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Tags
#cfa #cfa-level-1 #economics #reading-15-demand-and-supply-analysis-the-firm #section-3-analysis-of-revenue-costs-and-profit
Question

For the most recent financial reporting period, a business has revenue of $2 million and total costs of $2.5 million, which are or can be broken down into total fixed cost of $1 million and total variable cost of $1.5 million.

The net loss on the firm’s income statement is reported as $500,000 (ignoring tax implications). In prior periods, the firm had reported profits on its operations.

  1. What decision should the firm make regarding operations over the long term?

Answer
If the revenue shortfall is expected to persist over time, the firm should cease operations, liquidate assets, and pay debts to the extent possible. Any residual for shareholders would decrease the longer the firm is allowed to operate unprofitably.

Tags
#cfa #cfa-level-1 #economics #reading-15-demand-and-supply-analysis-the-firm #section-3-analysis-of-revenue-costs-and-profit
Question

For the most recent financial reporting period, a business has revenue of $2 million and total costs of $2.5 million, which are or can be broken down into total fixed cost of $1 million and total variable cost of $1.5 million.

The net loss on the firm’s income statement is reported as $500,000 (ignoring tax implications). In prior periods, the firm had reported profits on its operations.

  1. What decision should the firm make regarding operations over the long term?

Answer
?

Tags
#cfa #cfa-level-1 #economics #reading-15-demand-and-supply-analysis-the-firm #section-3-analysis-of-revenue-costs-and-profit
Question

For the most recent financial reporting period, a business has revenue of $2 million and total costs of $2.5 million, which are or can be broken down into total fixed cost of $1 million and total variable cost of $1.5 million.

The net loss on the firm’s income statement is reported as $500,000 (ignoring tax implications). In prior periods, the firm had reported profits on its operations.

  1. What decision should the firm make regarding operations over the long term?

Answer
If the revenue shortfall is expected to persist over time, the firm should cease operations, liquidate assets, and pay debts to the extent possible. Any residual for shareholders would decrease the longer the firm is allowed to operate unprofitably.
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Shutdown Analysis
For the most recent financial reporting period, a business domiciled in Ecuador (which recognizes the US dollar as an official currency) has revenue of $2 million and total costs of $2.5 million, which are or can be broken down into total fixed cost of $1 million and total variable cost of $1.5 million. The net loss on the firm’s income statement is reported as $500,000 (ignoring tax implications). In prior periods, the firm had reported profits on its operations. What decision should the firm make regarding operations over the short term? What decision should the firm make regarding operations over the long term? Assume the same business scenario except that revenue is now $1.3 million, which creates a net loss of $1.2 million. What decision should the firm make regarding operati

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