Name: Denny Kridex C.

Omolon Course: BSA – 3rd Year

Subject: BA 42

Warm-Up Exercises:

E1-1 Allie and Austin have operated a small florist business. As they consult me what the most
appropriate form of business organization, I advised if they should still incorporate or remain as a
partnership because each form of business organization has its advantages and disadvantages.
The strengths of partnership are the business is easy to establish and can start-up at low costs,
they have greater borrowing capacity, there is also an opportunity for income splitting, an
advantage of a particular importance due to resultant tax savings, there is limited external
regulation and it’s easy to change your legal structure later if circumstances change. On the other
hand, partnership weaknesses are there is a risk of disagreements and friction among partners
and management, if partners join or leave, you will probably have to value all the partnership
assets and this can be costly, each partner is ‘jointly and severally’ liable for the partnership debts,
that is, each partner is liable for their share of the partnership debts as well as being liable for all
debts. While, corporation is organized by the state laws, whose investors purchase shares of
stock as evidence of ownership in it. However, the strengths of corporation are structured of
limited liability, selling share or issuing bonds that became their source of capital and have
perpetual life. Nevertheless, the weaknesses of corporation are follows of double taxation,
excessive tax filings, and independent management. The motivation behind what I recommend is
that they must consider they’re budget to start a formal business. Starting a partnership is easier,
less time consuming, and less expensive than starting a corporation. However, starting a
corporation requires you to check off several boxes including by-laws, shareholder agreement,
and stock certificates.

E1-4 The cost that has already been incurred and cannot be recovered disregard the concept of
marginal cost-benefit analysis. Thus, the 2.5 million is irrelevant to the current decision that must
be made. The project must be considered further to see if it is the best use of capital if the 10,000
additional investment generate a present value of expected revenue that will exceed the said
investment. If the firm has a need to ratio the capital, the project must then be compared to other
projects competing for the limited capital to see if it is viable. Therefore, the fact that the project’s
technology for video conferencing has been surpassed by new technology does not immediately
disqualify the project because new technology doesn’t ensure a positive cost-benefit result. Thus,
in this case, 10,000 investment might avoid a heavy expenditure in advance technology but failure
to keep up with competitors can be devastating. Furthermore, it may lies in the statement of the
‘project has little chance to be viable’ which indicates that accepting the investment is closely to
be throwing good money after worse encountered.

E1-5 Agency costs is a type of internal company expense which comes from the actions of an
agent acting on behalf of a principal. Typically arises in the wake of core inefficiencies,
dissatisfactions and disruptions, such as conflict of interest between shareholders and
management. It is borne by stockholders to maintain a governance structure that ensures against
dishonest acts of management and gives managers the financial incentive to maximize share
price. For instance, is stock options, which are used to provide an incentive for managers to work
diligently for the benefit of the firm. Tips are similar in that they are offered as rewards for good
service much as stock options are used to reward managers, presumably based on their good
performance. The Donut Shop Inc, case does not represent a clear case of agency costs because
it is the management itself that has instituted the ‘’No tips’’ policy and the employees have
responded with reduced performance. From banning tips, the management has created a
situation where an agency cost may be necessary to provide an incentive for employees to
resume their former level of performance. Furthermore, the solution for this is to institute a
throwing a rewards like profit-sharing plan that reaches down to the employee level where the
slowdown and inefficiency are occurring. A profit-sharing plan is designed to motivate the
employees and could alleviate the aggravation caused by the no-tip policy but must be clearly
identified as the replacement to tipping in order to be effective. It is viewed by the employees as
a reward for good performance but does not have the immediacy of the positive effect that an
employee gets from a tip.

In addition, the solution is to recognize that the no-tip policy has created an unnecessary backlash
that can be alleviated by reversing management’s position without incurring the additional costs
of revising the current employee benefit plan and paying out a portion of corporate profits.
Problems:

P1-1 Liability Comparisons

a. If John Bailey is the sole proprietorship, he has unlimited liablity.

b. If John and his brother, Peter are partners with an equal partnership distribution, he as
encountered unlimited liability.

c. If the firm is a corporation, they have limited liability which guarantees that she cannot
lose more than she invested.

P1-2 Accrual income versus cash flow for a period

a. Accrual basis

Sales 500,000

Cost of goods sold 350,000

Net Profit 150,000

b. Cash basis

Cash receipts 400,000

Cost of goods sold 350,000

Net Cash Flow 50,000

c. The cash flow statement is more useful to the accountants and financial manager. The
accounting net income includes amounts that will not be collected and, as a result, do not
contribute to the wealth of the owners.
P1-3 Cash Flow

a. Sheldon’s total cash inflow: 500 + 5,500 = 6,000

Sheldon’s total cash outflow: 1,550 + 850 + 200 + 310 = 2,910

b. Net Cash Flow refers to the difference between a company’s cash inflows and outflows in a
given period. In this case, net cash flow refers to the change in a company’s cash balance as
detailed on its cash flow statement.

Sheldon’s net cash flow: (Total cash inflows – Total cash outflows)

6,000 – 2,910 = 3,090

c. If Sheldon is facing a surplus of funds, I advice he should compare these cash flows to those
of other months and verifying that August’s cash flows are typical. For instance, he may observe
the existence of large insurance bills or tendency to spend more during holiday season.
Otherwise, if his August net cash flow is not needed to pay anticipated bills, she should invest in
a diversified portfolio.

Spreadsheet Exercises: TO-DO

Answer:

a. The marginal (added) benefits of the proposed new equipment.

Benefits with the new equipment 900,000

Less: Benefits with the old equipment 300,000

Marginal (added) benefits of the new equipment 600,000

b. The marginal (added) cost of the proposed new equipment.

Cost of new equipment 600,000

Less: Proceeds from the sale of the old equipment 250,000

Marginal (added) cost of the new equipment 350,000

c. The net benefit of the proposed new equipment.

Marginal (added) benefits of the new equipment 600,000

Less: Marginal (added) cost of the new equipment 350,000

Net benefit 250,000

d. I would recommend to Monsanto Corporation to replace the old equipment with the new
equipment because the marginal benefits seem to be more than the cost of the new equipment.