ACC 291 Week 3 Discussion Questions and Responses
DQ1: The following are characteristics of a corporation: (a) separate legal existence, (b) limited liability of stockholders, and (c) transferable ownership rights. Explain these characteristics.
The R&D division of Healy Chemical Corp. has just developed a chemical for sterilizing the vicious Brazilian “killer bees” which are invading Mexico and the southern states of the United States. The president of Healy is anxious to get the chemical on the market to boost Healy’s profits. He believes his job is in jeopardy because of decreasing sales and profits. Healy has an opportunity to sell this chemical in Central American countries, where the laws are much more relaxed than in the United States.
The director of Healy’s R&D division strongly recommends further testing in the laboratory for side-effects of this chemical on other insects, birds, animals, plants, and even humans.
He cautions the president, “We could be sued from all sides if the chemical has tragic side effects that we didn’t even test for in the labs.” The president answers, “We can’t wait an additional year for your lab tests. We can avoid losses from such lawsuits by establishing a separate wholly owned corporation to shield Healy Corp. from such lawsuits. We can’t lose any more than our investment in the new corporation, and we’ll invest just the patent covering this chemical. We’ll reap the benefits if the chemical works and is safe, and avoid the losses from lawsuits if it’s a disaster.” The following week Healy creates a new wholly owned corporation called Dryden Inc., sells the chemical patent to it for $10, and watches the spraying begin.
(a) Are the president’s motives and actions ethical?
(b) Can Healy shield itself against losses of Dryden Inc.?
DQ 2: Class, the statement of cash flows is the only required financial statement that is not prepared from an adjusted trial balance. What are the sources of information for preparing a statement of cash flows? Explain how the accrual basis of accounting affects the statement of cash flows.
DQ3: What are three reasons why companies purchase investments in debt or stock securities? Why would a corporation have excess cash that it does not need for operations? What is the typical investment when investing cash for short periods of time?
DQ4: What are the typical investments when investing cash to generate earnings? Why would a company invest in securities that provide no current cash flows? What is the typical stock investment when investing cash for strategic reasons?
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