Question: This chapter introduces both U.S. GAAP

> Consider the Romer model of Section 3.5. For simplicity, neglect the constraint that LA cannot be negative. Set up the problem of choosing the path of LA(t) to maximize the lifetime utility of the representative individual. What is the control variable?

> Consider the social planner’s problem that we analyzed in Section 2.4: the planner wants to maximize∞ t=0 e−βt[c(t)1−θ/(1−θ)]dt subject to k(t)=f (k(t))−c(t)−(n+g)k(t). (a) What is the current-value Hamiltonian? What variables are the control variable,

> Consider an individual choosing the path of G to maximize∞ t=0 e−ρt− a 2G(t)2dt, a > 0, ρ>0.Here G(t) is the amount of garbage the individual creates at time t; for simplicity, we allow for the possibility that G can be negative. The individual’s creatio

> The major feature of the tax code that affects the user cost of capital in the case of owner-occupied housing in the United States is that nominal interest payments are tax-deductible. Thus the after-tax real interest rate relevant to home ownership is r

> Corporations in the United States are allowed to subtract depreciation allowances from their taxable income. The depreciation allowances are based on the purchase price of the capital; a corporation that buys a new capital good at time t can deduct fract

> Consider the analysis of the effects of uncertainty about discount factors in Section 9.7. Suppose, however, that the firm finances its investment using a mix of equity and risk-free debt. Specifically, consider the financing of the marginal unit of capi

> Describe how each of the following affects steady-state employment in the Diamond Mortensen Pissarides model of Section 11.4: (a) An increase in the job breakup rate, λ. (b) An increase in the interest rate, r. (c) An increase in the effectiveness of mat

> Consider a firm that is contemplating undertaking an investment with a cost of I. There are two periods. The investment will pay off π1 inperiod1and π2 inperiod2. π1 is certain, but π2 is uncertain. The firm maximizes expected profits and, for simplicity

> Consider the model of investment with kinked adjustment costs in Section 9.8. Describe the effect of each of the following on the q =0 locus, on the area where K = 0, on q and K at the time of the change, and on their behavior over time. In each case, as

> Consider the model of investment under uncertainty with a constant interest rate in Section 9.7. Suppose that, as in Problem 9.10, π(K) = a −bK and that C(I) = αI 2/2. In addition, suppose that what is uncertain is future values of a. This problem asks y

> Suppose that π(K)=a −bK and C(I)= αI 2/2. (a) What is the q =0 locus? What is the long-run equilibrium value of K? (b) What is the slope of the saddle path? (Hint: Use the approach in Section 2.6.)

> Suppose the costs of adjustment exhibit constant returns in κ and κ. Specifically, suppose they are given by C(κ/κ)κ, where C(0) = 0, C(0) = 0, C(•) > 0. In addition, suppose capital depreciates at rate δ; thus κ(t) = I(t)−δκ(t). Consider the representat

> Consider a firm that produces output using a Cobb Douglas combination of capital and labor: Y=KαL1−α,0

> Consider the setup of the previous problem without the assumption that lims→∞ Et [Pt+s/(1+r)s]=0. (a) Deterministic bubbles. Suppose that Pt equals the expression derived in part (b) of Problem 8.8 plus (1+r)tb, b > 0. (i) Is consumers’ first-order condi

> Consider a stock that pays dividends of Dt in period t and whose price in period t is Pt. Assume that consumers are risk-neutral and have a discount rate of r; thus they maximize E[∞ t=0 Ct/(1+r)t ]. (a) Show that equilibrium requires Pt = Et[(Dt+1 + Pt+

> Consider the two-period setup analyzed in Section 8.4. Suppose that the government initially raises revenue only by taxing interest income. Thus the individual’s budget constraint is C1 +C2/[1+(1− τ)r] ≤ Y1 +Y2/[1+(1− τ)r], where τ is the tax rate. The g

> Suppose that Ct equals [r/(1+r)]{At +∞ s =0 Et [Yt+s]/(1+r)s}, and that At+1 =(1+r )(At +Yt −Ct). (a) Show that these assumptions imply that Et[Ct+1]=Ct (and thus that consumption follows a random walk) and that ∞ s=0 Et [Ct+s]/(1 + r )s =At + ∞ s=0 Et [

