Financial Statements Taxes and Cash Flow Need help in answering all document attached Test Your Knowledge Chapter 2: Financial statements, taxes and cash f

Financial Statements Taxes and Cash Flow Need help in answering all document attached Test Your Knowledge
Chapter 2: Financial statements, taxes and cash flow
2.1 The balance sheet B/S
1. What is the balance sheet identity?
2. What is liquidity? Why is it important?
3. Explain the difference between book value and market value. Which is more important
to the financial manager? Why?
4. The Klingon Corporation has NFA with a book value of $700 and an appraised market
value of $1,000. Net working capital is $400 on the books, but approximately $600
would be realized if all current accounts were liquidated. Klingon has $500 in longterm debt, both book value and market value. What is the book value of the equity?
What is the market value?
5. Prepare a 2009 balance sheet for Bertinlli Corp. based on the following information:
Cash = $195,000; patents and copyrights = $780,000; accounts payable = $405,000;
accounts receivable = $137,000; tangible net fixed assets = $$2,800,000; inventory =
$264,000; notes payable = $160,000; accumulated retained earnings = $1,934,000;
long-term debt = $1,195,300.
2.2 The income statement
6. What is the income statement equation?
7. Why is accounting income not the same as cash flow?
8. Suppose U.S. had 200 million shares outstanding at the end of 2009. Based on the
following table:
Net sales
$1,509
Cost of goods sold
750
Depreciation
65
EBIT
Interest
$694
70
EBT (Taxable income)
$624
Taxes (34%)
212
Net income
412
Dividends
$103
Addition to retained earnings
309
What was the Earnings per share EPS? What were dividends per share DPS?
9. Given the following information for Rosato Pizza Co., calculate the depreciation
expense: Sales = $41,000; Costs = $19,500; Addition to retained earnings = $5,100;
dividends paid = $1,500; interest expense = $4,500; Tax rate = 35%.
2.3 Cash flow
10. What is the cash flow identity?
11. What are the components of operating cash flow?
12. Why is interest paid not a component of operating cash flow?
13. Dahlia industries had the following operating results for 2009: sales = $22,800; cost of
goods sold = $$16,050; depreciation = $4,050; interest = $1,830; dividend = $1,300. At
the beginning of the year, net fixed assets were $13,650, current assets were $4,800 and
current liabilities were $2,700. At the end of the year, net fixed assets were $16,800,
current assets were $5,930 and current liabilities were $3,150. The tax rate for 2009
was 34%.
a. What is net income for 2009?
b. What is the operating cash flow for 2009?
c. What is the cash flow from assets for 2009? Is it possible? Explain.
2.4 Accounting Vs. Finance
14. How is cost of equity in finance treated differently from accounting?
15. Why does the timing of cash flows matter to the financial manager?
16. The cost of equity for any firm is higher than the cost of debt. Why?
17. The matching principle in accounting matches an asset cost and revenue stream over its
lifetime. Why is this approach insufficient for the financial manager?
CHAPTER 3: Working with financial statements
3.1 Cash Flow and Financial Statements
1. What is a source of cash? Give three examples.
2. What is a use, or application of cash? Give three examples.
3.2 Standardized Financial Statements
3. Why is it necessary often to standardize financial statements?
4. Name two types of standardized statements and describe how each is formed.
5. Standardize the following B/S and fill in the table.
Cash
A/R
Inventory
FA
Total Assets
A/P
N/P
LTD
C/S
Retained earnings
TL&E
2008
$210
355
507
6,085
7,157
207
1,715
1,987
1,000
2,248
7,157
2009
$215
310
328
6,527
7,380
298
1,427
2,308
1,000
2,347
7,380
2008
2009
Change
100%
100%
0
100%
100%
0
6. Standardize the following I/S and fill in the table.
Sales (Revenues)
COGS
Depreciation
EBIT
Interest
Taxable income
Taxes (34%)
NI
Dividends
Addition to retained earnings
$2,311
1,344
276
$691
141
$550
187
$363
$121
242
3.3 Ratio Analysis
7. What are the five groups of ratios? Give examples for each.
100%
8. Selected financial data in Saudi Riyal for Hail cement and Najran cement are listed
below:
Current Assets
Fixed assets
Total assets
Current liabilities
Long-term debt
Equity
Total liabilities
Net sales
Net income
Share price
Outstanding shares
Hail cement
115,524,000
1,122,148,000
1,334,287,000
135,959,000
236,583,000
961,745,000
372,542,000
159,018,000
50,467,000
SAR23.46
Najran cement
88,265,000
2,493,686,000
2,913,019,000
483,232,000
609,247,000
1,820,540,000
1,092,479,000
631,639,000
198,142,000
SAR 29.08
97,900,000
170,000,000
Compare and contrast between the two corporations using the five ratio categories.
9. Selected financial data in thousands of dollars for the Hunter Corporation are listed
below:
2015
2014
Current assets
55
400
Fixed assets
700
600
Total assets
1,200
1,000
Current liabilities
300
200
Long-term debt
200
200
Common equity
700
600
Total liability and equity
1,200
1,000
Net sales
1,500
1,200
Net income
110
100
Shares outstanding
200,000
200,000
Share price
$20
$30
Analyze the company using the five ratio categories.
3.4 Using Financial Statement Information
10. What are some uses for financial statement analysis?
11. What are some problems that can come up with financial statement analysis?
12. What is time trend analysis? What is peer group analysis? What is cross-sectional
analysis?
