Chapter 2
Answers to Review Problems
Finance For Executives – 4th Edition
1. Accounting allocation of transactions.
CA NC
ACL NCL OE REV EXP RE
employees
2. Missing accounts.
Firm 1 Firm 2 Firm 3
Firm 1
Liabilities beginning of period = Assets beginning of period – Owners’ equity beginning of period
Earnings of the period = Revenues of the period – Expenses of the period
Owners’ equity end of period = Owners’ equity beginning of period + Earnings after tax of the period – Dividends
+ $Amount of shares issued during the period
Liabilities end of period = Assets end of period – Owners’ equityend of period
Firm 2
Assets beginning of period = Liabilities beginning of period + Owners’ equity beginning of period
Revenues of period = Earnings after tax of period + Expenses of period
Owners’ equity end of period = Owners’ equity beginning of period + Earnings after tax of the period – Dividends
+ $Amount of shares issued during the period
Liabilities end of period = Assets end of period – Owners’ equityend of period
Firm 3
Owners’ equity beginning of period = Owners’ equity end of period – Earnings after tax of the period + Dividends
– $Amount of shares issued during the period
Assets beginning of period = Liabilities beginning of period + Owners’ equitybeginning of period
Assets end of period = Liabilities end of period + Owners’ equityend of period
Expenses of the period = Revenues of the period – Earnings after tax of the period
3. Balance sheet changes.
Figures in millions
a.
Year 1
Total assets = Total liabilities and Owners’ equity
Noncurrent assets = Total assets – Current assets
Owners’ equity = Total assets – (Current Liabilities + Noncurrent liabilities)
Paid-in capital = Owners’ equity – Retained earnings
Year 2
Noncurrent assets = Total assets – Current assets
Total liabilities and owners’ equity = Total assets
Earnings after tax = Dividends + (Accumulated earningsyear 2 – Accumulated Earnings year 1)
Owners’ equity = Paid-in capital + Accumulated earnings
Noncurrent liabilities = Total assets – Current liabilities – Owners’ equity
Year 3
Total assets = Current assets + Noncurrent assets
Total liabilities and owners’ equity = Total assets
Owners’ equity = Total assets – (Current Liabilities + Noncurrent liabilities)
Retained earnings year 3 = (Retained earnings year 2+ Earnings (loss) after tax) – Dividends
Paid-in capital = Owners’ equity – Retained earnings
Year 4
Noncurrent assets = Total liabilities and owners’ equity – Current assets
Total assets = Total liabilities and owners’ equity
Retained earnings year 4 = (Retained earnings year 3 + Earnings (loss) after tax) – Dividends
Owners’ equity = Paid-in capital + Retained earnings
Noncurrent liabilities = (Total liabilities and owners’ equity – Owners’ equity) – Current liabilities
End-of-year for balance sheet items Year 1 Year 2 Year 3 Year 4
b.
A large investment (e.g., the acquisition of another firm) would explain the increase in total assets
c.
The decrease in retained earnings was the result of the year’s net loss and dividend payments. The
d.
The firm became profitable again in Year 4. A portion of the cash generated by the renewed profitability
4. Balance sheet changes.
Figures in millions
a.
Year 1
Total assets = Total liabilities and Owners’ equity
Noncurrent assets = Total assets – Current assets
Owners’ equity = Total assets – (Current Liabilities + Noncurrent liabilities)
Paid-in capital = Owners’ equity – Retained earnings
Current assets – current liabilities
Year 2
Current assets = (Current assets – current liabilities) + Current liabilities
Noncurrent assets = Total assets – Current assets
Total liabilities and owners’ equity = Total assets
Owners’ equity = Paid-in capital + Retained earnings
Noncurrent liabilities = (Total assets – Current liabilities) – Owners’ equity
Year 3
Total assets = Current assets + Noncurrent assets
Total liabilities and owners’ equity = Total assets
Owners’ equity = Total assets – (Current liabilities + Noncurrent liabilities)
Retained earnings year 3 = (Retained earnings year 2 + Earnings (loss) after tax) – Dividends
Paid-in capital = Owners’ equity – Retained earnings
Current assets – current liabilities
Year 4
Total assets = Total liabilities and owners’ equity
Noncurrent assets = Total assets – Current assets
Current liabilities = Current assets – (Current assets – current liabilities)
Retained earnings year 4 = (Retained earningsyear 3 + Earnings (loss) after tax) – Dividends
Owners’ equity = Paid-in capital + Retained earnings
Noncurrent liabilities = (Total assets – Current liabilities) – Owners’ equity
End-of-year for balance sheet items Year 1 Year 2 Year 3 Year 4
b.
A large investment (e.g., the acquisition of another firm) would explain the increase in total assets