Learning Objective 1-6
1) Good business planning involves the identification of risks such as operating risks and financial risks.
2) Managers are required to maximize shareholders' equity in the business, which often requires them to "cook the books."
3) A control is an activity performed to minimize or eliminate risk.
4) Bea Rich is enthusiastic about starting her catering business. She feels confident that she has a great concept and can handle the day-to-day details of running a business. However, this is her first attempt at running her own business. Advise Bea on the risks associated with starting a business.
5) Doug Depp is the manager at Chutes, Inc. that sells parachutes. Management's next year's bonus is based on the current year's net income. In an effort to increase his bonus, Doug decides to buy the pull-cord used in making the company's parachutes from a less reputable supplier. The supplier's prices are lower, but the pull-cords are less reliable in successfully opening the parachute.
a. Explain how net income will be higher if the cheaper pull-cord is used in the parachutes sold to Chutes, Inc.'s customers.
b. Discuss whether Doug is acting in the best interest of the company and its owners.
c. Discuss the ethical issue and what the consequences of Doug's actions may be.