> In the setup described in Problem 11.10, suppose that w is distributed uniformly on [μ−a,μ+a] and that C V, and rejects it if ˆw

> Suppose instantaneous utility is of the constant-relative-risk-aversion form, u(Ct)=C1−θ t /(1−θ),θ>0. Assume that the real interest rate, r, is constant but not necessarily equal to the discount rate, ρ. (a) Find the Euler equation relating Ct to expect

> In the model of Section 8.2, uncertainty about future income does not affect consumption. Does this mean that the uncertainty does not affect expected lifetime utility?

> Actual data do not give consumption at a point in time, but average consumption over an extended period, such as a quarter. This problem asks you to examine the effects of this fact. Suppose that consumption follows a random walk: Ct = Ct−1 +et, where e

> The average income of farmers is less than the average income of non-farmers, but fluctuates more from year to year. Given this, how does the permanent-income hypothesis predict that estimated consumption functions for farmers and non farmers differ?

> Consider the following seemingly small variation on part (b) of Problem 8.16. Choose an N, and define e ≡ 200/N. Now, assume that Y can take on only the values 0,e,2e,3e,...,200, each with probability 1/(N+1). Likewise, assume that C can only take on the

> Consider the dynamic programming problem that leads to Figure 8.4. This problem asks you to solve the problem numerically with one change: preferences are logarithmic, so that u(C) = lnC. Specifically, it asks you to approximate the value function by val

> Consider an individual who lives for three periods. In period 1, his or her objective function is lnc1 +δ lnc2 +δ lnc3, where 0

> Consider an individual who lives for two periods and has constant-absolute risk-aversion utility, U =−e−γC1 − e−γC2,γ>0. The interest rate is zero and the individual has no initial wealth, so the individual’s lifetime budget constraint is C1 +C2 = Y1 +Y2

> Suppose that the utility of the representative consumer, individual i, is given by T t=1 [1/(1+ρ)t](Cit/Zit)1−θ/(1−θ), ρ>0,θ>0, where Zit is the ‘‘reference” level of consumption. Assume the interest rate is constant at some level, r, and that there is n

> Suppose that, as in Section 8.2, the instantaneous utility function is quadratic and the interest rate and the discount rate are zero. Suppose, however, that goods are durable; specifically, Ct =(1−δ)Ct−1 + Xt, where Xt is purchases in period t and 0≤ δ

> Consider a worker searching for a job. Wages, w, have a probability density function across jobs, f (w), that is known to the worker; let F(w) be the associated cumulative distribution function. Each time the worker samples a job from this distribution,

> Consider an economy with two possible states, each of which occurs with probability one-half. In the good state, each individual’s consumption is 1. In the bad state, fraction λ of the population consumes 1−(φ/λ) and the remainder consumes 1, where 0

> Suppose the only assets in the economy are infinitely lived trees. Output equals the fruit of the trees, which is exogenous and cannot be stored; thus Ct = Yt, where Yt is the exogenously determined output per person and Ct is consumption per person. Ass

> Consider an individual who lives from 0 to T, and whose lifetime utility is given by U =T t=0 u(C(t))dt, where u(•) > 0,u(•) < 0. The individual’s income is Y0 +gt for 0 ≤ t < R, and 0 for R ≤ t ≤ T. The retirement age, R, satisfies 0 < R < T. The intere

> Consider the new Keynesian Phillips curve with indexation, equation (7.76), under the assumptions of perfect foresight and β=1, together with our usual aggregate demand equation, yt =mt −pt. (a) Express pt+1 in terms of its lagged values and mt. (b) Cons

> Consider a continuous-time version of the Taylor model, so that p(t)=(1/T )T τ=0 x(t−τ)dτ, where T is the interval between each firm’s price changes and x(t−τ) is the price set by firms that set their prices at time t−τ. Assume that φ =1, so that p∗ i (t

> Consider an economy like that of the Caplin Spulber model. Suppose, however, that m can either rise or fall, and that firms therefore follow a simple two-sided Ss policy: if pi − p∗ t reaches either S or −S, firm i changes pi sothat pi−p∗ t equals 0. As

> Consider the experiment described at the beginning of Section 7.4. Specifically, a Calvo economy is initially in long-run equilibrium with all prices equal to m, which we normalize to zero. In period 1, there is a one-time, permanent increase in m to m1.

