A Farmer Notices That a Neighboring Rancher's Cattle Are Wandering

question 285

Multiple Choice

A farmer notices that a neighboring rancher's cattle are wandering and destroying some of his crops. The farmer decides to offer a payment to the rancher if the rancher will reduce the size of his herd. By doing so, the farmer

• A) can be sure that the size of the herd will be reduced and the size of his own harvest will be increased.
• B) indicates to the rancher that there is an opportunity cost to the wandering of the cattle, and thereby internalizes the externality.
• C) inadvertently bears the costs of the externality when the rancher should be liable for the costs.
• D) informs the rancher that the cattle have destroyed crops, which should induce the farmer to build a fence in order to maintain good relations.

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Definitions:

Perpetual Inventory System

A financial recording method where sales or purchases of inventory are immediately captured through the use of computerized point-of-sale systems and software for managing enterprise assets.

Gross Method

An accounting practice where purchase discounts are ignored unless taken, with full invoice amounts recorded in the accounts payable.

Invoice Price

The price of goods as listed on the invoice, typically before any discounts, taxes, or additional charges.

Adjusting Entries

Journal entries made at the end of an accounting period to allocate income and expenditures to the period in which they actually occurred.