Financial Accounting Case Study Solution

Solution 1:

Ever since time immemorial, it has been assumed by economists that the main goal of a firm or business is to augment profit. But it has also been observed that sometimes managers take decisions which increase the expense for the particular year. But these expenses incurred serve the base for the profit in the coming years. For example: all kind of preliminary expense, fixed assets like building, machinery etc.

So, to calculate the value of the firm both the profits i.e., present and future profits are added. But, the future values are reduced to present value as devaluation of currency due to market forces is also taken into account. Thus,

V= π(1)/ (1+r) + π(2)/ (1+r)^2 +……… π(n)/ (1+r)^n (1)

V= value of firm π(n) = Profit

Hence the answer is (D)

Solution 5:

In financial accounting when profit and loss account and balance sheets are made the costs considered are known as explicit costs. Thus, all kinds of direct costs that have been made during the business are known as explicit costs. Accounting costs includes all the explicit costs.

But the task of economists is very different from that of accountants as they take into consideration the second principle of economics, which states that cost of an item or a service is what we give up to get that item. This cost is known as the opportunity cost. For example if a farmer decides to grow rice instead of wheat then his opportunity cost will be the cost of wheat which he has given up to grow rice that year.

Implicit cost, is the opposite of explicit cost i.e., it includes all the costs that the business could have earned on its asset but did not because instead of renting it, it was used for the business’ own use. This cost is not included in the P&L or Balance sheet.

Thus,

Accounting cost = explicit cost

Opportunity cost/ economic cost= implicit cost + explicit cost.

a) Accounting cost is $200000, this is the only amount will be entered when the financial statement of her business would be

In this question we have to find the quantity demanded as well as supplied at the given ceiling price. So, we put P= $16 in

QD = 150 - 2P => 150 – 32 => 118

QS = 30 + 4P => 30 + 64 => 94

Therefore, as quantity demanded is more than quantity supplied then there is a shortage in the market of QD – QS = 118 – 94 => 24 units. Thus, answer is (A).

Solution 10:

If someone decides to auction his watch on ebay and he starts the bidding with $15. Then there are many people who would be willing to pay $20, $30 or $40 for that watch during auction. As the price rises the watch is finally sold at $35 to Amy. Amy was the one who were willing to pay $40 for that watch. She had a benefit of $5. This $5 is the consumer surplus.

Consumer surplus can be defined as the difference between amount which buyers are willing to pay and they actually pay. This also serves as the good measure of the economic condition of the buyers. In the graph, this is shown by the area coloured in pink i.e., area below the demand curve and above the market