Suppose That a Company Has X Units of Resources and Is

question 19

Multiple Choice

Suppose that a company has X units of resources and is considering three investment/dividend policies,P₁,P₂ and P.The following graph shows market opportunity lines drawn through each of these points:
The line through P₁ shows that:

• A)if policy P₁ were adopted,the shareholders' wealth would decrease from W to W₁.
• B)if policy P₁ were adopted,the shareholders' wealth would increase from X to W₁.
• C)if policy P₁ were adopted,the shareholders' wealth would remain unchanged at W₁.
• D)none of the given options.

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Definitions:

Allowance Method

The Allowance Method is an accounting technique that estimates and accounts for doubtful accounts, reducing the accounts receivable to its net realizable value.

Going Concern Assumption

An accounting principle assuming that an entity will continue to operate for the foreseeable future.

Direct Method

An approach to preparing the cash flow statement where actual cash flows from operating activities are listed.

Lower of Cost

An accounting rule where inventory is recorded at the lower of either its acquisition cost or market value at reporting time.