"If countries fix their exchange rate, the exchange rate channel of monetary policy does not

exist." Is this statement true, false, or uncertain? Explain your answer.

"A decrease in short-term nominal interest rates necessarily implies a stance of monetary
easing." Is this statement true, false, or uncertain? Explain your answer.

One of the classic features of the global financial crisis was the failure of high-profile investment
banks and financial firms such as Lehman Brothers, Bear Stearns, and AIG. These firms
experienced sharp contractions in the values of their balance sheets due to risky asset holdings.
Comment on how this would affect t

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How can monetary authorities target any inflation rate they wish?

Suppose the inflation rate remains relatively constant while output decreases and the
unemployment rate increases. Using an aggregate demand and supply graph, show how this
scenario is possible.

If the economy's self-correcting mechanism works slowly, should the government necessarily
pursue discretionary policy to eliminate unemployment? Why or why not?

In the late 1990s, the stock market was rising rapidly, the economy was growing, and the Federal
Reserve kept interest rates relatively low. Comment on how this policy stance would affect the
economy as it relates to the Tobin q transmission mechanisms.

Suppose three economies are hit with the same temporary negative supply shock. In country A,
inflation initially rises and output falls; then inflation rises more and output increases. In country
B, inflation initially rises and output falls; then both inflation and output fall. In country C,
inflation initially rises

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Use a graph of aggregate demand and supply to demonstrate how lags in the policy process can
result in undesirable fluctuations in output and inflation.

Suppose the current administration decides to decrease government expenditures as a means of

cutting the existing government budget deficit. a. Using a graph of aggregate demand and
supply, show the effects of such a decision on the economy in the short run. Describe the effects
on inflation and output. b. What will

What evidence exists to support the credit view of monetary policy?

Describe an advantage and a disadvantage of the fact that monetary policy has so many different
channels through which it can operate.
Suppose that f is determined by two factors: financial panic and asset purchases. a. Using an MP
curve and an AS/AD graph, show how a sufficiently large financial panic can pull the economy
below the zero lower bound and into a destabilizing deflationary spiral. b. Using an MP curve
and an AS/AD graph, show how a suf

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If adverse selection and moral hazard increase, how does this affect the ability of monetary
policy to address economic downturns?

How does Switzerland's monetary targeting strategy demonstrate the case against monetary
policy rules?

In 2009, in the wake of the global financial crisis and when interest rates were at their lowest, the
U.S. government instituted a "cash for clunkers" program and later a "cash for appliances"
program. Both rebate programs were designed in part to stimulate new spending on automobiles
and major appliances. What does th

The fact that it takes a long time for firms to get new plants and equipment up and running is an
illustration of what policy problem?

What are the purposes of inflation targeting, and how does this monetary policy strategy achieve
them?

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How does the experience of Japan during the "two lost decades" lend support to the four lessons
for monetary policy outlined in this chapter?

Why do temporary negative supply shocks pose a dilemma for policymakers?

As the labor force becomes more productive over time, how is the long-run aggregate supply
curve affected?

On January 28, 2014, the Federal Reserve released a special statement that clarified its goals of
"price stability" and "maximum employment." Specifically, it stated that "the Committee judges
that inflation at the rate of 2 percent, as measured by the annual change in the price index for
personal consumption expenditu

Why does the self-correcting mechanism stop working when the policy rate hits the zero lower
bound?

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During 2014, some Fed officials discussed the possibility of increasing interest rates as a way of
fighting potential increases in expected inflation. If the public came to expect higher inflation
rates in the future, what would be the effect on the short-run aggregate supply curve? Use an
aggregate demand and supply g

Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption
expenditure price index (PCECTPI), a measure of the price level; real compensation per hour
(COM-PRNFB); the nonfarm business sector real output per hour (OPHNFB), a measure of
worker productivity; the price of a barrel of oil

How can the establishment of an exchange-rate target bring credibility to a country with a poor
record of inflation stabilization?

In 2003, as the U.S. economy finally seemed poised to exit its ongoing recession, the Fed began
to worry about a "soft patch" in the economy, in particular the possibility of a deflation. As a
result, the Fed proactively lowered the federal funds rate from 1.75% in late 2002 to 1% by mid-
2003, the lowest federal funds

Suppose two countries have identical aggregate demand curves and potential levels of output,
and γ is the same in both countries. Assume that in 2016, both countries are hit with the same
negative supply shock. Given the table of values below for inflation in each country, what can
you say, if anything, about the cred

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Using an aggregate demand and supply graph, show and describe the effects in both the short run
and the long run of the following: a. A temporary negative supply shock. b. A permanent
negative supply shock.

Given a relatively steep and a relatively flat short-run aggregate supply curve, which curve
would support the case for nonactivist policy? Why?

Why might the bank lending channel be less effective today than it once was?

During the global financial crisis, how was the Fed able to help offset the sharp increase in
financial frictions without the option of lowering interest rates further? Did the Fed's plan work?

In some countries, the president chooses the head of the central bank. The same president can
fire the head of the central bank and replace him or her with another director at any time. Explain
the implications of such a situation for the conduct of monetary policy. Do you think the central
bank will follow a monetary

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Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption
expenditure price index (PCECTPI), the unemployment rate (UNRATE), and an estimate of the
natural rate of unemployment (NROU). For the price index, adjust the units setting to "Percent
Change From Year Ago." Select the data fro

Why does Friedman’s view of the demand for money suggest that velocity is predictable,
whereas Keynes’s view suggests the opposite?

How can the interest rate channel still function when short term nominal interest rates are at the
zero lower bound?

If, in a surprise victory, a new administration that the public believes will pursue inflationary
policy is elected to office, predict what might happen to the level of output and inflation even
before the new administration comes into power.

What will happen if policymakers erroneously believe that the natural rate of unemployment is
7% when it is actually 5% and therefore pursue stabilization policy?

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Why does the divine coincidence simplify the job of policymakers?

If the Federal Reserve buys dollars in the foreign exchange market but does not sterilize the
intervention, what will be the impact on international reserves, the money supply, and the
exchange rate?

How would your prediction differ in problem 13 if the new Keynesian model provides a more
accurate description of the economy? What if the traditional model provides the most realistic
description of the economy?

“A budget deficit that is only temporary cannot be the source of source of inflation.” Is this
statement true, false, or uncertain? Explain your answer.

If a pill were invented that made workers twice as productive but their wages did not change,
what would happen to the position of the short-run aggregate supply curve?

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Looking at figure in the chapter, when were the two largest falls in velocity? What do declines
like this suggest about how velocity moves with the business cycle? Given the data in figure, is it
reasonable to assume, as the classical economists did, that declines in aggregate spending are
caused by declines in the qua

When aggregate output is below the natural rate level, what will happen to the price level over
time if the aggregate demand curve remains unchanged? Why?

