To state : Reasons for preference of stable earnings trend by managers.

Question

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Answer 1

Question

Chapter 5, Problem 5.1C

a)

To determine

To state : Reasons for preference of stable earnings trend by managers.

a)

Expert Solution

Explanation of Solution

Managers prefer stable earnings trend because of the following reasons:

Stable earnings make the company look less risky for investors and therefore, it stabilizes the stock price of the company.
Stable earnings allow the company to better forecast future performance.
Stable earnings help the company in making informed capital budgeting decisions.
Stable earnings allow the company to provide stable dividends.
Stable earnings reflect better on the performance of managers and there are better compensated.

b)

To determine

To state : Methods business managers might use to smooth earnings.

b)

Expert Solution

Explanation of Solution

Following methods can be used by managers to smooth earnings:

Earnings may be reduced or increased by altering the estimate of provisions, such as provision for employee costs.
Earnings may be reduced or increased by differing recognition of expenses or incomes to the next period.
Earnings may be made smooth by altering the amount of depreciation by recognizing impairment losses or by differing capital investments.
Earnings may be made smooth by recognition of unlikely expenses or revenue.
Earnings may be made smooth by differing non-recurring income.

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Coronado Fire, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: (1) a home fire extinguisher and (2) a commercial fire extinguisher. The home model is a high-volume (54,000 units), half-gallon cylinder that holds 2 1/2 pounds of multi- purpose dry chemical at 480 PSI. The commercial model is a low-volume (10,200 units), two-gallon cylinder that holds 10 pounds of multi-purpose dry chemical at 390 PSI. Both products require 1.5 hours of direct labor for completion. Therefore, total annual direct labor hours are 96,300 or [1.5 hours x (54,000+10,200)]. Estimated annual manufacturing overhead is $1,566,090. Thus, the predetermined overhead rate is $16.26 or ($1,566,090 ÷ 96,300) per direct labor hour. The direct materials cost per unit is $18.50 for the home model and $26.50 for the commercial model. The direct labor cost is $19 per unit for both the home and the commercial models. The company's managers identified six activity cost pools and related…

Coronado Fire, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: (1) a home fire extinguisher and (2) a commercial fire extinguisher. The home model is a high-volume (54,000 units), half-gallon cylinder that holds 2 1/2 pounds of multi- purpose dry chemical at 480 PSI. The commercial model is a low-volume (10,200 units), two-gallon cylinder that holds 10 pounds of multi-purpose dry chemical at 390 PSI. Both products require 1.5 hours of direct labor for completion. Therefore, total annual direct labor hours are 96,300 or [1.5 hours x (54,000+ 10,200)]. Estimated annual manufacturing overhead is $1,566,090. Thus, the predetermined overhead rate is $16.26 or ($1,566,090 ÷ 96,300) per direct labor hour. The direct materials cost per unit is $18.50 for the home model and $26.50 for the commercial model. The direct labor cost is $19 per unit for both the home and the commercial models. The company's managers identified six activity cost pools and related…

Answer 2

Question

Chapter 5, Problem 5.1C

a)

To determine

To state : Reasons for preference of stable earnings trend by managers.

a)

Expert Solution

Explanation of Solution

Managers prefer stable earnings trend because of the following reasons:

Stable earnings make the company look less risky for investors and therefore, it stabilizes the stock price of the company.
Stable earnings allow the company to better forecast future performance.
Stable earnings help the company in making informed capital budgeting decisions.
Stable earnings allow the company to provide stable dividends.
Stable earnings reflect better on the performance of managers and there are better compensated.

b)

To determine

To state : Methods business managers might use to smooth earnings.

b)

Expert Solution

Explanation of Solution

Following methods can be used by managers to smooth earnings:

Earnings may be reduced or increased by altering the estimate of provisions, such as provision for employee costs.
Earnings may be reduced or increased by differing recognition of expenses or incomes to the next period.
Earnings may be made smooth by altering the amount of depreciation by recognizing impairment losses or by differing capital investments.
Earnings may be made smooth by recognition of unlikely expenses or revenue.
Earnings may be made smooth by differing non-recurring income.

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Answer 3

Question

Chapter 5, Problem 5.1C

a)

To determine

To state : Reasons for preference of stable earnings trend by managers.

a)

Expert Solution

Explanation of Solution

Managers prefer stable earnings trend because of the following reasons:

Stable earnings make the company look less risky for investors and therefore, it stabilizes the stock price of the company.
Stable earnings allow the company to better forecast future performance.
Stable earnings help the company in making informed capital budgeting decisions.
Stable earnings allow the company to provide stable dividends.
Stable earnings reflect better on the performance of managers and there are better compensated.

b)

To determine

To state : Methods business managers might use to smooth earnings.

b)

Expert Solution

Explanation of Solution

Following methods can be used by managers to smooth earnings:

Earnings may be reduced or increased by altering the estimate of provisions, such as provision for employee costs.
Earnings may be reduced or increased by differing recognition of expenses or incomes to the next period.
Earnings may be made smooth by altering the amount of depreciation by recognizing impairment losses or by differing capital investments.
Earnings may be made smooth by recognition of unlikely expenses or revenue.
Earnings may be made smooth by differing non-recurring income.

