Question: Two businesses, Blue Skies Corp., and Open
Two businesses, Blue Skies Corp., and Open Road, Inc., have sought business loans from you. To decide whether to make the loans, you have requested their balance sheets. 
Requirement 1. Using only these balance sheets, to which entity would you be more comfortable lending money? Explain fully , citing specific items and amounts from the respective balance sheets. (Challenge)
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Blue Skies Corp. Balance Sheet August 31, 2011 Assets Liabilities $ 5,000 Accounts payable. Notes payable . $ 50,000 Cash. Accounts receivable.. 10,000 80,000 Furniture. 15,000 Total liabilities . 130,000 Land.. Equipment. Owners' Equity Owners' equity.. 75,000 45,000 20,000 Total liabilities and Total assets.... $150,000 owners' equity. . $150,000 Open Road, Inc. Balance Sheet August 31, 2011 Assets Liabilities Cash. $ 5,000 Accounts payable. $ 6,000 Accounts receivable. Merchandise inventory.. 10,000 Note payable.. 9,000 15,000 15,000 Total liabilities . Building. 35,000 Stockholders' Equity Stockholders' equity. 50,000 Total liabilities and Total assets.... $65,000 stockholders' equity. . $65,000
> The financial statement that reports revenues and expenses is called the a. statement of cash flows. b. income statement. c. statement of retained earnings. d. balance sheet.
> Revenues are a. decreases in liabilities resulting from paying off loans. b. increases in paid-in capital resulting from the owners investing in the business. c. increases in retained earnings resulting from selling products or performing services. d
> All of the following are current assets except a. Inventory . b. Sales Revenue. c. Cash. d. Accounts Receivable.
> The amount a company expects to collect from customers appears on the a. statement of cash flows. b. balance sheet in the current assets section. c. income statement in the expenses section. d. balance sheet in the stockholders equity section.
> During March, assets increased by $19,000 and liabilities increased by $6,000. Stockholders equity must have a. increased by $13,000. b. decreased by $13,000. c. increased by $25,000. d. decreased by $25,000.
> Assets are usually reported at their a. historical cost. b. current market value. c. appraised value. d. none of the above (fill in the blank).
> Which type of business organization provides the least amount of protection for bankers and other creditors of the company? a. Partnership b. Proprietorship c. Corporation d. Both a and b
> Assume M. Crew opened a store in Dallas, starting with cash and common stock of $94,000. Melissa Farino, the store manager, then signed a note payable to purchase land for $88,000 and a building for $123,000. Farino also paid $60,000 for equipment and $8
> The primary objective of financial reporting is to provide information a. useful for making investment and credit decisions. b. about the profitability of the enterprise. c. to the federal government. d. on the cash flows of the company .
> Gartex, a new company, completed these transactions. What will Gartexs total assets equal? (1) Stockholders invested $54,000 cash and inventory worth $27,000. (2) Sales on account, $15,000. a. $66,000 b. $69,000 c. $96,000 d. $54,000
> A businesss receipt of a $120,000 building, with a $60,000 mortgage payable, and issuance of $60,000 of common stock will a. increase stockholders equity by $60,000. b. increase assets by $60,000. c. decrease assets by $60,000. d. increase stockholde
> If the credit to record the payment of an account payable is not posted, a. expenses will be understated. b. liabilities will be understated. c. cash will be understated. d. cash will be overstated
> Which of the following transactions will increase an asset and increase stockholders equity? a. Borrowing money from a bank b. Purchasing supplies on account c. Performing a service on account for a customer d. Collecting cash from a customer on an a
> The journal entry to record the receipt of land and a building and issuance of common stock a. debits Land and credits Common Stock. b. debits Land and Building and credits Common Stock. c. debits Land, Building, and Common Stock. d. debits Common St
> What is the effect on total assets and stockholders equity of paying the telephone bill as soon as it is received each month? Total assets…………Stockholders equity a. No effect………………………..No effect b. Decrease……………………….No effect c. No effect………………………..Decr
> Purchasing a building for $110,000 by paying cash of $15,000 and signing a note payable for $95,000 will a. increase both total assets and total liabilities by $95,000. b. increase both total assets and total liabilities by $110,000. c. decrease both
> Pinker Corporation began the year with cash of $30,000 and a computer that cost $25,000. During the year Pinker earned sales revenue of $135,000 and had the following expenses: salaries, $57,000; rent, $11,000; and utilities, $4,000. At year-end Pinkers
> A major purpose of preparing closing entries is to a. zero out the liability accounts. b. close out the Supplies account. c. adjust the asset accounts to their correct current balances. d. update the Retained Earnings account.
