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McFriendly Software offer from Jupiter for software rights

1. McFriendly Software recently developed new spreadsheet software, Easy-Calc, which it intends to market by mail through ads in computer magazines. Just prior to introducing Easy-Calc, McFriendly receives an unexpected offer from Jupiter Computer to buy all rights to the software for $10 million cash.


a. Is the $10 million offer "relevant" financial information?
b. Describe McFriendly's opportunity cost if (1) accepts Jupiter's offer and (2) turns down the offer and markets Easy-Calc itself. Would these opportunity costs be recorded in McFriendly's accounting records? If so, explain the journal entry to record these costs.
c. Briefly describe the extent to which the dollar amounts of the two opportunity costs described in part b are known to management at the time the decision is made to accept or reject Jupiter's offer.
d. Might there be any other opportunity costs to consider at the time of making this decision? If so, explain briefly.

2. A Business Week article by Virginia Munger Kahn discusses the importance of cash budgets for all types of businesses and individuals. The following eight steps to cash flow control were identified in the article:

1. Establish a monthly cash flow budget. Determine the amount you need to achieve your business and personal financial goals, including enough to pay taxes and fund your retirement.
2. Compare your targets with your actual cash inflows and outflows at the end of every month and make necessary adjustments
3. Review your monthly or quarterly cash flow results with your accountant.
4. Use accounting software-the simplest one that will work for your business-to automate the process.
5. Ask your accountant or financial planner to project your quarterly tax liability. Don't wait until year-end to find out what you owe, or you may find you have already spent the money.
6. Set aside cash each month to pay your taxes on time.
7. Make quarterly contributions to a retirement account.
8. Establish a line of credit with a bank, or investigate other short-term financing sources, well before you think you'll need extra cash.


a. Assume for item number 2 that a business's actual cash flows are not enough to achieve its business goals and some necessary adjustments must be made. Name at least four adjustment procedures that businesses can use to equalize cash flows.
b. Write a short paragraph discussing how cash budgeting can be critical for the ongoing success of a business or individual.

Solution Preview

Please see the below for the complete tutorial.


Instructions a. Yes, the $10 million offer is relevant financial information as this would be the opportunity cost the company will forego if it decides to market the product itself.

Instruction b. 1) The opportunity cost would be the income it will earn if it sells the software itself 2) in this case, it's the $10 million offered by Easy-Calc. ...

Solution Summary

McFriendly Software offer from Jupiter for software rights is examined.