Chapter 1
2. Management is either dumb or thinks its board is. Earning $100 million on a $4 billion equity
4. a. Cash rises $500,000; plant and equipment falls $300,000; equity rises $200,000.
b. Net plant and equipment rises $80 million; Cash falls $32 million; Bank debt rises $48
million.
e. Cash falls $240,000; Owners’ equity falls by $240,000 (via an increase in treasury stock).
f. Cash rises $80,000; Inventory falls; Accrued taxes, Owners’ equity, and possibly other cost
6. a. R&E Supplies, Inc. Sources and Uses Statement 2011–2014 ($000).
Sources of cash:
Decrease in cash and securities $259
Increase in accounts payable 2,205
Uses of cash:
Increase in accounts receivable $1,543
Increase in inventories 1,148
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b. Insights:
i. R&E is making extensive use of trade credit to finance a buildup in current assets. The increase
ii. External long-term debt financing is a use of cash for R&E, meaning that it is repaying its loans.
8. Accounting income will be the value of the parcels sold, less their original purchase price. So
if all parcels are sold, the income is 5 × $16 million + 5 × $8 million – $100 million = $20
part of the question appear below.
Question
Accounting Income
Economic Income
a
$20 million
$20 million
b
0
$20 million
c
–$10 million
$20 million
d
$30 million
$20 million
e. Too many companies have tried this. If the market value of a piece of land falls, the owner
loses whether he sells or not. The market price of the land fell because people thought the
accounting earnings, but has nothing to do with reality.
10. The accounting profits from Jonathan’s brewery are expected to be $40,000. These accounting
profits do not include the implicit cost of the entrepreneur’s time. Jonathan’s time is worth at
12. a.
Company A B C
End-of-year cash
Balance $150 million $30 million $120 million
b. It appears that company C retired more debt than it issued, repurchased more stock than it
issued, or some combination of the two.
c. I’d prefer to own company A. A appears to be a growing company as evidenced by the
sizable net cash used in investing activities, and its negative net cash flow from operations
d. I don’t think there is necessarily any cause for concern. It appears company C is a mature,
14. See Excel solutions at mhhe.com/higgins11e.