The chairman of the Federal Reserve Board announces that over the next year, the rate of money
growth will be reduced from its current rate of 10% to a rate of 2%. If the chairman is believed
by the public but the Fed actually reduces the rate of money growth to 5%, predict what will
happen to the inflation rate and ag

In a speech early in the Iraq=Kuwait crisis in 1990, President Georg H.W. Bush stated that
although his heart went out to the hostages held by Saddam Hussein, he would not let this
hostage-taking deter the United States from insisting on the withdrawal of Iraq from Kuwait. Do
you think that Bush’s position made sense

Will aggregate output rise or fall if an increase in autonomous consumer expenditure is matched
by an equal increase in taxes?

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When is exchange-rate targeting likely to be a sensible strategy for industrialized countries?

When is exchange-rate targeting likely to be a sensible strategy for emerging market countries?

If a series of defaults in the bond market make bonds riskier and as a result the demand for
money rises, predict what will happen to interest rates and aggregate output.

Why is Keynes’s analysis of the speculative demand for money important to his view that
velocity will undergo substantial fluctuations and thus cannot be treated as constant?

The more sluggish wage and price adjustment is, the more variable output and the price level are
when a discretionary policy is pursued. Is this statement true, false, or uncertain? Explain your
answer.

“The less important expectations about policy are to movements of the aggregate supply
curve, the stronger the case is for discretionary policy to eliminate unemployment.” Is this
statement true, false, or uncertain? Explain your answer.

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In the 1973-1975 recession, the value of common stocks in real terms fell by nearly 50%. How
might this decline in the stock market have affected aggregate demand and thus contributed to
the severity of this recession? Be specific about the mechanisms through which the stock market
decline affected the economy.

“A cost-push inflation occurs as a result of workers’ attempts to push up their wages.
Therefore, inflation does not have to be a monetary phenomenon.” Is this statement true, false,
or uncertain? Explain your answer.

If, in a surprise victory, a new administration is elected to office that the public believes will
pursue inflationary policy, predict what might happen to the level of output and inflation even
before the new administration comes into power. Would your prediction differ depending on
which of the three models—traditi
If the public expects the Fed to pursue a policy is likely to raise short-term interest rates
permanently to 12% but the Fed does not go through with this policy change, what will happen
to long-term interest rates? Explain your answer.

In late1969, the Federal Reserve reduced the money supply while the government raised taxes.
What do you think should have happened to interest rates and aggregate output?

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If taxes and government spending rise by equal amounts, what will happen to the position of the
IS curve? Explain this with a Keynesian cross diagram.

What are the key advantages of exchange-rate targeting as a monetary policy strategy?

What are the key advantages and disadvantages of dollarization over other forms of exchange-
rate targeting?

The more credible the policymakers who pursue an anti-inflation policy, the more successful that
policy will be. Is this statement true, false, or uncertain? Explain your answer.

“To prevent inflation, the Fed should follow Teddy Roosevelt’s advice:’ Speak softly
and carry a big stick.” What would the Fed’s “big stick” be? What is the statement
trying to say?

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For each of the following, identify in which part of the balance-of-payments account it appears
(current account, capital account, or net change in international reserves) and whether it is a
receipt or a payment. a. A British subjects purchases of a share of Johnson & Jonson stock. b. An
American’s purchase of an ai

Suppose that when you visit the Ford and GM car factories to examine how the cars are built,
you only have time to see how well the engine is put together. If Ford engines are better built
than GM engines, does that mean that the Ford will be more reliable than the GM car?

How can exchange-rate targets lead to a speculative attack on a currency?

Show how aggregate demand and supply analysis can explain why both aggregate output and the
price level fell sharply when investment spending collapsed during the Great Depression.

Having studied the new classical model, the new chairman of the Federal Reserve Board has
thought up a surefire plan for reducing inflation and lowering unemployment. He announces that
the Fed will lower the rate of money growth from 10% to 5% and then persuades the FOMC to
keep the rate of money growth at 10%. If the

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Under the gold standard, if Britain became more productive relative to the United States, what
would happen to the money supply in the two countries? Why would the changes in the money
supply help preserve a fixed exchange rate between the United States and Britain?

Plot the consumption function C = 100 + 0.75Y on graph paper. a. Assuming no government
sector, if planned investment spending is 200, what is the equilibrium level of aggregate output?
Show this equilibrium level on the graph you have down. b. If businesses become more
pessimistic about the profitability of investment

If exports fall while imports rise, what happens to the aggregate demand curve?",5,/business-
banking?page=5 1544212458-384,https://www.solutioninn.com/business,Banking,/business-
banking,"Proposals have come before Congress that advocate the implementa

What will happen to the position of the aggregate demand curve if the money supply is reduced
when government spending increases?

In Keynes’s analysis of the speculative demand for money, what will happen to money
demand if people suddenly decide that the normal level of the interest rate has declined? Why?

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If brokerage fees go to zero, what does the Baumol-Tobin analysis suggest Grant Smith’s
average holdings of money should be?

Which principle of rational expectations theory is used to prove the proposition that stabilization
policy can have no predictable effect on aggregate output in the new classical model?

Predict what will happen to stock prices if the money supply rises. Explain why you are making
this prediction.

The new classical model does not eliminate policy-makers’ ability to reduce unemployment
because they can always pursue policies that are more expansionary than the public expects. Is
this statement true, false, or uncertain? Explain your answer.

If the GM car you plan to buy has a better repair record than a Ford, does this mean that the GM
car is necessarily more reliable? (GM car owners might, for example, change their oi1 more
frequently than Ford owners.)

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If interest rates on bonds go to zero, what does the Baumol-Tobin analysis suggest Grant
Smith’s average holdings of money balances should be?

The Lucas critique by itself casts doubt on the ability of discretionary stabilization policy to be
beneficial. Is this statement true, false, or uncertain? Explain your answer.
A music video is an information good a product that is essentially a bundle of information. Most
of the cost of producing an information good results from collecting the information and making
a first copy. Once the information is organized and digitized, the marginal cost of reproduction is
tiny. In other words, an in

Profit-maximizing behavior on the part of firms explains why the short-run aggregate supply
curve is upward-sloping. Is this statement true, false, or uncertain? Explain your answer.

The abandonment of fixed exchange rates after 1973 has meant that countries have pursued more
independent monetary policies. Is this statement true, false, or uncertain? Explain your answer.

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How can a large balance-of-payments surplus contribute to the country’s inflation rate?

If a country’s par exchange rate was undervalued during the Bretton Woods fixed exchange
rate regime, what kind of intervention would that country’s central bank be forced to
undertake, and what effect would it have on its international reserves and the money supply?

Suppose that you plan to buy a car and want to know whether a General Motors car is more
reliable than a Ford. One way to find out is to ask owners of both cars how often their cars go
into the shop for repairs. Another way is to visit the factory producing the cars and see which one
is built better. Which procedure wi

How did the research strategies of Keynesian and monetarist economists differ after they were
exposed to the earliest monetarist evidence?