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Answer 4

Question

Chapter 5, Problem 5.1C

a)

To determine

To state : Reasons for preference of stable earnings trend by managers.

a)

Expert Solution

Explanation of Solution

Managers prefer stable earnings trend because of the following reasons:

Stable earnings make the company look less risky for investors and therefore, it stabilizes the stock price of the company.
Stable earnings allow the company to better forecast future performance.
Stable earnings help the company in making informed capital budgeting decisions.
Stable earnings allow the company to provide stable dividends.
Stable earnings reflect better on the performance of managers and there are better compensated.

b)

To determine

To state : Methods business managers might use to smooth earnings.

b)

Expert Solution

Explanation of Solution

Following methods can be used by managers to smooth earnings:

Earnings may be reduced or increased by altering the estimate of provisions, such as provision for employee costs.
Earnings may be reduced or increased by differing recognition of expenses or incomes to the next period.
Earnings may be made smooth by altering the amount of depreciation by recognizing impairment losses or by differing capital investments.
Earnings may be made smooth by recognition of unlikely expenses or revenue.
Earnings may be made smooth by differing non-recurring income.

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Answer 5

Chapter 5, Problem 5.1C

a)

To determine

To state : Reasons for preference of stable earnings trend by managers.

a)

Expert Solution

Explanation of Solution

Managers prefer stable earnings trend because of the following reasons:

Stable earnings make the company look less risky for investors and therefore, it stabilizes the stock price of the company.
Stable earnings allow the company to better forecast future performance.
Stable earnings help the company in making informed capital budgeting decisions.
Stable earnings allow the company to provide stable dividends.
Stable earnings reflect better on the performance of managers and there are better compensated.

b)

To determine

To state : Methods business managers might use to smooth earnings.

b)

Expert Solution

Explanation of Solution

Following methods can be used by managers to smooth earnings:

Earnings may be reduced or increased by altering the estimate of provisions, such as provision for employee costs.
Earnings may be reduced or increased by differing recognition of expenses or incomes to the next period.
Earnings may be made smooth by altering the amount of depreciation by recognizing impairment losses or by differing capital investments.
Earnings may be made smooth by recognition of unlikely expenses or revenue.
Earnings may be made smooth by differing non-recurring income.

Answer 6

Chapter 5, Problem 5.1C

a)

To determine

To state : Reasons for preference of stable earnings trend by managers.

a)

Expert Solution

Explanation of Solution

Managers prefer stable earnings trend because of the following reasons:

Stable earnings make the company look less risky for investors and therefore, it stabilizes the stock price of the company.
Stable earnings allow the company to better forecast future performance.
Stable earnings help the company in making informed capital budgeting decisions.
Stable earnings allow the company to provide stable dividends.
Stable earnings reflect better on the performance of managers and there are better compensated.

Answer 7

Chapter 5, Problem 5.1C

a)

To determine

To state : Reasons for preference of stable earnings trend by managers.

Answer 8

a)

Expert Solution

Explanation of Solution

Managers prefer stable earnings trend because of the following reasons:

Stable earnings make the company look less risky for investors and therefore, it stabilizes the stock price of the company.
Stable earnings allow the company to better forecast future performance.
Stable earnings help the company in making informed capital budgeting decisions.
Stable earnings allow the company to provide stable dividends.
Stable earnings reflect better on the performance of managers and there are better compensated.

Answer 9

a)

Expert Solution

Answer 10

a)

Expert Solution

Answer 11

Expert Solution

Answer 12

b)

To determine

To state : Methods business managers might use to smooth earnings.

b)

Expert Solution

Explanation of Solution

Following methods can be used by managers to smooth earnings:

Earnings may be reduced or increased by altering the estimate of provisions, such as provision for employee costs.
Earnings may be reduced or increased by differing recognition of expenses or incomes to the next period.
Earnings may be made smooth by altering the amount of depreciation by recognizing impairment losses or by differing capital investments.
Earnings may be made smooth by recognition of unlikely expenses or revenue.
Earnings may be made smooth by differing non-recurring income.

Answer 13

b)

To determine

To state : Methods business managers might use to smooth earnings.

Answer 14

b)

Expert Solution

Explanation of Solution

Following methods can be used by managers to smooth earnings:

Earnings may be reduced or increased by altering the estimate of provisions, such as provision for employee costs.
Earnings may be reduced or increased by differing recognition of expenses or incomes to the next period.
Earnings may be made smooth by altering the amount of depreciation by recognizing impairment losses or by differing capital investments.
Earnings may be made smooth by recognition of unlikely expenses or revenue.
Earnings may be made smooth by differing non-recurring income.