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Financial Accounting/ Law Discussion Questions.

All questions do not need to be in APA format and there is no min word count… no references needed unless you cite.


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Class — just to make sure we all understand how to prepare a schedule showing a vertical analysis would you do this for the following Gallup Corp. income statements for 2012 and 2011 and briefly discuss the analysis?

Operating data for Gallup Corporation are presented below.

  2012               2011

Sales        $750,000      $600,000
Cost of goods sold 465,000     390,000
  Gross Margin 285,000      210,000
Selling expenses  120,000             72,000
Administrative expenses      60,000    54,000
Income tax expense 33,000 24,000
  Net income  72,000  60,000


Class — one of the more commonly cited ratios in financial analysis circles is the P/E ratio.  I wanted to expand on this bit just because it shows up so often but is not easily understood.  I thought the following taken from Investopedia was a good description of the P/E ratio:

“The P/E is sometimes referred to as the “multiple”, because it shows how much investors are willing to pay per dollar of earnings (my emphasis). If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings (my emphasis).

It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.”

Things to Remember
  • Generally a high P/E ratio means that investors are anticipating higher growth in the future.
  • The average market P/E ratio is 20-25 times earnings.
  • The p/e ratio can use estimated earnings to get the forward looking P/E ratio.
  • Companies that are losing money do not have a P/E ratio.

Note that the P/E ratio =  Market Value per Share     and EPS = Net Income (minus preferred dividend) 
  Earnings per Share (EPS)        Avg weighted average number of common shares outstanding

So, the P/E ratio is complicated — if Earnings Per Share is the amount of income each common stockholder would receive if all the income for the year were distributed in dividends, then the P/E ratio is how much an investor is willing to pay for every dollar that is earned by the company (lets assume no preferred dividends to make this more simple):

P/E ratio = Market Value per Share
  NI / # shrs of common stock 


P/E ratio = Market Value per Share x # shrs of common stock
  Net Income

so — the denominator is the market value of all the common stock that has been sold, right?  If our stock is selling for $20 per share and we have sold 100,000 shares we have $2,000,0000 (market value) of stock that’s been sold over time.

If the company earns, say, $100,000 this year, then the P/E ratio is $2,000,000 / $100,000 which = 20.

We have been willing to pay $20 for every $1 the the company earns.

So you can see that as the P/E ratio goes higher we are saying that our valuation of the company is increasing — we think it is worth more.  But, of course, at some point the P/E ratio can be so high that the expectation is too high — a P/E ratio of 30 or 40 probably means the company is overvalued — that stock might be at its peak unless the company does something new or innovative to create more value.

I don’t know if this helps but sometimes it is worth digging into the math of these ratios to better understand their story.

I’d like to hear your thoughts on this?

Law Questions

1. Some people believe that prison management should return to the days of chain gangs and harsh treatment.  The development of prisoner’s rights has been a controversial subject.  Do you think that prisoners have too many rights?  What rights should be added or removed?

2.Truth-in-sentencing pertains to the practice of an offender serving an actual sentence relatively close in length of time to the sentence imposed by the court. People who advocate the wide use of parole are not likely to advocate punishment philosophies aligned to truth-in-sentencing laws. Do you think that parole is overused? Does parole undermine the purpose of punishment and sentencing?

3.Think back over our studies during the past 8 weeks.  People who advocate the wide use of parole are more likely to agree with which punishment philosophy?  What punishment philosophy is most aligned to advocates of truth-in-sentencing laws?  Do you think that parole is overused?

4.Think about the forms of sentencing we have covered in the class (Indeterminate, Structured, Determinate, Presumptive, Mandatory, Alternative), which form of sentencing to you think is most effective? Which form of sentencing is least effective? Is there a form of sentencing that should not be used? Why? Everyone is welcome to respond.

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