BIKE Company starts with $3,000 cash to finance its business plan to produce bike helmets with a simple assembly process

Understanding Revenue Recognition

For this assignment, turn to page 364 in your textbook (Chapter 6 of Financial Statements Analysis), and complete Case 6-1, Understanding Revenue Recognition.

BIKE Company starts with $3,000 cash to finance its business plan to produce bike helmets with a simple assembly process. During the first month of business the company signs sales contracts for 1,300 units (sales price of $9 per unit), produces 1,200 units (production cost of $7 per unit), ships 1,100 units, and collects in full for 900 units. Production costs are paid at the time of production. The company has only two other costs:

This is the entire problem. Do you think it will be completed by tonight? Sorry but i need it by then.

1. Commission of 10% of the selling price when the company collects from the customer;
2. Shipping costs of $0.20 per unit paid at time of shipment. Selling price and all costs per unit have been constant and are likely to remain the same.

A. Prepare comprehensive (side by side) balance sheets and income statements for the first month of BIKE Company for each of the following three alternatives:
1. Revenue is recognized at the time of shipment
2. Revenue is recognized at the time of collection
3. Revenue is recognized at the time of production

Note: net income for each of the three alternatives is (1) $990, (2) $810, and (3) $1080 respectively.

B. The method where revenue is recognized at the time of collection, known as the installment method, is except the bull for financial reporting in unusual and special cases. Why is BIKE Company likely to prefer this method for tax purposes? (one line simple answer)

C. Comment on the usefulness of the installment method for a credit analyst is using both the balance sheet and income statement.


Click here for the solution: BIKE Company starts with $3,000 cash to finance its business plan to produce bike helmets with a simple assembly process

Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc

Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle Dellatorre, a professional tennis player who has just come to the United States from Chile. Dellatorre is a highly ranked tennis player who would like to start a company to produce and market apparel that she designs. She also expects to invest substantial amounts of money through Balik and Kiefer. Dellatorre is also very bright, and, therefore, she would like to understand, in general terms, what will happen to her money. Your boss has developed the following set of questions which you must ask and answer to explain the U.S. financial system to Dellatorre.

a.Why is corporate finance important to all managers?
b. Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form.
c. How do corporations go public and continue to grow?
d.What should be the primary objective of managers?
e.What three aspects of cash flows affect the value of any investment?
f. What are free cash flows
g. What is the weighted average cost of capital?

AND SO ON


p. Briefly explain mortgage securitization and how it contributed to the global economic crisis.


Click here for the solution: Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc

A government opts to set aside $10 million of general fund resources to finance a new city hall

1. A government opts to set aside $10 million of general fund resources to finance a new city hall. Construction is expected to begin in several years, when the city has been able to accumulate additional resources.

2. A government should distinguish underwriting and other issue costs from bond premiums and discounts and should

3. When a government issues bonds at premiums or discounts and records the proceeds in a capital projects fund, it should

4. A city holds U.S. Treasury notes as an investment in a capital projects fund. During the year the market value of the notes increases by $50,000. Of this amount, $14,000 can be attributed to a decline in prevailing interest rates and $36,000 to interest that has been earned but not yet received. As of year-end, the city should recognize as revenue

5. Which of the following accounts is least likely to be shown on the balance sheet of a debt service fund?

6. Special assessment debt should be reported on the balance sheet of a city if the debt is to be paid from assessments on property owners and

7. In its fund statements a government should recognize revenue from special assessments

8. In the year it imposes a special assessment, a government should recognize in its government-wide statements

9. Under existing federal statutes, arbitrage as it applies to state and local governments

10. Bond refunding are most likely to result in an economic gain when


Click here for the solution: A government opts to set aside $10 million of general fund resources to finance a new city hall

On December 31, 2011, Hurston Inc. borrowed $3,000,000 at 12% payable annually to finance the construction of a new building

E10-8 (Capitalization of Interest) On December 31, 2011, Hurston Inc. borrowed $3,000,000 at 12% payable annually to finance the construction of a new building. In 2012, the company made the following expenditures related to this building: March 1, $360,000; June 1, $600,000; July 1, $1,500,000; December 1, $1,200,000. Additional information is provided as follows.

