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AMBO UNIVERSITY WOLISO CAMPUS

SCHOOL OF BUSINESS AND ECONOMICS
MASTER’S DEGREE IN BUSINESS
ADMINISTRATION (MBA)
WEEKEND PROGRAM
INDIVIDUAL ASSIGNMENT ON THE COURSE:
FINANCIAL AND MANAGERIAL ACCOUNTING

PREPARED BY:
TEZERA TESHALE (MBA-PGW/023/15)

SUBMITTED TO: Dr. ERMIAS M (PhD)

January, 2023
Woliso, Ethiopia
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1. The major focus of accounting information is to facilitate decision making.

a. As an investor in a company, what would be your primary objective?
Answer:
Accounting information is useful for investors to estimate the expected return and
risk of securities. So, my primary objective as an investor of a company would be to obtain
return on investment and minimizing risks associated with it. This would ensure that I would
obtain my investment back and earn a profit in spending my funds to the company.

b. As a manager in a company, what would be your primary objective?

Answer:
 My primary objectives are:
 Evaluating the performance of a company to know its financial position, such as profit and
loss, costs and earnings, liabilities and assets,etc.
 Evaluating the performance of department and individuals.
 Using the accounting information for budgeting and other planning functions.
c. Is the same accounting information likely to be equally useful to you in these two different
roles?
Answer:
 No, the same accounting information will not equally be useful in the two different roles
because the investor is part of external users of Accounting information where as a
manager is internal user. Some companies may share the same accounting information to
both the investors and managers depending on the type of investment; however it is more
likely that managers will have access to more information than investors to ensure that
company secrets are not exposed to competition.
2. Solomon Raga, controller for Addis Industries, was reviewing production cost reports for the
year. One amount in these reports continued to bother him was advertising. During the year,
the company had instituted an expensive advertising campaign to sell some of its slower-
moving products. It was still too early to tell whether the advertising campaign was
successful.

There had been much internal debate as how to report advertising cost. The vice president of
finance argued that advertising costs should be reported as a cost of production, just like direct
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materials and direct labor. He therefore recommended that this cost be identified as
manufacturing overhead and reported as part of inventory costs until sold. Others disagreed.
Solomon believed that this cost should be reported as an expense of the current period, so as not
to overstate net income.

Others argued that it should be reported as prepaid advertising and reported as a current asset.
The president finally had to decide the issue. He argued that these costs should be reported as
inventory. His arguments were practical ones. He noted that the company was experiencing
financial difficulty and expensing this amount in the current period might jeopardize a planned
bond offering. Also, by reporting the advertising costs as inventory rather than as prepaid
advertising, less attention would be directed to it by the financial community.

Instructions
(a) Who are the stakeholders in this situation?
(b) What are the ethical issues involved in this situation?
(c) What would you do if you were Solomon?

Answer:

a. Who are the stakeholders in this situation?

 Stakeholders include every one of those individuals who are affected by decision or action of
the industry: Solomon, Vice-President, President, employees, financial community and
others
b. What are the ethical issues involved in this situation?
Answer:
An ethical issue in this situation is involved in the correct way of reporting the advertising
costs and where it should be on the company’s financial statements. One said that it should
be reported as a cost of production; Solomon believed that it should be reported as an
expense of the current period. They were debating on how to report the expense of as prepaid
expense or inventory.
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c. What would you do if you were Solomon?

Answer:
 I would recommend recording this expense as a Prepaid Advertising Expense of the current
period. Even if it grabs the attention of the financial community, the right thing to do is
report expenses as they are. If the expense is not reported correctly, if the financial
community finds out later on it can jeopardize the health of the company.
 Then, as those sales occur, those advertising expenses are moved from the balance sheet
(prepaid expenses) to the income statement as this will not put pressure on the net income of
the expense incurred. This treatment is ethically perfect as per GAAP.
3. Moon Corporation and Star Corporation are in the same line of business and both were
recently organized, so it may be assumed that the recorded costs for assets are close to
current market values.
The balance sheets for the two companies are as follows at July 31, 2011:
CORPORATION
BALANCE Moon Corporation
JULY 31, 2011 Balance sheet
July 31, 2011
Assets Liabilities & Owners’ Equity
Cash . . . . . . . . . . . . . . . . $ 18,000 Liabilities:
Accounts Receivable . . . 26,000 Notes Payable
Land . . . . . . . . . . . . . . . . 37,200 (due in 60 days). . . . . . . . . . . . . $ 12,400
Building. . . . . . . . . . . . . . 38,000 Accounts Payable . . . . . . . . . . . . . 9,600
Office Equipment . . . . . . 1,200 Total liabilities . . . . . . . . . . . . . . $ 22,000
Stockholders’ equity:
Capital Stock . . . . . . . . . $60,000
Retained Earnings . . . . . 38,400 98,400
Total . . . . . . . . . . . . . . . . $120,400 Total . . . . . . . . . . . . . . . . . . . . . . . . . $120,400
STAR CORPORATIONBALANCE SHEET
Star Corporation
JULY 31, 20112011 Balance sheet
July 31, 2011
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Assets Liabilities & Owners’ Equity

