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CHAPTER 2
ACCOUNTING STATEMENTS, TAXES AND CASH FLOW
Answers to Concepts Review and Critical Thinking Questions
1.
Liquidity measures how quickly and easily an asset can be converted to cash without significant loss in value. It’s desirable for firms to have high liquidity so that they have a large factor of safety in meeting short-term creditor demands. However, since liquidity also has an opportunity cost associated with it - namely that higher returns can generally be found by investing the cash into productive assets - low liquidity levels are also desirable to the firm. It’s up to the firm’s financial management staff to find a reasonable compromise between these opposing needs
The recognition and matching principles in financial accounting call for revenues, and the costs associated with producing those revenues, to be “booked” when the revenue process is essentially complete, not necessarily when the cash is collected or bills are paid. Note that this way is not necessarily correct; it’s the way accountants have chosen to do it.
The bottom line number shows the change in the cash balance on the balance sheet. As such, it is not a useful number for analyzing a company.
The major difference is the treatment of interest expense. The accounting statement of cash flows treats interest as an operating cash flow, while the financial cash flows treat interest as a financing cash flow. The logic of the accounting statement of cash flows is that since interest appears on the income statement, which shows the operations for the period, it is an operating cash flow. In reality, interest is a financing expense, which results from the company’s choice of debt/equity. We will have more to say about this in a later chapter. When comparing the two cash flow statements, the financial statement of cash flows is a more appropriate measure of the company’s performance because of its treatment of interest.
Market values can never be negative. Imagine a share of stock selling for –$20. This would mean that if you placed an order for 100 shares, you would get the stock along with a check for $2,000. How many shares do you want to buy? More generally, because of corporate and individual bankruptcy laws, net worth for a person or a corporation cannot be negative, implying that liabilities cannot exceed assets in market value.
For a successful company that is rapidly expanding, for example, capital outlays will be large, possibly leading to negative cash flow from assets. In general, what matters is whether the money is spent wisely, not whether cash flow from assets is positive or negative.
It’s probably not a good sign for an established company, but it would be fairly ordinary for a start-up, so it depends.
2.
3. 4.
5.
6. 7.
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8. For example, if a company were to become more efficient in inventory management, the amount of
inventory needed would decline. The same might be true if it becomes better at collecting its receivables. In general, anything that leads to a decline in ending NWC relative to beginning would have this effect. Negative net capital spending would mean more long-lived assets were liquidated than purchased.
9. If a company raises more money from selling stock than it pays in dividends in a particular period,
its cash flow to stockholders will be negative. If a company borrows more than it pays in interest and principal, its cash flow to creditors will be negative.
10. The adjustments discussed were purely accounting changes; they had no cash flow or market value
consequences unless the new accounting information caused stockholders to revalue the derivatives.
Solutions to Questions and Problems
NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic
1. To find owner’s equity, we must construct a balance sheet as follows: Balance Sheet CA $5,000 CL $4,500 NFA 23,000 LTD 13,000 OE ?? TA $28,000 TL & OE $28,000 We know that total liabilities and owner’s equity (TL & OE) must equal total assets of $28,000. We
also know that TL & OE is equal to current liabilities plus long-term debt plus owner’s equity, so owner’s equity is:
OE = $28,000 –13,000 – 4,500 = $10,500 NWC = CA – CL = $5,000 – 4,500 = $500
2. The income statement for the company is: Income Statement Sales S/.527,000 Costs 280,000 Depreciation 38,000 EBIT S/.209,000 Interest 15,000 EBT S/.194,000 ---------------------------------------------------------精品 文档---------------------------------------------------------------------
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-------------------------------------------------------------------------------------------------------------------------------------------- Taxes (35%) 67,900 Net income S/.126,100
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One equation for net income is:
Net income = Dividends + Addition to retained earnings
Rearranging, we get:
3. 4. 5.
Addition to retained earnings = Net income – Dividends Addition to retained earnings = S/.126,100 – 48,000 Addition to retained earnings = S/.78,100
To find the book value of current assets, we use: NWC = CA – CL. Rearranging to solve for current assets, we get:
CA = NWC + CL = $900K + 2.2M = $3.1M
The market value of current assets and fixed assets is given, so:
Book value CA = $3.1M Market value CA = $2.8M Book value NFA = $4.0M Market value NFA = $3.2M Book value assets = $3.1M + 4.0M = $7.1M Market value assets = $2.8M + 3.2M = $6.0M
Taxes = 0.15(�50K) + 0.25(�25K) + 0.34(�25K) + 0.39(�273K – 100K) Taxes = �89,720
The average tax rate is the total tax paid divided by net income, so:
Average tax rate = �89,720 / �273,000 Average tax rate = 32.86%.
The marginal tax rate is the tax rate on the next �1 of earnings, so the marginal tax rate = 39%. To calculate OCF, we first need the income statement:
Income Statement Sales Costs
Depreciation EBIT Interest Taxable income Taxes (35%) Net income
元13,500 5,400 1,200 元6,900 680 元6,220 2,177 元4,043
OCF = EBIT + Depreciation – Taxes
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-------------------------------------------------------------------------------------------------------------------------------------------- OCF = 元6,900 + 1,200 – 2,177 6. 7.
OCF = 元5,923
Net capital spending = NFAend – NFAbeg + Depreciation Net capital spending = ￡4,700,000 – 4,200,000 + 925,000 Net capital spending = ￡1,425,000
The long-term debt account will increase by $8 million, the amount of the new long-term debt issue. Since the company sold 10 million new shares of stock with a $1 par value, the common stock account will increase by $10 million. The capital surplus account will increase by $16 million, the value of the new stock sold above its par value. Since the company had a net income of $7 million, and paid $4 million in dividends, the addition to retained earnings was $3 million, which will increase the accumulated retained earnings account. So, the new long-term debt and stockholders’ equity portion of the balance sheet will be:
Long-term debt
Total long-term debt
Shareholders equity Preferred stock
Common stock ($1 par value) Accumulated retained earnings Capital surplus Total equity
Total Liabilities & Equity
$ 68,000,000 $ 68,000,000
$ 18,000,000 35,000,000 92,000,000 65,000,000 $ 210,000,000
$ 278,000,000
8. 9. 10.
Cash flow to creditors = Interest paid – Net new borrowing Cash flow to creditors = �340,000 – (LTDend – LTDbeg)
Cash flow to creditors = �340,000 – (�3,100,000 – 2,800,000) Cash flow to creditors = �340,000 – 300,000 Cash flow to creditors = �40,000
Cash flow to stockholders = Dividends paid – Net new equity
Cash flow to stockholders = �600,000 – [(Commonend + APISend) – (Commonbeg + APISbeg)] Cash flow to stockholders = �600,000 – [(�855,000 + 7,600,000) – (�820,000 + 6,800,000)] Cash flow to stockholders = �600,000 – (�7,620,000 – 8,455,000) Cash flow to stockholders = –�235,000 Note, APIS is the additional paid-in surplus.
Cash flow from assets = Cash flow to creditors + Cash flow to stockholders = �40,000 – 235,000 = –�195,000
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罗斯公司理财第二章：财务报表和现金流