> Lanos Medical, Inc., ended 2009 with cash of $25,000. During 2010, Lanos earned net income of $95,000 and had adjustments to reconcile net income to net cash provided by operations totaling $20,000 (this is a negative amount). Lanos paid $35,000 to purch
> Which of the following accounts would not be included in the closing entries? a. Depreciation Expense b. Accumulated Depreciation c. Retained Earnings d. Service Revenue
> For 2010, Matthews Company had revenues in excess of expenses. Which statement describes Matthews closing entries at the end of 2010? a. Revenues will be credited, expenses will be debited, and retained earnings will be credited. b. Revenues will be de
> Unadjusted net income equals $7,500. Calculate what net income will be after the following adjustments: 1. Salaries payable to employees, $660 2. Interest due on note payable at the bank, $100 3. Unearned revenue that has been earned, $950 4. Supplie
> Selected data for the Blossom Company follow: Based on these facts, what are Blossoms current ratio and debt ratio? Current ratio Debt ratio a. 1.633 to 1 0.742 to 1 b. 0.694 to 1 6.815 to 1 c. 1.183 to 1
> What effect does the adjusting entry in question 3-57 have on Bambis net income for February? a. Increase by $200 b. Decrease by $200 c. Increase by $400 d. Decrease by $400
> Assume the same facts as in question 3-56. Bambis adjusting entry at the end of February should include a debit to Rent Expense in the amount of a. $200. b. $1,000. c. $400. d. $0.
> On January 1 of the current year, Bambi Company paid $1,200 rent to cover six months (January June). Bambi recorded this transaction as follows: Bambi adjusts the accounts at the end of each month. Based on these facts, the adjusting entry at the end of
> In which month should revenue be recorded? a. In the month that cash is collected from the customer b. In the month that goods are shipped to the customer c. In the month that goods are ordered by the customer d. In the month that the invoice is mail
> At December 31, 2010, Tommer Products has cash of $12,000, receivables of $5,000, and inventory of $42,000. The companys equipment totals $82,000. Tommer owes accounts payable of $17,000, and long-term notes payable of $78,000. Common stock is $14,800. P
> Frank Dunn began a music business in January 2010. Dunn prepares monthly financial statements and uses the accrual basis of accounting. The following transactions are Dunn Companys only activities during January through April: If Dunn Company uses the c
> Frank Dunn began a music business in January 2010. Dunn prepares monthly financial statements and uses the accrual basis of accounting. The following transactions are Dunn Companys only activities during January through April: In which month should Dunn
> Frank Dunn began a music business in January 2010. Dunn prepares monthly financial statements and uses the accrual basis of accounting. The following transactions are Dunn Companys only activities during January through April: In which month should Dunn
> The Unearned Revenue account of Super Incorporated began 2010 with a normal balance of $2,000 and ended 2010 with a normal balance of $17,000. During 2010, the Unearned Revenue account was credited for $26,000 that Super will earn later. Based on these f
> On April 1, 2010, Rural Insurance Company sold a one-year insurance policy covering the year ended April 1, 2011. Rural collected the full $2,700 on April 1, 2010. Rural made the following journal entry to record the receipt of cash in advance: Nine mon
> An adjusting entry recorded April salary expense that will be paid in May. Which statement best describes the effect of this adjusting entry on the companys accounting equation? a. Assets are decreased, liabilities are increased, and stockholders equity
> The manager of News Maker, Inc., prepared the company’s balance sheet while the accountant was ill. The balance sheet contains numerous errors. In particular, the manager knew that the balance sheet should balance, so he plugged in the
> Compute the missing amount (?) for each company amounts in millions. Which company has the Highest net income? Highest percent of net income to revenues? Diamond Corp. Lally Co. Bryant Inc. Beginning Assets. Liabilities . Common stock.. Retained ea
> Assume that the A division of Perez Corporation experienced the following transactions during the year ended December 31, 2011: a. Suppose division A supplied copy products for a customer for the discounted price of $263,000. Under normal conditions the
> Summarized versions of Cora Corporations financial statements are given for two recent years. // Requirement 1. Determine the missing amounts denoted by the letters.