Suppose that government policymakers decide that they will change taxes to raise aggregate
output by $400 billion, and mpc = 0.5. By how much will taxes have to be changed?

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Predict what will happen to interest rates and output if a stock market crash causes autonomous
consumer expenditure to fall.

What happens to the position of the LM curve if the Fed decides that it will decrease the money
supply to fight inflation and if, at the same time, the demand for money falls?

Franco Modigliani found that the most important transmission mechanisms of monetary policy
involve consumer expenditure. Describe how at least two of these mechanisms work.

The high level of interest rates and the rapidly growing economy during Ronald Reagan's third
and fourth years as president can be explained by a tight monetary policy combined with an
expansionary fiscal policy. Do you agree? Why or why not?
In every business cycle in the past 100 years, the rate at which money supply is growing always
decreases before output does. Therefore the money supply causes business cycle movements."
Do you agree? What objections can you raise against this argument?

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Calculate the value of the consumption function at each level of disposable income in Table 1 if
a = 100 and mpc = 09.

What happens to aggregate output if both taxes and government spending are lowered by $300
billion and mpc = 05? Explain your answer.

The monetarists have demonstrated that the early Keynesians were wrong in saying that money
doesn't matter at all to economic activity. Therefore, we should accept the monetarist position
that money is all that matters. Do you agree? Why or why not?

How would your prediction differ in problem 11 if the new Keynesian model provides a more
realistic description of the economy? What if the traditional model provides the most realistic
description of the economy?

An important difference between Keynesians and monetarists rests on how long they think the
long run actually is. Is this statement true, false, or uncertain? Explain your answer.

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Photovoltaic cells (or solar cells) convert sunlight directly into electricity. In 1980, the capital
cost of solar cells was about $20 per watt of electricity generated. Technological innovation
reduced the capital cost to less than $5 per watt in 2007. Even more recent advances focus on
reducing the amount of silicon

If government expenditure goes down while taxes are raised to balance the budget, what happens
to the aggregate demand curve?

If research indicates that joggers live longer than nonjoggers, is it possible that jogging is not
good for your health? Give a concrete example.

If a country wants to keep its exchange rate from changing, it must give up some control over its
money supply. Is this statement true, false, or uncertain? Explain your answer.

If the Federal Reserve buys dollars in the foreign exchange market but conducts an offsetting
open market operation to sterilize the intervention, what will be the impact on international
reserves, the money supply, and the exchange rate?

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When there is a decline in the value of the dollar, some experts expect it to lead to a dramatic
improvement in the ability of American firms to compete abroad. Predict what would happen to
output and the price level in the United States as a result.

If consumer expenditure is related to consumers’ expectations of their average income in the

future, will an income tax cut have a larger effect on consumer expenditure if the public expects
the tax to last for one year or for ten years?

Many economists are worried that a high level of budget deficits may lead to inflationary
monetary policies in the future. Could these budget deficits have an effect on the current rate of
inflation?

Why do economists focus on historical episodes of hyperinflation to decide whether inflation is a

monetary phenomenon?

What happened to the IS curve during the Great Depression when investment spending
collapsed. Why?

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The costs of fighting inflation in the new classical and new Keynesian models are lower than in
the traditional model. Is this statement true, false, or uncertain? Explain your answer?

1. The computation of economic cost is based on the principle of __________. 2. A firms

implicit cost is defined as the cost of non purchased inputs, such as the entrepreneur’s
_________and _________. 3. Economic profit equals _________minus_________. 4. Fill with
economic or accounting: Because _________cost typical

“Because government policymakers do not consider inflation desirable, their policies cannot
be the source of inflation.” Is this statement true, false, or uncertain? Explain your answer.

The cost of financing investment is related only to interest rates; therefore, the only way that
monetary policy can affect investment spending is through its effects on interest rates." Is this
statement true, false, or uncertain? Explain your answer.

How can the long-term bond market help reduce the time-inconsistency problem for monetary
policy? Can the foreign exchange market also perform this role?

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Suppose that a researcher is trying to determine whether jogging is good for a person's health.
She examines this question in two ways. In method A, she looks to see whether joggers live
longer than nonjoggers. In method B, she looks to see whether jogging reduces cholesterol in the
bloodstream and lowers blood pressur
What are the advantages and disadvantages of a currency board over a monetary policy that just
uses an exchange-rate target?

How can the Fed’s desire to prevent high interest rates lead to inflation?

Suppose that a treaty is signed limiting armies throughout the world. The result of the treaty is
that the public expects military and hence government spending to be reduced. If the new
classical view of the economy is correct and government spending does affect the aggregate
demand curve, predict what will happen to

Why are the multipliers in Problems 3and 4 different? Explain intuitively why one is higher than
the other.

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How might bank behavior (described in Chapter 16) lead to causation running from output to the
money supply? What does this say about evidence that finds a strong correlation between money
and output?

“Because increases in government spending raise the aggregate demand curve, fiscal policy
by itself can be the source of inflation.” Is this statement true, false, or uncertain? Explain
your answer.

Evidence indicates that lately the demand for money in has become quite unstable. Why is this
finding important to Federal Reserve policymakers?

The new classical model is an offshoot of the monetarist framework because it has a similar view
of aggregate supply. What are the differences and similarities between monetarist and new
classical views of aggregate supply?

”If the data and recognition lags could be reduced, discretionary policy would more likely be
beneficial to the economy.” Is this statement true, false, or uncertain? Explain your answer.

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Why do companies cut production when they find that their unplanned inventory investment is
greater than zero? If they didn't cut production, what effect would this have on their profits?
Why?

Why is it that in a pure flexible exchange rate system, the foreign exchange market has no direct
effects on the money supply? Does this mean that the foreign exchange market has no effect on
monetary policy?

There are scale economies in the production of electricity from wind because electricity can be
generated from turbines of different sizes. Although large wind turbines are more costly than
small ones, the higher cost is more than offset by greater generating capacity. The scale
economies occur because the cost of purc

If the dollar increases in value relative to foreign currencies so that foreign goods become
cheaper in the United States, what will happen to the position of the short-run aggregate supply
curve? The aggregate demand curve?

Both Keynes’s and Friedman’s theories of the demand for money suggest that as the
relative expected return on money falls, demand for it will fall. Why does Friedman think that
money demand is unaffected by changes in interest rates? Why did Keynes think that money
demand is affected by changes in interest rates?

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Suppose that the public believes that a newly announced anti-inflation program will work and so
lowers its expectations of future inflation. What will happen to aggregate output and the price
level in the short run?