1. Other debt outstanding
10-year, 11% bond, December 31, 2005, interest payable annually $4,000,000
6-year, 10% note, dated December 31, 2009, interest payable annually $1,600,000
2. March 1, 2012, expenditure included land costs of $150,000
3. Interest revenue earned in 2012 $49,000

Instructions
(a) Determine the amount of interest to be capitalized in 2012 in relation to the construction of the building.
(b) Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2012.


Click here for the solution: On December 31, 2011, Hurston Inc. borrowed $3,000,000 at 12% payable annually to finance the construction of a new building

Leoni Co. receives $240,000 when it issues a $240,000, 10%, mortgage note payable to finance the construction of a building at December 31, 2011

E10-15 Leoni Co. receives $240,000 when it issues a $240,000, 10%, mortgage note payable to finance the construction of a building at December 31, 2011. The terms provide for semiannual installment payments of $20,000 on June 30 and December 31.

Prepare the journal entries to record the mortgage loan and the first two installment payments.

Click here for the solution: Leoni Co. receives $240,000 when it issues a $240,000, 10%, mortgage note payable to finance the construction of a building at December 31, 2011

You are the vice-president of finance for Exploratory Resources, headquartered in Houston, Texas

You are the vice-president of finance for Exploratory Resources, headquartered in Houston, Texas. In January 2007, your firm’s Canadian subsidiary obtained a six-month loan of 100,000 Canadian dollars from a bank in Houston to finance the acquisition of a titanium mine in Quebec province. The loan will also be repaid in Canadian dollars. At the time of the loan, the spot exchange rate was U.S. $0.8180/Canadian dollar and the Canadian currency was selling at a discount in the forward market. The June 2007 contract (Face value = $100,000 per contract) was quoted at U.S. $0.8120/Canadian dollar.

a. Explain how the Houston bank could lose on this transaction assuming no hedging.
b. If the bank does hedge with the forward contract, what is the maximum amount it can lose

Click here for the solution: You are the vice-president of finance for Exploratory Resources, headquartered in Houston, Texas

(Assessing Roche Publishing Company’s Cash Management Efficiency) Lisa Pinto, vice president of finance at

Assessing Roche Publishing Company’s Cash Management Efficiency

Lisa Pinto, vice president of finance at Roche Publishing Company, a rapidly growing publisher of college texts, is concerned about the firm’s high level of short-term resource investment. She believes that the firm can improve the management of its cash and, as a result, reduce this investment. In this regard, she charged Arlene Bessenoff, the treasurer, with assessing the firm’s cash management efficiency. Arlene decided to begin her investigation by studying the firm’s operating and cash conversion cycles.

AND SO ON

Roche Publishing Company is currently spending $12,000,000 per year on its operating-cycle investment, but it expects that initiating a cash discount will increase its operating-cycle investment to $13,100,000 per year. (Note: The operating-cycle investment per dollar of inventory, receivables, and payables is assumed to be the same.) Arlene’s concern was whether the firm’s cash management was as efficient as it could be. Arlene knew that the company paid 12% annual interest for its resource investment and therefore viewed this value as the firm’s required return. For this reason, she was concerned about the resource investment cost resulting from any inefficiencies in the management of Roche’s cash conversion cycle. (Note: Assume a 365- day year.)

To Do

a. Assuming a constant rate for purchases, production, and sales throughout the year, what are Roche’s existing operating cycle (OC), cash conversion cycle (CCC), and resource investment need?

b. If Roche can optimize operations according to industry standards, what would its operating cycle (OC), cash conversion cycle (CCC), and resource investment

need be under these more efficient conditions?

c. In terms of resource investment requirements, what is the annual cost of Roche’s operational inefficiency?

d. Evaluate whether Roche’s strategy for speeding its collection of accounts receivable would be acceptable. What annual net profit or loss would result from implementation of the cash discount?

e. Use your finding in part d, along with the payables and inventory costs given, to determine the total annual cost the firm would incur to achieve the industry level of operational efficiency.

f. Judging on the basis of your findings in parts c and e, should the firm incur the annual cost to achieve the industry level of operational efficiency? Explain why or why not.

Click here for the solution: (Assessing Roche Publishing Company’s Cash Management Efficiency) Lisa Pinto, vice president of finance at