> Refer to Redberrys trial balance in Short Exercise 2-10. The purpose of this exercise is to help you learn how to correct three common accounting errors. Error 1. Slide. Suppose the trial balance lists Land as $5,200 instead of $52,000. Recompute column
> The following data come from the financial statements of The Water Sport Company for the year ended May 31, 2011 (in millions): Requirements 1. Prepare a cash flows statement for the year ended May 31, 2011. Not all items given appear on the cash flows
> Sandy Healey is a realtor. She organized the business as a corporation on April 16, 2011. The business received $95,000 cash from Healey and issued common stock. Consider the following facts as of April 30, 2011: a. Healey has $16,000 in her personal ban
> The manager of Headlines, Inc., prepared the company’s balance sheet while the accountant was ill. The balance sheet contains numerous errors. In particular, the manager knew that the balance sheet should balance, so he plugged in the s
> Compute the missing amount (?) for each company amounts in millions. At the end of the year, which company has the Highest net income? Highest percent of net income to revenues? Sapphire Corp. Lance Co. Branch Inc. Beginning Assets.. Liabilities .
> Assume that the A division of Smith Corporation experienced the following transactions during the year ended December 31, 2011: a. Suppose division A supplied copy products for a customer for the discounted price of $252,000. Under normal conditions the
> The following amounts summarize the financial position of Rodriguez Resources on May 31, 2010: During June, 2010, the business completed these transactions: a. Rodriguez Resources received cash of $8,600 and issued common stock. b. Performed services
> The trial balance of Advantage Specialties, Inc., follows: Rebecca Smith, your best friend, is considering making an investment in Advantage Specialties, Inc. Rebecca seeks your advice in interpreting the companys information. Specifically , she asks ho
> During the first month of operations, Simmons Heating and Air Conditioning, Inc., completed the following transactions: Requirements 1. Record each transaction in the journal. Key each transaction by date. Explanations are not required. 2. Post the tr
> During December, Smith Auction Co. completed the following transactions: Smiths business uses the following accounts: Cash, Accounts Receivable, Supplies, Land, Accounts Payable, Notes Payable, Common Stock, Dividends, Service Revenue, Salary Expense, A
> Demers Real Estate Co. experienced the following events during the organizing phase and its first month of operations. Some of the events were personal for the stockholders and did not affect the business. Others were transactions of the business. Requi
> Refer to equations (15.19) and (15.20). Assume that σu = σx, so that the population variation in the error term is the same as it is in x. Suppose that the instrumental variable, z, is slightly correlated with u: Corr(z, u) = .1. Su
> Suppose that, for a given state in the United States, you wish to use annual time series data to estimate the effect of the state-level minimum wage on the employment of those 18 to 25 years old (EMP). A simple model is where MINt is the minimum wage, in
> Consider the simple regression model and let z be a binary instrumental variable for x. Use (15.10) to show that the IV estimator y = Bo + Bix + u
> Suppose that you wish to estimate the effect of class attendance on student performance. A basic model is where the variables are defined as in Chapter 6. (i) Let dist be the distance from the students’ living quarters to the lecture ha
> Consider a simple time series model where the explanatory variable has classical measurement error: where Y = Bo + Bixi + u, [15.58] X, = x; + e,
> In a recent article, Evans and Schwab (1995) studied the effects of attending a Catholic high school on the probability of attending college. For concreteness, let college be a binary variable equal to unity if a student attends college, and zero otherwi
> Consider a simple model to estimate the effect of personal computer (PC) ownership on college grade point average for graduating seniors at a large public university: where PC is a binary variable indicating PC ownership. (i) Why might PC ownership be co