> Repeat Problem 7.4 using lag operators. Data from Problem 7.4: Consider the Taylor model with the money stock white noise rather than a random walk; that is, mt =εt, where εt is serially uncorrelated. Solve the model using the method of undetermined co

> Consider the Taylor model with the money stock white noise rather than a random walk; that is, mt =εt, where εt is serially uncorrelated. Solve the model using the method of undetermined coefficients.

> Consider the Taylor model. Suppose, however, that every other period all the firms set their prices for that period and the next. That is, in period t prices are set for t and t +1; in t +1, no prices are set; in t +2, prices are set for t+2 and t+3; and

> Suppose there are two sectors. Jobs in the primary sector pay wp; jobs in the secondary sector pay ws. Each worker decides which sector to be in. All workers who choose the secondary sector obtain a job. But there are a fixed number, Np, of primary-secto

> Consider the efficiency-wage model analyzed in equations (11.12) (11.17). Suppose, however, that fraction f of workers belong to unions that are able to obtain a wage that exceeds the nonunion wage by proportion μ. Thus, wu = (1+μ)wn, where wu and wn den

> Moulton Corporation engaged in the following seven transactions during December, Year 12, in preparation for opening the business on January 1, Year 13. We continue with data for Moulton Corporation in Chapter 3, Problem 3.22. You will not need some of t

> Express the following transactions of Winkle Grocery Store, Inc., in journal entry form. If an entry is not required, indicate the reason. You may omit explanations for the journal entries. The store: (1) Receives $30,000 from John Winkle in return for 1

> Assume that during Year 14, Inheritance Brands, a U.S. manufacturer and distributor, engaged in the following five transactions. Inheritance Brands applies U.S. GAAP and reports its results in millions of U.S. dollars ($). You may round to one significan

> Assume that during Year 15, Bullseye Corporation, a U.S. retailer, engages in the following six transactions. Bullseye Corporation applies U.S. GAAP and reports its results in millions of U.S. dollars ($). Do not be concerned that after these transaction

> GAAP classifies items on the balance sheet in one of the following ways: Asset (A) Liability (L) Shareholders’ equity (SE) Item that would not appear on the balance sheet as conventionally prepared under GAAP. (N/A) Using the abbreviations, indicate the

> GAAP classifies items on the balance sheet in one of the following ways: Asset (A) Liability (L) Shareholders’ equity (SE) Item that would not appear on the balance sheet as conventionally prepared under GAAP. (N/A) Using the abbreviations, indicate the

> When will a firm’s fiscal year differ from a calendar year?

> Cement Plus, a firm specializing in building materials, engaged in the following four transactions during 2014: (1) purchased and received inventory costing $14,300 million, of which $12,000 million was on account with the rest paid in cash; (2) purchase

> Consider the following information reported by DairyLamb, a New Zealand firm; all figures are in millions of New Zealand dollars ($). The firm reported revenues of $13,882, cost of goods sold of $11,671, interest and other expenses of $2,113, and tax exp

> Financial statements include amounts in units of currency. What is the most common determinant of a firm’s choice of currency for financial reporting?

> Heckle Group began operations as an engineering consulting firm, on June 1, 2013. On that date it issued 100,000 shares of common stock for €920,000. During June, Heckle used €600,000 of the proceeds to purchase office equipment. It acquired a patent for

> Kenton Limited began retail operations on January 1, 2013. On that date it issued 10,000 shares of common stock for £50,000. On January 31, Kenton used £48,000 of the proceeds to rent a store, paying in advance for the next two years. Kenton also purchas

> The statement of cash flows for Buenco, a firm in Argentina, showed a net cash inflow from operations of Ps427,182 and a net cash outflow for financing of Ps21,806. The comparative balance sheets showed a beginning balance in cash of Ps32,673 and an endi