Sea lions off the Washington coast eat steelhead and other fish, depleting some species
threatened with extinction and decreasing the harvest of the commercial fishing industry. Rick
Funk is a plastics manufacturer who has offered to build a life-sized fiberglass killer whale,
mount it on a rail like a roller coaster,

If the point describing the combination of interest rate and aggregate output is not on either the
IS or the LM curve, the economy will have no tendency to head toward the intersection of the
intersection of the two curves. Is this statement true, false, or uncertain? Explain your answer.

Predict what will happen to aggregate output and the price level if the Federal Reserve increases
the money supply at the same time that Congress implements and income tax cut.

Why does a balance-of payments deficit for the United States have a different effect on its
international reserves than a balance-of-payments deficit for the Netherlands?

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Why were people in the United States in the nineteenth century sometimes willing to be paid by
check rather than with gold, even though they knew that there was a possibility that the check
might bounce?

If money demand is unaffected by changes in the interest rate, what effect will a rise in
government spending have on the position of the aggregate demand curve?

What operating procedures of the Fed (described in chapter17) might explain how movements in
output might cause movements in the money supply?
“If the public believes that the monetary authorities will pursue a discretionary policy, a cost-
push inflation is more likely to develop.” Is this statement true, false, or uncertain? Explain
your answer.

There are frequently years when the inflation rate is high and yet money growth is quite low.
Therefore, statement that inflation is a monetary phenomenon cannot be correct. Comment.

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The more collateral there is backing a loan, the less the lender has to worry about adverse
selection. Is this statement true, false, or uncertain? Explain your answer.

Whenever it is snowing when Joe Commuter gets up in the morning, he misjudges how long it
will take him to drive to work. Otherwise, his expectations of the driving time are perfectly
accurate. Considering that it snows only once every ten years where Joe lives, Joe’s
expectations are almost always perfectly accurate

In Brazil, a country that underwent a rapid inflation before 1994, many transactions were
conducted in dollars rather than in real’s, the domestic currency. Why?

How can financial liberalizations lead to financial crises?

Explain why you would be more or less willing to buy long-term AT&T bonds under the
following circumstances: a. Trading in these bonds increases, making them easier to sell. b. You
expect a bear market in stock (stock prices are expected to decline). c. Brokerage commissions
on stock fall. d. You expect interest rates

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How does the free-rider problem aggravate adverse selection and moral hazard problems in
financial markets?

Francine the Financial Advisor has just given you the following advice: Long-term bonds are a
great investment because their interest rate is over 20%. Is Francine necessarily right?

How can economies of scale help explain the existence of financial intermediaries?

How does a general increase in uncertainty as a result of a failure of a major financial institution
lead to an increase in adverse selection and moral hazard problems?

Why should a rise in the price level (but not in expected inflation) cause interest rates to rise
when the nominal money supply is fixed?

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If a yield curve looks like the one shown in figure (b) below, what is the market predicting about
the movement of future short-term interest rates? What might the yield curve indicate about the
market’s predictions for the inflation rate in thefuture?

You are offered two bonds, a one-year U.S. Treasury bond with a yield to maturity of 9% and a
one-year U.S Treasury bill with a yield on a discount basis of 8.9%. Which would you rather
own?

How can a currency crisis lead to higher interest rates?

How does spinning lead to a less efficient financial system?

If your broker has been right in her five previous buy and sell recommendations, should you
continue listening to her advice?

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Wealthy people often worry that others will seek to marry them only for their money. Is this a
problem of adverse selection?

If you are an employer, what kinds of moral hazard problems might you worry about with your
employees?

How do standard accounting principles help financial markets work more efficiently?

Which firms are most likely to use bank financing rather than to issue bonds or stocks to finance
their activities? Why?

An efficient market is one in which no one ever profits from having better information than the
rest. Is this statement true, false, or uncertain? Explain your answer.

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Describe two ways in which financial intermediaries help lower transaction costs in the
economy.

In ancient Greece, why was gold a more likely candidate for use as money than wine was?

Some economists think that the central banks should try to prick bubbles in the stock market
before they get out of hand and cause later damage when they burst. How can monetary policy
be used to prick a bubble? Explain how it can do this using the Gordon growth model.

Discuss some of the manifestations of the globalization of world capital markets.

How does an unanticipated decline in the price level cause a drop in lending?

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Why might you be willing to make a loan to your neighbor by putting funds in a saving account
earning a 5% interests rate at the bank and having the bank lend her the funds at a 10% interest
rate rather than lend her the funds yourself?

How can government fiscal imbalances lead to a financial crisis?

How does a deterioration in balance sheets of financial institutions and the simultaneous failures
of these institutions cause a decline in economic activity?

Which provisions of the Global Legal Settlement do you think are beneficial, and which are not?

Can we expect the value of the dollar to rise by 2% next week if our expectations are rational?

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Suppose that a researcher discovers that a measure of the total amount of debt in the U.S
economy over the past twenty years was a predictor of inflation and the business cycle than M1
or M2. Does this discovery mean that we should define money as equal to the total amount of
debt in the economy?

When can a decline in the value of a country’s currency exacerbate adverse selection and
moral hazard problems? Why?

Describe two conflicts of interest that occur in accounting firms.

Why do debt deflations occur in advanced countries, but not in emerging market countries?

How can the adverse selection problem explain why you are more likely to make a loan to a
family member than to a stranger?

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If you read in the Wall Street Journal that the smart money on Wall Street expects stock prices to
fall, should you follow that lead and sell all your stocks?

Foreign exchange rates, like stock prices, should follow a random walk. Is this statement true,
false, or uncertain? Explain your answer.

True, false, or uncertain: Financial engineering always leads to a more efficient financial system.

How can conflicts of interest make financial service firms less efficient?

Was money a better store of value in the United States in the 1950s than it was in the 1970s?
Why or why not? In which period would you have been more willing to hold money?

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Human fear is the source of stock market crashes, so these crashes indicate that expectations in
the stock market cannot be rational. Is this statement true, false, or uncertain? Explain your
answer.

If most participants in the stock market do not follow what is happening to the monetary
aggregates, prices of common stock will not fully reflect information about them. Is this
statement true, false, or uncertain? Explain your answer.

If the price level falls next year, remaining fixed there-after, and the money supply is fixed, what
is likely to happen to interest rates over the next two year?

If there were no asymmetry in the information that a borrower and a lender had, could there still
be a moral hazard problem?

Which provisions of Sarbanes-Oxley do you think are beneficial, and which are not?

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What effect will a sudden increase in the volatility of gold prices have on interest rates?

Suppose that increases in the money supply lead to a rise in stock prices. Does this mean that
when you see that the money supple has had a sharp increase in the past week, you should go out
and buy stocks? Why or why not?

If the income tax exemption on municipal bonds were abolished, what would happen to the
interest rates on these bonds? What effect would the change have on interest rates on U.S.
Treasury securities?

Would you be willing to give up your checkbook and instead use an electronic means of payment
if it were made available? Why or why not?

Which $1,000 bond has the higher yield to maturity, a twenty-years bond selling for $800 with a
current yield of 15% or a one-year bond selling for $800 with a current yield of 5%?