Cash . . . . . . . . . . . . . . . . $ 4,800 Liabilities:
Accounts Receivable . . . 9,600 Notes Payable
Land . . . . . . . . . . . . . . . . 96,000 (due in 60 days). . . . . . . . . . . . . $ 22,400
Building . . . . . . . . . . . . . . 60,000 Accounts Payable . . . . . . . . . . . . . 43,200
Office Equipment . . . . . . 12,000 Total liabilities . . . . . . . . . . . . . . $ 65,600
Stockholders’ equity:
Capital Stock . . . . . . . . . $72,000
Retained Earnings . . . . . 44,800 116,800
Total . . . . . . . . . . . . . . . . $182,400 Total . . . . . . . . . . . . . . . . . . . . . . . . . $182,400

Instructions
a. Assume that you are a banker and that each company has applied to you for a 90-day loan of
$12,000. Which would you consider to be the more favorable prospect? Explain your answer
fully.
Answer: Moon Corporation
 A good way to determine a company's credit eligibility is to find its current ratio. The current
ratio is equal to the sum of current assets divided by the sum of current liabilities, and
measures a firm's ability to pay its obligations. According to the information in the
attachments, Moon Corporation's Current Assets are $44,000 ($18,000 worth of cash +
$26,000 of accounts receivable), and its current liabilities are $22,000 (the sum of notes
payable $12,400, and accounts payable $9,600):
 The current ratio of Moon Corporation is = $44,000 / $22,000 = 2
Star Corporation's current assets are $14,400, and current liabilities are $65,600:
 The current ratio of Star Corporation is = $14,400 / $65,600 = 0.21 A much lower
number.
Thus, Moon Corporation, according to current ratios, is a far more favorable prospect for
a loan.
 Bankers considering a loan application are particularly interested in the ability of the company
to pay its debts. They want to make loans that will be repaid promptly and in full at the agreed
maturity date. Therefore, they give close attention to the amount of cash and other assets or
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account receivable that will soon become cash. They compare these assets with the amount of
existing liability of the company that become due in the future. On these criterion Moon
corporation appears far superior to Star Corporation; its cash and receivable total $44,000
which is two times the $22,000 of note payable and account payable combined. Star
corporation, on the other hand has only $14,400 of cash and account receivable compared with
note and account payable of $65,000. Star Corporation may be insolvent or close to it.
Certainly Moon Corporation would appear to have greater debt-paying ability in the near
future.
 A banker also interested in the amount of owners’ equity, since this ownership capital serves as
a protecting buffer between the banker and any losses that may face the business. Although
Star Corporation has slightly greater owners’ equity than Moon Corporation, the difference is
relatively small. Relating the owners’ equity of the business to their total liability shows that
Moon Corporation has owners’ equity over four times the $22,000 owed to creditors of the
business. Star Corporation shows $116,800 of owners’ equity compared to $65,600 of liability,
or almost two times the creditors’ claim. Since the two companies were recently organized, the
balance in the retained earning accounts indicates that both companies are off to a profitable
start.
Therefore, a banker would probably consider Moon Corporation to be to be the better prospect
for a loan.
b. Assume that you are an investor considering purchasing all the capital stock of one or both of
the companies. For which business would you be willing to pay the higher price? Do you see
any indication of a financial crisis that you might face shortly after buying either company?
Explain your answer fully.
Answer:
 Purchasing is depending on the difference of cash and account receivable and a given
liability. Cash and account receivable (birr 44,000) – Liability (birr 22,000) for Moon
Corporation is birr 22,000, and Cash and account receivable (birr 14,400) – Liability (birr
65,600) for Star Corporation is birr -51,200. According to those two corporation balance
sheet statement given, I will give the highest values of purchasing capital stock for Moon
Corporation because it’s cash in birr is positive or birr 22,000.
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 As an Investor I can also use the D/E ratio (debt-to-equity ratio) as a benchmark to
determine the risk of investing in a business. Therefore, let`s calculate debt-to-
equity ratio for both Corporations separately:
 Moon Corporation D/E ratio=$ 22,000/98,400 = 0.22
 Star Corporation D/E ratio= $ 65,600/116,800 = 0.56
 The higher the Debt-to-equity ratio, the riskier the business to pay off its
debts. Accordingly, Moon Corporation is preferable as it is on better financial
position to pay off its debts.