> The data in CENSUS2000 is a random sample of individuals from the United States. Here we are Interested in estimating a simple regression model relating the log of weekly income, lweekinc, to schooling, educ. There are 29,501 observations. Associated wit
> Using the “cluster” option in the econometrics package Stata® 11, the fully robust standard errors for the pooled OLS estimates in Table 14.2—that is, robust to serial correlation and heteroskedasticity in the composite errors, {vit: t = 1, ….., ,T}—are
> Suppose that, for one semester, you can collect the following data on a random sample of college juniors and seniors for each class taken: a standardized final exam score, percentage of lectures attended, a dummy variable indicating whether the class is
> Use all the data in PHILLIPS to answer this question. You should now use 56 years of data. (i) Reestimate equation (11.19) and report the results in the usual form. Do the intercept and slope estimates change notably when you add the recent years of data
> In order to determine the effects of collegiate athletic performance on applicants, you collect data on applications for a sample of Division I colleges for 1985, 1990, and 1995. (i) What measures of athletic success would you include in an equation? Wha
> In a random effects model, define the composite error vit =
> With a single explanatory variable, the equation used to obtain the between estimator is where the overbar represents the average over time. We can assume that E(ai) = 0 because we have included an intercept in the equation. Suppose that ui is uncorrelat
> Suppose that the idiosyncratic errors in (14.4), {
> Using the data in INJURY for Kentucky, we find the estimated equation when afchnge is dropped from (13.12) is Is it surprising that the estimate on the interaction is fairly close to that in (13.12)? Explain. (ii) When afchnge is included but highearn is
> In 1985, neither Florida nor Georgia had laws banning open alcohol containers in vehicle passenger compartments. By 1990, Florida had passed such a law, but Georgia had not. (i) Suppose you can collect random samples of the driving-age population in both
> Suppose that we want to estimate the effect of several variables on annual saving and that we have a panel data set on individuals collected on January 31, 1990, and January 31, 1992. If we include a year dummy for 1992 and use first differencing, can we
> If we think that b1 is positive in (13.14) and that Dui and Dunemi are negatively correlated, what is the bias in the OLS estimator of b1 in the first-differenced equation? crmrtet Во + 8od87, + Biunem, + a, + lis [13.14]
> Using the data in KIELMC, the following equations were estimated using the years 1978 and 1981: And Compare the estimates on the interaction term y81·nearinc with those from equation (13.9). Why are the estimates so different? log(price
> Assume that the averages of all factors other than educ have remained constant over time and that the average level of education is 12.2 for the 1972 sample and 13.3 in the 1984 sample. Using the estimates in Table 13.1, find the estimated change in aver
> Use the data in TRAFFIC2 for this exercise. (i) Compute the first order autocorrelation coefficient for the variable prcfat. Are you concerned that prcfat contains a unit root? Do the same for the unemployment rate. (ii) Estimate a multiple regression m
> Consider a standard multiple linear regression model with time series data: Assume that Assumptions TS.1, TS.2, TS.3, and TS.4 all hold. (i) Suppose we think that the errors {ut} follow an AR(1) model with parameter r and so we apply the Prais-Winsten me
> We found evidence of heteroskedasticity in ut in equation (12.47). Thus, we compute the heteroskedasticity-robust standard errors (in 3#4) along with the usual standard errors: What does using the heteroskedasticity-robust t statistic do to the significa
> (i) A regression of the OLS residuals on the lagged residuals produces
> True or false: “If the errors in a regression model contain ARCH, they must be serially correlated.”
> Estimate a variant on Fair’s model for predicting presidential election outcomes in the United States. (i) What argument can be made for the error term in this equation being serially uncorrelated? (Hint: How often do presidential elections take place?)
> Explain what is wrong with the following statement: “The Cochrane-Orcutt and Prais-Winsten methods are both used to obtain valid standard errors for the OLS estimates when there is a serial correlation.”