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What role does weak financial regulation and supervision play in causing financial crises?

There are three goods produced in an economy by three individuals: Good ........ Producer Apples
........ Orchard owner Bananas......... Banana grower Chocolate....... Chocolatier If the orchard
owner likes only bananas, the banana grower likes only chocolate, and the Chocolatier likes only
apples, will any trade b

Would a dollar tomorrow be worth more to you today when the interest rate is 20% or when it is
10%?
Identify the cash flows available to an investor in stock. How reliably can these cash flows be
estimated? Compare the problem of estimating stock cash flows to estimating bond cash flows.
Which security would you predict to be more volatile?

In a world without information and transaction costs, financial intermediaries would not exist. Is
this statement true, false, or uncertain? Explain your answer.

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If there is a decline in interest rate, which would you rather be holding long-term bonds or short-
term bonds? Why? Which type of bond has the greater interest-rate risk?

If stock prices did not follow a random walk, there would be unexploited profit opportunities in
the market. Is this statement true, false, or uncertain? Explain your answer.

If mortgage rates rise from 5% to 10% but the expected rate of increase in housing prices rises
from 2% to 9%, are people more or less likely to but houses?

To pay for college, you have just taken out a $1,000 government loan that makes you pay $126
per year for 25 years. However, you don’t have to start making these payments until you
graduate from college two years from now. Why is the yield to maturity necessarily less than
12%, the yield to maturity on a normal $1,00

Why do loan sharks worry less about moral hazard in connections with their borrowers than
some other lenders do?

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How does risk sharing benefit both financial intermediaries and private investors?

Do you think the lemons problem would be more severe for stocks traded on the New York
Stock Exchange or those traded over-the-counter? Explain.

How can a bursting of an asset-price bubble in the stock market help trigger a financial crisis?

Would you be more will to lend to a friend if she put all of her life savings into her business than
you would if she had not done so? Why?

Explain why you would be more or less willing to buy a share of Microsoft stock in the
following situations: a. Your wealth falls. b. You expect the stock to appreciate in value. c. The
bond market becomes more liquid. d. You expect gold to appreciate in value. e. Prices in the
bond market become more volatile.

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Explain why you would be more or less willing to buy a house under the following
circumstances: a. You just inherited $100,000. b. Real estate commissions fall from 6% of the
sales price to 5% of the sales price. c. You expect Microsoft stock to double in value next year.
d. Prices in the stock market become more volat

Why are revisions of monetary aggregates less of a problem for measuring long-run movements
of the money supply than they are for measuring short-run movements?

Why have some economists described money during a hyperinflation as a “hot potato” that
is quickly passed from one person to another?

Describe two conflicts of interest that occur when underwriting and research are provided by a
single investment firm.

Using both the liquidity preference framework and the supply and demand for bonds framework,
show why interest rates are procyclical (rising when the economy is expanding and falling during
recessions).

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If a yield curve looks like the one shown in figure (a) below, what is the market predicting about
the movement of future short-term interest rates? What might the yield curve indicate about the
markets predictions for the inflation rate in thefuture?

Explain how the separation of ownership and control in American corporations might lead to
poor management.

Predict what will happen to interest rates on a corporations bond if the federal government
guarantees today that it will pay creditors if the corporation goes bankrupt in the future. What
will happen to the interest rates on Treasury securities?

Risk premiums on corporate bonds are usually anticyclical; that is, they decrease during business
cycle expansions and increase during recessions. Why is this so?

Will there be an effect on interest rates if brokerage commissions on stocks fall? Explain your
answer.

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Interest rates were lower in the mid-1980s than they were in the late 1970s, yet many economisis
have commented that real interest rates were actually much higher in the mid-1980s than in the
late 1970s. Does this make sense? Do you think that these economists are right?
The chairman of the Fed announces that interest rates will rise sharply next year, and the market
believes him. What will happen to today’s interest rate on AT&T bonds, such as the 8 1/8s of
2022?

An important why in which the Federal Reserve decreases the money supply is by selling bonds
to the public. Using a supply and demand analysis for bonds, show what effect this action has on
interest rates. Is your answer consistent with what you would expect to find with the liquidity
preference framework?

If the public expects a corporation to lose $5 per share this quarter and it actually loses $5, which
is still the largest loss in the history of the company, what does the efficient market hypothesis
say will happen to the price of the stock when the $4 loss is announced?

What are the two ways that spikes in interest rates lead to an increase in adverse selections and
moral hazard problems?

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What technological innovations led to the development of the subprime mortgage market?

Explain what effect a large federal deficit might have on interest rates.

Can a person with rational expectations expect the price of a share of Google to rise by 10% in
the next month?

What is the yield to maturity on a simple loan for $1 million that requires a repayment of $2
million in five years time?

The president of the United States announces in a press conference that he will fight the higher
inflation rate with a new anti-inflation program. Predict what will happen to interest rates if the
public believes him.

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Why do U.S. Treasury bills have lower interest rates than large-denomination negotiable bank
CDs?

What effect would reducing income tax rates have on the interest rates of municipal bonds?
Would interest rates of Treasury securities be affected, and if so how?

Would moral hazard and adverse selection still arise in financial markets if information were not
asymmetric? Explain.

If you suspect that a company will go bankrupt next year, which would you rather hold, bonds
issued by the company or equities by the company? Why?
Assuming that the expectations theory is the correct theory of the term structure, calculate the
interest rates in the term structure for maturities of one to five years, and plot the resulting yield
curves for the following series of one-year interest rates over the next five years: a. 5%, 7%, 7%,
7%, 7% b. 5%, 4%, 4%

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Forecasters’ predictions of inflation are notoriously inaccurate, so their expectations of

inflation cannot be rational. Is this statement true, false, or uncertain? Explain your answer.

How can a decline in real estate prices cause deleveraging and a decline in lending?

Using both the supply and demand for bonds and liquidity preference frameworks, shown what
the effect is on interest rates when the riskiness of bonds rises. Are the results the same in the
two frameworks?

Assuming that the expectations theory is the correct theory of the term structure, calculate the
interest rates in the term structure for maturities of one to five years, and plot the resulting yield
curves for the following paths of one-year interest rates over the next five years: a. 5%, 6%, 7%,
6%, 5%, b. 5%, 4%, 3%

If the next chair of the Federal Reserve Board has a reputation for advocating an even slower rate
of money growth than the current chair, what will happen to interest rates? Discuss the possible
resulting situations.

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What are adjusting entries and why are they necessary?

How can the existence of asymmetric information provide a rationale for government regulation
of financial markets?

Explain why you would be more or less willing to buy gold under the following circumstances:
a. Gold again becomes acceptable as a medium of exchange. b. Prices in the gold market become
more volatile. c. You expect inflation to rise, and gold prices tend to move with the aggregate
price level. d. You expect interest r

If higher money growth is associated with higher future inflation, and if announced money
growth turns out to be extremely high but is still less than the market expected, what do you
think would happen to long-term bond prices?

