on consolidated financial statements is the responsibility wholly of the
chief entity auditor. Where consolidated statements contain amounts relating to controlled
entities that were audited by other firms, what can the chief entity auditor do to be satisfied that
the consolidated statements dis

Under what circumstances can a public accountant be involved with forecast financial
statements? What specific items should be included in his or her report on forecast financial
statements?

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Carole Wever is testing sales as part of the audit of Carbald Ltd. Her audit procedures include the
following: 1. Foot and cross-foot the sales journal and trace the balance to the general ledger. 2.
Review all sales transactions for reasonableness. 3. Select a sample of recorded sales from the
sales journal and tra

Saint Gabriel Hospital has an extremely reputable research department that employs several
renowned scientists. The research department operates on a project basis. The department
consists of a pool of scientists and technicians who can be called on to participate in a given
project. Assignments are made for the durati
Why is it that when auditors are conducting tests of accounts payable, they are more concerned
with understatement than overstatement of the balance?

Johnson Clock Company sells specialty clocks, watches and other time-keeping devices. Since
its inception, the company has sold items through its home office store and at industry and
collector trade shows around the country. To meet the demand from collectors around the world,
the company began selling items through i

When the CUDR exceeds the TDR, what courses of action are available to the auditor? Under
what circumstances should each of these be followed?

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Distinguish between the TDR and the CUDR. How is each determined?

North Queensland Supply Company Ltd is a medium-sized distributor of wholesale hardware

supplies. It has been a client of yours for several years and has instituted excellent internal
controls for sales at your recommendation. In providing control over shipments, the client has
pre-numbered 'warehouse removal slips' t

Following are the financial statements of Young Manufacturing Company Ltd and the auditor's
report for the year ended 30 June 20X0. The examination was conducted by John Smith, an
individual practitioner, who has examined the company's financial statements and reported on
them for many years. To: Mr Paul Young, Managi

What are the purposes of the sections preceding the opinion section in the auditor's report?
Identify the most important information included in these sections.

What are the two types of simple random sample selection methods? Which of the two methods
is used most often by auditors, and why?

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What responsibility does the auditor have for information on the company's website that may be
linked to electronic versions of the company's annual financial statements and auditor's report?
How does this differ from the auditor's responsibility for other information in the company's
annual report that includes the fi

Carl Monson, the owner of Major Products Manufacturing Company Pty Ltd, a small, successful
longtime client of your firm, has requested you to work with them in preparing three-year
forecasts of information for the year ended 30 June 20X0 and two subsequent years. Monson
informs you that he intends to use the forecasts

In an annual audit at 31 December 20X8, you find the following transactions near the closing
date: 1. Merchandise costing $1822 was received on 3 January 20X9 and the related purchase
invoice recorded 5 January. The invoice showed the shipment was made on 29 December 20X8,
FOB destination. 2. Merchandise costing $625

What are the main differences in the 14 steps used to do non-statistical sampling for tests of
details of balances versus for tests of controls and substantive tests of transactions?

Albring Ltd. sells electronics equipment, and has grown rapidly in the last year by adding new
customers. The audit partner has asked you to evaluate the allowance for doubtful debts at 30
June 20X4. Comparative information on sales and accounts receivable is included below:

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Suppose a firm has had the historic sales figures shown as follows. What would be the forecast
for next year's sales using regression to estimate a trend?

Why might a firm announce a reverse stock split?

Suppose that the 2016 actual and 2017 projected financial statements for your firm are initially
shown as follows. In these tables, sales are projected to rise by 18 percent in the coming year,
and the components of the income statement and balance sheet that are expected to increase at
the same 18 percent rate as sale

Suppose a firm has had the historic sales figures shown as follows. What would be the forecast
for next year's sales using regression to estimate a trend?

The following are sales, cost of sales, and inventory data for Aladdin Products Supply Company,
a wholesale distributor of cleaning supplies. Dollar amounts are in millions. a. Calculate the
following ratios, using an electronic spreadsheet program (Instructor's option): (1) Gross margin
as a percentage of sales (2)

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Ramakrishnan Inc. reported 2018 net income of $15 million and depreciation of $2,650,000. The
top part of Ramakrishnan, Inc.'s 2018 and 2017 balance sheets is listed below (in millions of
dollars). Calculate the 2018 net cash flow from operating activities for Ramakrishnan, Inc.?

What are the documentation retention requirements of AS 1215?

You have been given the following information for Patty-Cake's Athletic Wear Corp. for the year
2018: a. Net sales = $38,250,000. b. Cost of goods sold = $22,070,000. c. Other operating
expenses = $5,300,000. d. Addition to retained earnings = $1,195,500. e. Dividends paid to
preferred and common stockholders = $
Rebecky's Flowers 4U, Inc., had free cash flows during 2018 of $43 million, NOPAT of $85
million, and depreciation of $14 million. Using this information, fill in the blanks on Rebecky's
balance sheet below?

The following article was published in Newsday on February 9, 2009: Call for Probe of Ticket
Sales Bruce Springsteen fans were victims of a "classic bait and switch" scam by the nation's
largest concert ticket seller, Senator Charles Schumer said yesterday, as he called for a federal
investigation into the company, T

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Everything else held constant, would you rather depreciate a project with DDB depreciation or
deduct it under a Section 179 deduction?