> The statement of cash flows for Bargain Purchase, a retailer, showed a net cash inflow from operations of $4,125, a net cash outflow for investing of $6,195, and a net cash inflow for financing of $3,707. The balance sheet showed a beginning-of-year bala

> The balance sheet of Delvico, an Indian firm, showed retained earnings of Rs26,575 at the start of a year and Rs70,463 at the end of that year. The firm declared dividends during the year of Rs3,544. All amounts are in millions of Indian rupees (Rs). Com

> The balance sheet of Veldt, a South African firm, showed a balance in retained earnings of R5,872.4 at the end of 2013 and R4,640.9 at the end of 2012. Net income for the year was R2,362.5 million. All amounts are in millions of South African rand (R). C

> The income statement of AutoCo, a U.S. automotive manufacturer, reported revenues of $207,349, cost of sales of $164,682, other operating expenses, including income taxes, of $50,335, and net financing income, after taxes, of $5,690. Amounts are in milli

> Fresh Foods Group, a European food retailer that operates supermarkets in seven countries, engaged in the following three transactions during 2013: (1) purchased and received inventory costing €678 million on account from various suppliers; (2) returned

> The income statement of GrandRider, a U.K. automotive manufacturer, reported revenues of &Acirc;&pound;7,435, cost of sales of &Acirc;&pound;6,003, other operating expenses of &Acirc;&pound;918, a loss of &Acirc;&pound;2 on the sale of a business, and ne

> The balance sheet of GoldRan, a South African mining company, shows current assets of R6,085.1, noncurrent assets of R49,329.8, noncurrent liabilities of R13,948.4, and current liabilities of R4,360.1. GoldRan reports in millions of South African rand (R

> The balance sheet of EuroTel, a European Union communications firm, shows current assets of €20,000 million, current liabilities of €15,849 million, shareholders’ equity of €17,154 million, and noncurrent assets of €29,402 million. What is the amount of

> A firm recorded various transactions with the journal entries shown below. Using the notation O/S (overstated), U/S (understated), or No (no effect), indicate the effects on assets, liabilities, and shareholders&acirc;&#128;&#153; equity of any errors in

> Refer to Exhibit 1.10, which contains income statement information that is based on the financial report of Capcion, an Austrian paper and packaging manufacturer. Capcion reports all amounts in thousands of euros (&acirc;&#130;&not;). Answer the followin

> Refer to Exhibit 1.9, which contains balance sheet information from the financial report of Palmer Coldgate, a U.S. consumer products manufacturer. This firm reports all amounts in millions of U.S. dollars ($). Answer the following questions that pertain

> Using the notation O/S (overstated), U/S (understated), or No (no effect), indicate the effects on assets, liabilities, and shareholders’ equity of failing to record or recording incorrectly each of the following transactions or events. For example, a fa

> Whitley Products Corporation begins operations on April 1. The firm engages in the following transactions during April: (1) Issues 25,000 shares of $10 par value common stock for $15 per share in cash. (2) Acquires land costing $25,000 and a building cos

> Veronica Regaldo creates a new business in Mexico on January 1, Year 8, to operate a retail store. Transactions of Regaldo Department Stores during January Year 8 in preparation for opening its first retail store in February Year 8 appear below. Regaldo

> Patterson Corporation begins operations on January 1, Year 13. See the assumptions given at the end of the list. Problem 3.23 continues this problem. The firm engages in the following transactions during January: (1) Issues 15,000 shares of $10 par value

> Who prepares a firm’s financial statements?

> Why does every accounting transaction have two effects?

> Investing activities pertain to the acquisition of productive capacity to enable a firm to carry out its activities. Examples of this capacity include (1) land, buildings, and equipment and (2) patents and licenses. How are these two kinds of capacity th

> In what sense are a firm’s accounts receivable a source of financing for that firm’s customers?

> In what sense can suppliers of raw materials, merchandise, or labor services (employees) also be sources of financing for firms?

> What is the purpose of using contra accounts? What is the alternative to using them?

> What is involved in an audit by an independent external auditor?