How might a sudden increase in people’s expectations of future real estate prices affect
interest rates?

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Indicate whether each of the items below is a real or nominal account and whether it appears in
the balance sheet or the income statement. (a) Prepaid Rent. (b) Salaries and Wages Payable. (c)
Merchandise Inventory. (d) Accumulated Depreciation. (e) Office Equipment. (f) Income from
Services. (g) Office Salaries Expens

If the $3,900 cost of a new microcomputer and printer purchased for office use were recorded as
a debit to Purchases, what would be the effect of the error on the balance sheet and income
statement in the period in which the error was made?

Give an example of a transaction that results in: (a) A decrease in an asset and a decrease in a
liability. (b) A decrease in one asset and an increase in another asset. (c) A decrease in one
liability and an increase in another liability.

Under a perpetual system, what is the purpose of the Cost of Goods Sold account?

What are reversing entries, and why are they used?

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What are closing entries and why are they necessary?

What is the major distinction? (a) Between revenues and gains and (b) Between expenses and
losses?

(Corrected Trial Balance) The trial balance of Antoine Watteau Co. shown below does not
balance. Each of the listed accounts has a normal balance per the general ledger. An examination
of the ledger and journal reveals the following errors. 1. Cash received from a customer on
account was debited for $570, and Accounts

How should prior period adjustments be reported in the financial statements? Give an example of
a prior period adjustment.

(Analyze Adjusted Data) A partial adjusted trial balance of Piper Company at January 31, 2005,
shows the following. Answer the following questions, assuming the year begins January 1. (a) If
the amount in Supplies Expense is the January 31 adjusting entry, and $850 of supplies was
purchased in January, what was the bal

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What kinds of questions about future cash flows do investors and creditors attempt to answer
with information in the income statement?

What is the purpose of the Cost of Goods Sold account? (Assume a periodic inventory system.)
(a) How do the components of revenues and expenses differ between a merchandising company
and a service enterprise? (b) Explain the income measurement process of a merchandising
company.

Indicate where the following items would ordinarily appear on the financial statements of
Aleppo, Inc. for the year 2004. (a) The service life of certain equipment was changed from 8 to 5
years. If a 5-year life had been used previously, additional depreciation of $425,000 would have
been charged. (b) In 2004 a flood d

Prepare the following adjusting entries at December 31 for DeGads Co. (a) Interest on notes
payable of $400 is accrued. (b) Fees earned but unbilled total $1,400. (c) Salaries earned by
employees of $700 have not been recorded. (d) Bad debt expense for year is $900. Use the
following account titles: Service Revenue, Ac

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(Conceptual Framework—General) Roger Morgan has some questions regarding the theoretical
framework in which standards are set. He knows that the FASB and other predecessor
organizations have attempted to develop a conceptual framework for accounting theory
formulation. Yet, Roger’s supervisors have indicated that t

(Matching Principle) An accountant must be familiar with the concepts involved in determining
earnings of a business entity. The amount of earnings reported for a business entity is dependent
on the proper recognition, in general, of revenue and expense for a given time period. In some
situations, costs are recognized

What is the basis for distinguishing between operating and non-operating items?

Discuss the appropriate treatment in the financial statements of each of the following. (a) An
amount of $113,000 realized in excess of the cash surrender value of an insurance policy on the
life of one of the founders of the company who died during the year. (b) A profit-sharing bonus
to employees computed as a percen

How are materialities (and immateriality) related to the proper presentation of financial
statements? What factors and measures should be considered in assessing the materiality of a
misstatement in the presentation of a financial statement?

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Smith Company had cash receipts from customers in 2005 of $152,000. Cash payments for
operating expenses were $97,000. Smith has determined that at January 1, accounts receivable
was $13,000, and prepaid expenses were $17,500. At December 31, accounts receivable was
$18,600, and prepaid expenses were $23,200. Compute (
(Adjusting Entries) A review of the ledger of Oklahoma Company at December 31, 2005,
produces the following data pertaining to the preparation of annual adjusting entries. 1. Salaries
Payable $0. There are eight salaried employees. Salaries are paid every Friday for the current
week. Five employees receive a salary of

(Elements of Financial Statements) Ten interrelated elements that are most directly related to
measuring the performance and financial status of an enterprise are provided below. Assets
Distributions to owners Expenses Liabilities Comprehensive income Gains Equity Revenues
Losses Investments by owners I

Using the data in BE3-3, journalize the entry on July 1 and the adjusting entry on December 31
for Hindi Insurance Co. Hindi uses the accounts Unearned Insurance Revenue and Insurance
Revenue.

Omar Morena, a fellow student, contends that the double entry system means that each
transaction must be recorded twice. Is Omar correct? Explain.

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What is earnings management?

If the going concern assumption is not made in accounting, what difference does it make in the
amounts shown in the financial statements for the following items? (a) Land. (b) Unamortized
bond premium. (c) Depreciation expense on equipment. (d) Merchandise inventory. (e) Prepaid
insurance.

What are some of the costs of providing accounting information? What are some of the benefits
of accounting information? Describe the cost-benefit factors that should be considered when new
accounting standards are being proposed.

What are closing entries and why are they necessary?

Briefly describe the types of information concerning financial position, income, and cash flows
that might be provided: (a) Within the main body of the financial statements, (b) In the notes to
the financial statements, or (c) As supplementary information.

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(Qualitative Characteristics) SFAC No. 2 identifies the qualitative characteristics that make
accounting information useful. Presented below are a number of questions related to these
qualitative characteristics and underlying constraints. (a) What is the quality of information that
enables users to confirm or correct

How can earnings management affect the quality of earnings?

How can information based on past transactions be used to predict future cash flows?

Karen Sepaniak has year-end account balances of Sales $828,900; Interest Revenue $13,500;
Cost of Goods Sold $556,200; Operating Expenses $189,000; Income Tax Expense $35,100; and
Dividends $18,900. Prepare the year-end closing entries.

Is it necessary that a trial balance be taken periodically? What purpose does it serve?

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Identify at least two situations in which application of different accounting methods or

accounting estimates results in difficulties in comparing companies.

Distinguish between the all-inclusive income statement and the current operating performance
income statement. According to present generally accepted accounting principles, which is
recommended? Explain.

Employees are paid every Saturday for the preceding work week. If a balance sheet is prepared
on Wednesday, December 31, what does the amount of wages earned during the first three days
of the week (12⁄29, 12⁄30, 12⁄31) represent? Explain.