Go to the Yahoo! Industry Center at biz.yahoo.com/ic/, choose an industry from amongst the
"Top Industries" listed in the left column, and choose three of the leading firms for that industry:
What are these firms' debt ratios? Investigate each firm's background to try to determine whether
the factors we discussed in

Build a spreadsheet that automatically computes the expected market return and risk for different
assumptions about the state of the economy. a. First, create the following spreadsheet and
compute the expected return and standard deviation. b. Compute the expected return and risk for
the following scenarios: and

Campbell Supper Co. paid a $0.632 dividend per share in 2013, which grew to $0.76 in 2016.
This growth is expected to continue. What is the value of this stock at the beginning of 2017
when the required return is 8.7 percent?

Explain why we need to use the iterative calculation approach described in the text to get a
complete solution for AFN.

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WorldGone, Inc. declared bankruptcy on September 25, 2018 through a Chapter 7 filing.
WorldGone's balance sheet at the time of the bankruptcy filing is listed below. The accrued
wages were earned within the last 90 days prior to filing for bankruptcy. The unpaid employee
benefits were due in the six months prior to th

What is the auditor's responsibility regarding fraud risk?

Create the spreadsheet below. The spreadsheet should use the returns for assets A and B to form
a portfolio return using the weights for each asset shown in cells E1 and E2. The average
portfolio return and standard deviation should compute at the bottom of the column of portfolio
returns. When you change the weights,
What's the source of firm-specific risk? What's the source of market risk?

The case below tells the actual story of a cash embezzlement scheme. The case has two major
parts: (1) Problem and (2) Audit approach. For the case, please consider how the auditor may
have discovered the cash embezzlement scheme. Problem Albert owned and operated 40 coin
laundries around town. As the business grew

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Describe how being a residual claimant can be very valuable.

You can use the computer-based Electronic Work-papers on the textbook website to prepare the
schedule of interbank transfers required in this problem. Ever-Ready Corporation is in the home
building and repair business. Construction business has been in a slump, and the company has
experienced financial difficulty over

What is the auditor's responsibility regarding fraud risk?

LilyMac Studios, a national chain of photography studios, is considering opening up a chain of

coffee shop/art galleries. While the existing operations of the firm have a beta of 1.17, the new
chain is expected to have a beta of 0.8. LilyMac currently has 500,000 shares of common stock
outstanding, which are selling f

The following four questions are taken from an internal control questionnaire. For each question,
state (a) One test of controls procedure you could use to find out whether the control technique
was really functioning and (b) what error or fraud could occur if the question were answered
"no" or if you found the contr

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You are thinking of investing in Nikki T's, Inc. You have only the following information on the
firm at year-end 2018: net income is $250,000, total debt is $2.5 million, and debt ratio is 55
percent. What is Nikki T's ROE for 2018?

Shown below are partial financial statements for Garners' Platoon Mental Health Care, Inc. Fill
in the blanks on the four financial statements. Garners' Platoon Mental Health Care, Inc.
Statement of Cash Flows for Year Ending December 31, 2018 (In millions of dollars) A. Cash
flows from operating activities Net in

Oil prices have increased a great deal in the last decade. The table below shows the average oil
price for each year since 1949. Many companies use oil products as a resource in their own
business operations (like airline firms and manufacturers of plastic products). Managers of these
firms will keep a close watch on h
Sorrell, CPA, is auditing the financial statements of Van Dyke as of December 31, 2017.
Sorrell's substantive procedures and other tests indicated that Van Dyke's financial statements
were prepared in accordance with generally accepted accounting principles and, accordingly,
Sorrell expressed an unqualified opinion on

Go to the SEC's Edgar site at www.sec.gov/edgar.shtml and download the latest annual ("10-K")
report for the firm of your choice. Use the financial statements in the report to calculate the firm's
cash cycle.

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Annual dividends of ATTA Corp grew from $0.96 in 2005 to $1.76 in 2017. What was the
annual growth rate?

Investors can choose from many thousands of stocks. The large number to choose from can be
quite daunting to new investors. Fortunately, some good stock screeners are available for free on
the Internet that will find only the kinds of companies the investor is looking for. Looking for
small value companies? A stock scr

Disaster Airlines is a firm in severe financial distress. The firm can no longer pay its bills on
time and it is far behind on payments to its banks and long-term debt holders. The firm has
decided to ether be purchased by another air carrier or liquidate its assets and close. The
managers have approached Altruistic Ai

Why do auditors focus on revenue as a significant account and the occurrence of revenue as a
relevant assertion in the revenue cycle?

People have had a fascination with gold for thousands of years. Archaeologists have discovered
gold jewelry in Southern Iraq dating to 3000 BC and gold ornaments in Peru dating to 1200 BC.
The ancient Egyptians were masters in the use of gold for jewelry, ornaments, and economic
exchange. By 1000 BC, squares of gold we

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Tiggie's Dog Toys, Inc., reported a debt-to-equity ratio of 1.75 times at the end of 2018. If the
firm's total assets at year-end were $25 million, how much of their assets are financed with debt
and how much with equity?

What is meant by the information and communications component of an effective internal

control system? How can an auditor evaluate whether a client's internal control system is
functioning properly for this component?

Calculate the following ratios for Lake of Egypt Marina, Inc. as of year-end 2018?

Under what conditions would the constant growth rate model not be appropriate?