FINANCE

1. FINANCE Reviews of Questions and Problems Part I: Chapter 1-3

2. Part one which includes Chapter 1 to 3 • Performance • Excellent homework • Unclean and unclear writing • Complete homework on time! • Complete your homework independently! • Team work: good! • Error correcting

3. Chapter 1: What is Finance? • Finance, as a scientific discipline, is the study of how people allocate scarce resources over time under conditions of uncertainty. • Problems of homework: • Express your opinions in terms of finance • Keep your work clean and clear • The concept of Trade-Off (such as return/risk, consumption/saving, study/work )

4. Problems of homework: Understand correctly the concepts of Limited- Liability, Moral-Hazard, Adverse-Selection and Principal-Agent Give examples besides those in book How to determine the investment weight in the S&P-Type indexes Market values in base year Chapter 2: The Financial System

5. Limited Liability • Common stock has the feature of Limited Liability and also represents a Residual Claim on assets of a corporation. (page 35) • You are equity investor and your partner is debt holder, so lenders do share some of the business risk along with the equity investors .

6. Moral-Hazard, Adverse-Selection and Principal-Agent • Definitions and examples are given from page 30 to page 32 on book . • Sample answer:

7. Stock Indexes • Market Weighted Stock Indexes (See appendix on page 61-62 ): • DJI- benchmark portfolio consists of one share of each stock. • S&P- holds each stock in proportion to its total market value. • DJI-type index will give inaccurate answer in some cases.

8. Question 3.1--dealwith following items properly Depreciation/Accumulated Depreciation Note Payable/Accounts Payable/Current Liability Average Total Assets/Receivables Question 3.10--dealwith following items properly Interest Expenses/ Liabilities Change in Retained Earnings/Retained Earnings Additional Financing Needed/Decrease in Short-term debt Difficult Questions and Problems Chapter 3: Financial Statements

9. Assignments 3.1-3.8 a. Machine 21,000(9,000+12,000) Inf c. Less Accumulated depreciation -3,000 Net Machine 18,000 b. Sale Revenue 431,000(115,000+316,000) Inf f. COGS 250,000 Inf a. Equipment 25,000 Less Accumulated depreciation) -3,750 Net Equipment 21,250 Inf b. Furniture 16,000 Less Accumulated depreciation) -4,000 Net Equipment 12,000

10. e. Rent expenses 43,000 f. Insurance expenses 23,000 g. Utility expenses 6,000(7,500-1,500) h. Wages and salaries 76,000(79,000-3,000) i. Miscellaneous operating expenses 4,000 By transaction c and information i and f, we have Inventory 14,000(57,000+207,000-250,000) By transaction b, j and information g, we have Accounts receivable 81,000(35,000-270,000+316,000) By transaction b, j and information h, we have Accounts payable 47,000(65,000+207,000-225,000)

11. By transaction a, g and, we have Utilities payable 0 Salary payable 0 Note payable 12,000 k. Interest expense 25,000 inf e. Dividends 1,316.25 • Solutions: to refer to Excel 3.1-3.8

12. Assignments 3.10 • Percent-of –sales method: • Firstly, to determine some fixed ratios to sales; • Secondly, determine the rate of growth in sales=15%; • Thirdly, forecast those items that are assumed to maintain a constant ratio to sales; • Finally, fill in the missing items in the income statement and balance sheet. • Solutions: to refer to Excel 3.10 • Sample Answers