(Corrected Trial Balance) The trial balance of Blues Traveler Corporation (see next page) does
not balance. An examination of the ledger shows these errors. 1. Cash received from a customer
on account was recorded (both debit and credit) as $1,380 instead of $1,830. 2. The purchase on
account of a computer costing $3,2

Catherine Janeway Company’s weekly payroll, paid on Fridays, totals $6,000. Employees
work a 5-day week. Prepare Janeway’s adjusting entry on Wednesday, December 31, and the
journal entry to record the $6,000 cash payment on Friday, January 2.

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When wages expense for the year is computed, why are beginning accrued wages subtracted
from and ending accrued wages added to, wages paid during the year?

Explain the transaction approach to measuring income. Why is the transaction approach to
income measurement preferable to other ways of measuring income?

(Transaction Analysis—Service Company) Beverly Crusher is a licensed CPA. During the first
month of operations of her business (a sole proprietorship), the following events and transactions
occurred. April 2 Invested $32,000 cash and equipment valued at $14,000 in the business. 2
Hired a secretary-receptionist at a

Included in Martinez Company’s December 31 trial balance is a note receivable of $10,000.

The note is a 4-month, 12% note dated October 1. Prepare Martinez’s December 31 adjusting
entry to record $300 of accrued interest, and the February 1 journal entry to record receipt of
$10,400 from the borrower.

(Adjusting Entries) Bjorn Borg is the new owner of Ace Computer Services. At the end of
August 2005, his first month of ownership, Bjorn is trying to prepare monthly financial
statements. Below is some information related to unrecorded expenses that the business incurred
during August. 1. At August 31, Mr. Borg owed hi

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Identify which qualitative characteristic of accounting information is best described in each item
below. (Do not use relevance and reliability.) (a) The annual reports of Best Buy Co. are audited
by certified public accountants. (b) Black & Decker and Cannondale Corporation both use the
FIFO cost flow assumption. (c)

(Adjusting Entries) Karen Weller, D.D.S., opened a dental practice on January 1, 2005. During
the first month of operations the following transactions occurred. 1. Performed services for
patients who had dental plan insurance. At January 31, $750 of such services was earned but not
yet billed to the insurance companies

A Wall Street Journal article noted that Micro Strategy reported higher income than its
competitors by using a more aggressive policy for recognizing revenue on future upgrades to its
products. Some contend that Micro Strategy’s quality of earnings is low. What does the term
“quality of earnings” mean?

(Qualitative Characteristics) Accounting information provides useful information about business

transactions and events. Those who provide and use financial reports must often select and
evaluate accounting alternatives. FASB Statement of Financial Accounting Concepts No. 2,
“Qualitative Characteristics of Accounting

Transactions for Argot Company for the month of May are presented below. Prepare journal
entries for each of these transactions. (You may omit explanations.) May 1 B.D. Argot invests
$3,000 cash in exchange for common stock in a small welding corporation. 3 Buys equipment on
account for $1,100. 13 Pays $400 to landlord

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The treasurer of Joan Osborne Co. has heard that conservatism is a doctrine that is followed in
accounting and, therefore, proposes that several policies be followed that is conservative in
nature. State your opinion with respect to each of the policies listed below. (a) The company
gives a 2-year warranty to its custo

(Assumptions, Principles, and Constraints) Presented below are the assumptions, principles, and
constraints used in this chapter. 1. Economic entity assumption 5. Historical cost principle 9.
Materiality 2. Going concern assumption 6. Matching principle 10. Industry practices 3.
Monetary unit assumption 7. Full disclos

Selanne Enterprises made the following entry on December 31, 2005. Dec. 31, 2005 Interest
Expense 10,000 Interest Payable 10,000 (To record interest expense due on loan from Anaheim
National Bank.) What entry would Anaheim National Bank make regarding its outstanding loan
to Selanne Enterprises? Explain why t

Distinguish between cash-basis accounting and accrual basis accounting. Why is accrual-basis
accounting acceptable for most business enterprises and the cash basis unacceptable in the
preparation of an income statement and a balance sheet?

(Revenue Recognition and Matching Principle) On June 5, 2003, McCoy Corporation signed a
contract with Sulu Associates under which Sulu agreed (1) to construct an office building on
land owned by McCoy, (2) to accept responsibility for procuring financing for the project and
finding tenants, and (3) to manage the prope

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Adjusting Entries) The ledger of Duggan Rental Agency on March 31 of the current year
includes the following selected accounts before adjusting entries have been prepared. An
analysis of the accounts shows the following. 1. The equipment depreciates $250 per month. 2.
One-third of the unearned rent was earned during

Mogilny Corporation owns a warehouse. On November 1, it rented storage space to a lessee

(tenant) for 3 months for a total cash payment of $2,700 received in advance. Prepare
Mogilny’s November 1 journal entry and the December 31 annual adjusting entry.

(Transactions, Financial Statements—Service Company) Listed below are the transactions of

Isao Aoki, D.D.S., for the month of September. Sept. 1 Isao Aoki begins practice as a dentist and
invests $20,000 cash. 2 Purchases furniture and dental equipment on account from Green Jacket
Co. for $17,280. 4 Pays rent for of

(Qualitative Characteristics) Recently, your Uncle Waldo Ralph, who knows that you always
have your eye out for a profitable investment, has discussed the possibility of your purchasing
some corporate bonds. He suggests that you may wish to get in on the “ground floor” of
this deal. The bonds being issued by Cricke

(Matching Principle) Accountants try to prepare income statements that are as accurate as
possible. A basic requirement in preparing accurate income statements is to match costs against
revenues properly. Proper matching of costs against revenues requires that costs resulting from
typical business operations be recogni
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Identify at least two situations in which important changes in value are not reported in the
income statement.

In January 2005, Alan Jackson Inc. doubled the amount of its outstanding stock by selling on the
market an additional 10,000 shares to finance an expansion of the business. You propose that this
information be shown by a footnote on the balance sheet as of December 31, 2004. The president
objects, claiming that this sa

Discuss whether the changes described in each of the cases below require recognition in the
CPA’s report as to consistency. (Assume that the amounts are material.) (a) After 3 years of
computing depreciation under an accelerated method for income tax purposes and under the
straight-line method for reporting purposes,

Why should caution be exercised in the use of the income figure derived in an income statement?
What are the objectives of generally accepted accounting principles in their application to the
income statement?