> Once upon a time many, many years ago, a feudal landlord lived in a small province of central Europe. The landlord, called the Red-Bearded Baron, lived in a castle high on a hill. This benevolent fellow took responsibility for the well-being of many peas

> The photographic analogy for a balance sheet is a snapshot, and for the income statement and the statement of cash flows it is a motion picture.” Explain.

> The ABC Company starts the year in fine shape. The firm makes widgets—just what the customer wants. It makes them for $0.75 each and sells them for $1.00. The ABC Company keeps an inventory equal to shipments of the past 30 days, pays its bills promptly,

> Dina Richards opens a high-end stationery store, Stationery Plus, on November 1, 2013. She finances the store by investing $80,000 in cash in exchange for all the common stock of the firm. She also obtains a bank loan for $100,000, which she promises to

> Jack Block opens a tax and bookkeeping services business, Block’s Tax and Bookkeeping Services, on July 1, 2013. He invests $40,000 for all the common stock of the business, and the firm borrows $20,000 from the local bank, promising to repay the loan on

> The accounting records of Jet Away Airlines reveal the following. The fiscal year ends on September 30 and amounts are in thousands of US$: a. Prepare a comparative balance sheet for JetAway Airlines as of September 30, 2013, and September 30, 2012, in

> Selected data from the statement of cash flows for Jackson Corporation for the years ended October 31, 2013, 2012, and 2011 appear as follows (amounts in millions of US$): Prepare a statement of cash flows for each of the three years 2013, 2012 and 201

> The following information is based on data reported in the statement of cash flows for AB Brown, a Swedish firm. All amounts are in millions of Swedish kronor (SEK). Prepare a statement of cash flows for AB Brown for the three years presented using the

> Selected income statement information for Yankee Fashion, a U.S. clothing retailer, appears next. All amounts are in millions of U.S. dollars ($). Compute the missing amounts. 2013 2012 2011 Net Revenues.. $4,295.4 $3,746.3 $3,305.4 Cost of Goods So

> Selected income statement information for Easton Home, a U.S. consumer products manufacturer, appears next. All amounts are in millions of U.S. dollars ($). Compute the missing amounts. 2013 2012 2011 Sales.... $13,790 ? $11,397 Cost of Goods Sold ?

> Selected balance sheet amounts for SinoTwelve, a Chinese manufacturer, appear next. All amounts are in thousands of U.S. dollars ($). Compute the missing amounts. 2013 2012 Total Assets. $5,450,838 Current Liabilities . Current Assets Total Liabilit

> Selected balance sheet amounts for ComputerCo, a manufacturer located in Singapore, appear next. All amounts are in millions of Singapore dollars ($). Compute the missing amounts. 2013 2012 Total Assets $199,824 Noncurrent Liabilities 7,010 2013 201

> The chapter describes four activities common to all entities: setting goals and strategies, financing activities, investing activities, and operating activities. How would these four activities likely differ for a charitable organization versus a busines

> The following information is based on the financial statements of Hewston, a large manufacturing firm. Annual revenues are $66,387 million and net expenses (including income taxes) are $62,313 million. During the year, the firm collected $65,995 million

> Information based on and adapted from the statement of cash flows of Seller Redbud, a U.S. retailer, appears in Exhibit 1.11. This firm reports all amounts in thousands of U.S. dollars ($). Answer the following questions that pertain to the information i

> What is the advantage of the accrual basis of accounting, relative to the cash basis of accounting, for measuring performance?

> What is the purpose of the FASB’s and IASB’s conceptual frameworks?

> What distinguishes noncurrent assets from current assets?

> What is the role of the following participants in the financial reporting process: the U.S. Securities and Exchange Commission (SEC); the Financial Accounting Standards Board (FASB); the International Accounting Standards Board (IASB)?

> How does an income statement connect two successive balance sheets? How does a statement of cash flows connect two successive balance sheets?

> The measurement basis for reporting items on a firm’s balance sheet can be either historical amounts or current amounts. What is the difference between these two measurement bases?

> Assets and liabilities appear on balance sheets as either current or noncurrent. What is the difference between a current item and a noncurrent item? Why would users of financial statements likely be interested in this distinction?

> What is the relation between a T-account and a journal entry?

> Review the meaning of the terms and concepts listed in Key Terms and Concepts.