CHAPTER 3: Working with financial statements
3.1 Cash Flow and Financial Statements
1. What is a source of cash? Give three examples.
2. What is a use, or application of cash? Give three examples.
3.2 Standardized Financial Statements
3. Why is it necessary often to standardize financial statements?
4. Name two types of standardized statements and describe how each is formed.
5. Standardize the following B/S and fill in the table.
Cash
A/R
Inventory
FA
Total Assets
A/P
N/P
LTD
C/S
Retained earnings
TL&E
2008
$210
355
507
6,085
7,157
207
1,715
1,987
1,000
2,248
7,157
2009
$215
310
328
6,527
7,380
298
1,427
2,308
1,000
2,347
7,380
2008
2009
Change
100%
100%
0
100%
100%
0
6. Standardize the following I/S and fill in the table.
Sales (Revenues)
COGS
Depreciation
EBIT
Interest
Taxable income
Taxes (34%)
NI
Dividends
Addition to retained earnings
$2,311
1,344
276
$691
141
$550
187
$363
$121
242
3.3 Ratio Analysis
7. What are the five groups of ratios? Give examples for each.
100%
8. Selected financial data in Saudi Riyal for Hail cement and Najran cement are listed
below:
Current Assets
Fixed assets
Total assets
Current liabilities
Long-term debt
Equity
Total liabilities
Net sales
Net income
Share price
Outstanding shares
Hail cement
115,524,000
1,122,148,000
1,334,287,000
135,959,000
236,583,000
961,745,000
372,542,000
159,018,000
50,467,000
SAR23.46
Najran cement
88,265,000
2,493,686,000
2,913,019,000
483,232,000
609,247,000
1,820,540,000
1,092,479,000
631,639,000
198,142,000
SAR 29.08
97,900,000
170,000,000
Compare and contrast between the two corporations using the five ratio categories.
9. Selected financial data in thousands of dollars for the Hunter Corporation are listed
below:
2015
2014
Current assets
55
400
Fixed assets
700
600
Total assets
1,200
1,000
Current liabilities
300
200
Long-term debt
200
200
Common equity
700
600
Total liability and equity
1,200
1,000
Net sales
1,500
1,200
Net income
110
100
Shares outstanding
200,000
200,000
Share price
$20
$30
Analyze the company using the five ratio categories.
3.4 Using Financial Statement Information
10. What are some uses for financial statement analysis?
11. What are some problems that can come up with financial statement analysis?
12. What is time trend analysis? What is peer group analysis? What is cross-sectional
analysis?
Chapter 5: The time value of money
5.1 Future value and compounding
1. What do we mean by the future value of an investment?
2. What does it mean to compound interest? How does compound interest differ from
simple interest?
3. In general, what is the future value of $1 invested at r per period for t periods?
4. Suppose you locate a two-year investment that pays 14% per year. If you invest $325,
how much will you have at the end of two years? How much of this is simple interest?
How much is compound interest?
Answer:
$422.37; Total interest is $97.37; Simple interest is $91; Compounding interest is $6.37
5. You have located an investment that pays 12% per year. That rate sounds good to you,
so you invest $400. How much will you have in three years? How much in Seven years?
How much interest will you have earned? How much of that interest results from
compounding?
Answer:
4-years is $561.97, Seven-years is $884.27; Interest from compounding is $148.27
5.2 Present value and discounting
6. What do we mean by the present value of an investment?
7. The process of discounting a future amount back to the present is the opposite of
doing what?
8. In general, what is the present value of $1 to be received in t periods, assuming a
discount rate of r per period?
9. Suppose you need $400 to buy textbooks next year. You can earn 7% on your money.
How much do you have to put up today?
Answer:
$373.83
10. You would like to buy a new car. You have $50,000, but the car costs $68,500. If you
can earn 9%, how much do you have to invest today to buy the car in two years? Do
you have enough? Assume the price will stay the same.
Answer:
Need to invest $57,655.08; you are $7,655.08 less
11. Businesses sometimes advertise that “you should come try our product. If you do, we
will give you $100 just for coming by” If you read the fine print, what you find out is
that they will give you a certificate that will pay you $100 in 25 years or so. If the
interest rate is 10% per year, how much are they really giving you today?
Answer:
They are giving you $9.23
5.3 More about present value and future value
12. Your company proposes to buy an asset for $335. This investment is very safe. You
would sell off the asset in three years for $400. You know that you could invest the
$335 elsewhere at 10% with very little risk. What do you think of the proposed
investment?
Answer:
This is not good investment. Investing $335 at 10% offers $445.89, while the proposed investment pays only
$400.
13. You are considering a one-year investment. If you put up $1,250, you will get back
$1,350. What rate is this investment paying?
Answer:
r = 8%
14. You would like to retire in 50 years as a millionaire. If you have $10,000 today, what
rate of return do you need to earn to achieve your goal?
Answer:
r = 9.65%
15. You have been saving up to buy Alianz insurance company. The total cost will be
$10M. You currently have about $2.3M. If you can earn 5% on your money, how long
will you have to wait? At 16%, how long must you wait?
Answer:
At 5%, t = 30 years.
At 16%, t = 10 years.
16. During 2003, Sotheby’s sold the Edgar Degas bronze sculpture at auction for a price
of $10,311,500. Unfortunately for the previous owner, he had purchased it in 1999 at a
price of $12,377,500. What was his annual rate of return on this sculpture?
Answer:
r = -4.46%

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