(Corrected Trial Balance) The trial balance of Wanda Landowska Company shown below does
not balance. Your review of the ledger reveals the following: (a) Each account had a normal
balance. (b) The debit footings in Prepaid Insurance, Accounts Payable, and Property Tax
Expense were each understated $100. (c) A transposi

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(Assumptions, Principles, and Constraints) Presented below are a number of operational

guidelines and practices that have developed over time. Select the assumption, principle, or
constraint that most appropriately justifies these procedures and practices. (Do not use qualitative
characteristics.) (a) Price-level chan

(Conceptual Framework—General) The Financial Accounting Standards Board (FASB) has

developed a conceptual framework for financial accounting and reporting. The FASB has issued
seven Statements of Financial Accounting Concepts. These statements are intended to set forth
objectives and fundamentals that will be the bas

(Adjusting Entries and Financial Statements) Yount Advertising Agency was founded by
Thomas Grant in January 2001. Presented below are both the adjusted and unadjusted trial
balances as of December 31, 2005. (a) Journalize the annual adjusting entries that were made. (b)
Prepare an income statement and a statement of r

(Accounting Principles—Comprehensive) Presented below are a number of business

transactions that occurred during the current year for Fresh Horses, Inc. In each of the situations,
discuss the appropriateness of the journal entries in terms of generally accepted accounting
principles. (a) The president of Fresh Horses

(Revenue Recognition and Matching Principle) After the presentation of your report on the
examination of the financial statements to the board of directors of Bones Publishing Company,
one of the new directors expresses surprise that the income statement assumes that an equal
proportion of the revenue is earned with th

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Why are revenue and expense accounts called temporary or nominal accounts?

(Accounting Principles—Comprehensive) Presented below is information related to Garth

Brooks, Inc. Comment on the appropriateness of the accounting procedures followed by Garth
Brooks, Inc. (a) Depreciation expense on the building for the year was $60,000. Because the
building was increasing in value during the year,

(Objectives of Financial Reporting) Regis Gordon and Kathy Medford are discussing various
aspects of the FASB’s pronouncement Statement of Financial Accounting Concepts No. 1,
“Objectives of Financial Reporting by Business Enterprises.” Regis indicates that this
pronouncement provides little, if any, guidance to

(Matching Principle) Carlos Rodriguez sells and erects shell houses, that is, frame structures that
are completely finished on the outside but are unfinished on the inside except for flooring,
partition studding, and ceiling joists. Shell houses are sold chiefly to customers who are handy
with tools and who have time t

Explain how you would decide whether to record each of the following expenditures as an asset
or an expense. Assume all items are material. (a) Legal fees paid in connection with the purchase
of land are $1,500. (b) Benjamin Bratt, Inc. paves the driveway leading to the office building at a
cost of $21,000. (c) A meat

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For each item below, indicate to which category of elements of financial statements it belongs.
(a) Retained earnings (b) Sales (c) Additional paid-in capital (d) Inventory (e) Depreciation (f)
Loss on sale of equipment (g) Interest payable (h) Dividends (i) Gain on sale of investment (j)
Issuance of common stock

Brett Favre Repair Shop had the following transactions during the first month of business.
Journalize the transactions. Aug. 2 Invested $12,000 cash and $2,500 of equipment in the
business. 7 Purchased supplies on account for $400. (Debit asset account.) 12 Performed services
for clients, for which $1,300 was collecte
(Matching) Hinckley Nuclear Power Plant will be “mothballed” at the end of its useful life
(approximately 20 years) at great expense. The matching principle requires that expenses be
matched to revenue. Accountants Jana Kingston and Pete Henning argue whether it is better to
allocate the expense of mothballing over

What accounting assumption, principle, or modifying convention does Target Corporation use in
each of the situations below? (a) Target uses the lower of cost or market basis to value
inventories. (b) Target was involved in litigation over the last year. This litigation is disclosed in
the financial statements. (c) Targ

What are the advantages and disadvantages of the single-step income statement?

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Pelican Company made a December 31 adjusting entry to debit Salaries Expense and credit
Salaries Payable for $3,600. On January 2, Pelican paid the weekly payroll of $6,000. Prepare
Pelican’s (a) January 1 reversing entry; (b) January 2 entry (assuming the reversing entry
was prepared); and (c) January 2 entry (ass

(Qualitative Characteristics) The qualitative characteristics that make accounting information

useful for decision-making purposes are as follows. Relevance Timeliness Representational
faithfulness Reliability Verifiability Comparability Predictive value Neutrality Consistency
Feedback value Identify the app

Statement of Financial Accounting Concepts No. 5 identifies four characteristics that an item
must have before it is recognized in the financial statements. What are these four characteristics?

“A work sheet is a permanent accounting record, and its use is required in the accounting
cycle.” Do you agree? Explain.

The Enterprise Standard Industrial Classification (SIC) coding scheme, a published classification
of firms into separate industries, is commonly used in practice. SIC codes permit identification of
company activities on three levels of detail. Two-digit codes designate a “major group,”
three-digit codes designate a

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Which constraints on accounting information are illustrated by the items below? (a) Zip’s
Farms, Inc. reports agricultural crops on its balance sheet at market value. (b) Crimson Tide
Corporation does not accrue a contingent lawsuit gain of $650,000. (c) Wildcat Company does
not disclose any information in the notes

Presented below are three different transactions related to materiality. Explain whether you
would classify these transactions as material. (a) Marcus Co. has reported a positive trend in
earnings over the last 3 years. In the current year, it reduces its bad debt allowance to ensure
another positive earnings year. The

Identify which basic principle of accounting is best described in each item below. (a) Norfolk
Southern Corporation reports revenue in its income statement when it is earned instead of when
the cash is collected. (b) Yahoo, Inc. recognizes depreciation expense for a machine over the 2-
year period during which that mach

Willis Corporation has beginning inventory $81,000; Purchases $540,000; Freight-in $16,200;
Purchase Returns $5,800; Purchase Discounts $5,000; and ending inventory $70,200. Compute
cost of goods sold.

Identify which basic assumption of accounting is best described in each item below. (a) The
economic activities of FedEx Corporation are divided into 12-month periods for the purpose of
issuing annual reports. (b) Solectron Corporation, Inc. does not adjust amounts in its financial
statements for the effects of inflati

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Do the following events represent business transactions? Explain your answer in each case. (a) A
computer is purchased on account. (b) A customer returns merchandise and is given credit on
account. (c) A prospective employee is interviewed. (d) The owner of the business withdraws
cash from the business for personal use

At the end of its first year of operations, the trial balance of Rafael Company shows Equipment
$30,000 and zero balances in Accumulated Depreciation—Equipment and Depreciation
Expense. Depreciation for the year is estimated to be $3,000. Prepare the adjusting entry for
depreciation at December 31, and indicate the b

(Adjusting Entries) Selected accounts of Urdu Company are shown below. From an analysis of
the T-accounts, reconstruct (a) The October transaction entries, and (b) The adjusting journal
entries that were made on October 31,2005.

Name the accounts debited and credited for each of the following transactions. (a) Billing a
customer for work done. (b) Receipt of cash from customer on account. (c) Purchase of office
supplies on account. (d) Purchase of 15 gallons of gasoline for the delivery truck.

(Adjusting Entries) Greco Resort opened for business on June 1 with eight air-conditioned units.
Its trial balance on August 31 is as follows. Other data: 1. The balance in prepaid insurance is a
one-year premium paid on June 1, 2005. 2. An inventory count on August 31 shows $450 of
supplies on hand. 3. Annual deprecia

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