Consider the joint effect of entry and exit barriers during periods of recession and of economic prosperity (consider four possible states (high/high, high/low; low/high; low/low). Identify four industry sectors that conform to these states.
What will be an ideal response?
High entry/high exit status deters entry and exit, leading to stable sectors such as electricity supply
whose profitability depends greatly on the economic cycle. Difficult trading conditions prompt price
competition, harming margins, unless there is a de facto cartel. Low/low status suggests a dynamic
sector constantly in flux, characterised by many relatively small and powerless suppliers. Since exit
is easy, there is little incentive to remain when profits are hard to obtain; however, the quitters make
life easier for the stayers, which stabilises collective profitability at a tolerable level, all else equal.
Market traders and independent retailers are examples, but even so, there is some ‘stickiness’ in the
exit propensity of less efficient suppliers. High entry barriers combined with low exit barriers seems
a contradiction, since the prospect of writing off the high costs incurred during entry in order to
achieve later exit is very unattractive, hence an entry deterrent. Yet if the unhappy entrant can pass
those costs on to another enterprise, it can achieve exit in practice at low cost. The ideal condition
would require many prospective entrants willing to replace incumbents. Prime location retailing of
clothing is an example, since high traffic sites are intrinsically desirable to enterprises without them,
yet which have the resources to take on expensive, long-term leases and store refitting costs. By so
doing, they will maintain intense competition, but the impact on sector profitability also depends on
many additional factors such as image and distinctiveness. Finally, low entry but high exit barriers
suggests the analogy of a quicksand: best avoided! Since the exit barriers are high, it suggests they
are qualitatively different from the entry barriers, for example legal obligations and psychological
factors. Thus, a newly qualified doctor or dentist may have set up a solo medical practice some years
ago without huge monetary costs, but now has commitments to the NHS, staff and patients that
represent legal and psychological factors that would deter exit.
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Answer the following statements true (T) or false (F)
An argument supporting accounting regulation is that the production costs of mandatory reporting requirements may be small since most of the basic information is produced as a by-product of internal accounting systems.
Pro forma statements are tools used by the company to forecast its profitability and obligations for the coming year
Indicate whether the statement is true or false.
The rate of return that equates the present value of cash inflows and outflows is the:
A. hurdle rate. B. desired rate of return. C. minimum rate of return. D. internal rate of return.
Franton Co., a calendar year, accrual basis corporation, reported $2,076,000 net income after tax on its current year financial statements prepared in accordance with GAAP. The corporation's financial records reveal the following information.Federal tax expense per books was $660,000. Franton received $22,400 of dividends from its investment in Microsoft and General Motors stock. Bad debt expense was $12,900, and write-offs of uncollectible accounts receivable totaled $16,300. Book depreciation was $110,890, and MACRS depreciation was $94,700. Franton paid a $50,000 fine to the City of Albany for illegal trash dumping. Compute Franton's taxable income and regular tax liability.
What will be an ideal response?