I Like Piue Essay

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Chapter 1 Investments: Background and Issues 1. a. Cash is a financial asset because it is the liability of the federal government. b. No. The cash does not directly add to the productive capacity of the economy. c. Yes. d. Society as a whole is worse off, since taxpayers, as a group will make up for the liability. 2. a. The bank loan is a financial liability for Lanni. Lanni's IOU is the bank's financial asset. The cash Lanni receives is a financial asset. The new financial asset created is Lanni's promissory note held by the bank. b. The cash paid by Lanni is the transfer of a financial asset to the software developer. In return, Lanni gets a real asset, the completed software. No financial assets are created or destroyed. Cash is simply transferred from one firm to another. c. Lanni sells the software, which is a real asset, to Microsoft. In exchange Lanni receives a financial asset, 1,500 shares of Microsoft stock. If Microsoft issues new shares in order to pay Lanni, this would constitute the creation of new financial asset. d. In selling 1,500 shares of stock for $120,000, Lanni is exchanging one financial asset for another. In paying off the IOU with $50,000 Lanni is exchanging financial assets. The loan is "destroyed" in the transaction, since it is retired when paid. {00319628.DOC / 1}1-1 3. a. Assets Liabilities & Shareholders’ equity Bank loan $50,000 Shareholders’ equity 50,000 $100,000 Cash Computers Total $100,000 $70,000 30,000 Total Ratio of real to total assets = $30,000/$100,000 = 0.30 b. Assets Software product* Computers Total Liabilities & Shareholders’ equity Bank loan $50,000 Shareholders’ equity 50,000 $100,000 $100,000 $70,000 30,000 Total *Valued at cost Ratio of real to total assets = $100,000/$100,000 = 1.0 c. Assets Microsoft shares Computers Total Liabilities & Shareholders’ equity Bank loan

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