> When the errors in a regression model have AR(1) serial correlation, why do the OLS standard errors tend to underestimate the sampling variation in the
> The purpose of this exercise is to compare the estimates and standard errors obtained by correctly using 2SLS with those obtained using inappropriate procedures. Use the data file WAGE2. (i) Use a 2SLS routine to estimate the equation where sibs is the I
> Use the data in 401KSUBS for this exercise. The equation of interest is a linear probability model: The goal is to test whether there is a tradeoff between participating in a 401(k) plan and having an individual retirement account (IRA). Therefore, we wa
> Use the data in PHILLIPS for this exercise. (i) In Example 11.5, we estimated an expectations augmented Phillips curve of the form where ∆inft = inft – inft-1. In estimating this equation by OLS, we assumed that the su
> Use the data in PHILLIPS for this exercise. (i) Estimate an AR(1) model for the unemployment rate. Use this equation to predict the unemployment rate for 2004. Compare this with the actual unemployment rate for 2004. (You can find this information in a r
> Use the data in MURDER for this exercise. The variable mrdrte is the murder rate, that is, the number of murders per 100,000 people. The variable exec is the total number of prisoners executed for the current and prior two years; unem is the state unempl
> Use the data in CARD for this exercise. (i) In Table 15.1, the difference between the IV and OLS estimates of the return to education is economically important. Obtain the reduced form residuals,
> Use the data in INTDEF for this exercise. A simple equation relating the three-month T-bill rate to the inflation rate (constructed from the Consumer Price Index) is (i) Estimate this equation by OLS, omitting the first time period for later comparisons.
> Use the data in CARD for this exercise. (i) The equation is as where the other explanatory variables are listed in Table 15.1. In order for IV to be consistent, the IV for educ, nearc4, must be uncorrelated with u. Could nearc4 be correlated with things
> The data in FERTIL2 include, for women in Botswana during 1988, information on number of children, years of education, age, and religious and economic status variables. (i) Estimate the model by OLS and interpret the estimates. In particular, holding age
> Use the data in CATHOLIC to answer this question. The model of interest is where cathhs is a binary indicator for whether a student attends a Catholic high school. (i) How many students are in the sample? What percentage of these students attend a Cathol
> The data set in VOUCHER, which is a subset of the data used in Rouse (1998), can be used to estimate the effect of school choice on academic achievement. Attendance at a choice school was paid for by a voucher, which was determined by a lottery among tho
> Use the data in HTV for this exercise. (i) Run a simple OLS regression of log(wage) on educ. Without controlling for other factors, what is the 95% confidence interval for the return to another year of education? (ii) The variable ctuit, in thousands of
> Use the data in WAGE2 for this exercise. (i) Sibs is used as an instrument for educ, the IV estimate of the return to education is .122. To convince yourself that using sibs as an IV for educ is not the same as just plugging sibs in for educ and running
> The file PENSION contains information on participant-directed pension plans for U.S. workers. Some of the observations are for couples within the same family, so this data set constitutes a small cluster sample (with cluster sizes of two). (i) Ignoring t
> Use CONSUMP for this exercise. One version of the permanent income hypothesis (PIH) of consumption is that the growth in consumption is unpredictable. [Another version is that the change in consumption itself is unpredictable. Let gct = log(ct) – log(ct-
> Use the data in MATHPNL for this exercise. You will do a fixed effects version of the first differencing done in Computer Exercise 11 in Chapter 13. The model of interest is where the first available year (the base year) is 1993 because of the lagged spe
> Use the state-level data on murder rates and executions in MURDER for the following exercise. (i) Consider the unobserved effects model where mrdrte = 1 + Biexec, + Bzunem, + a; + Uj, %3D
> Add the interaction term unionit ·t to the equation estimated in Table 14.2 to see if wage growth depends on union status. Estimate the equation by random and fixed effects and compare the results. TABLE 14.2 Three Different Estimators
> (i) In the wage equation in Example 14.4, explain why dummy variables for occupation might be important omitted variables for estimating the union wage premium. (ii) If every man in the sample stayed in the same occupation from 1981 through 1987, would y
> Papke also uses a model that allows each city to have its own time trend: where ai and ci are both unobserved effects. This allows for more heterogeneity across cities. (i) Show that, when the previous equation is first differenced, we obtain Notice that
> For this exercise, we use JTRAIN to determine the effect of the job training grant on hours of job training per employee. The basic model for the three years is (i) Estimate the equation using fixed effects. How many firms are used in the FE estimation?
> Use CRIME4 for this exercise. (i) Reestimate the unobserved effects model for crime in Example 13.9 but use fixed effects rather than differencing. Are there any notable sign or magnitude changes in the coefficients? What about statistical significance?
