Solutions to Chapter 3
Accounting and Finance
1. The balance sheet shows the position of the firm at one point in time. It shows the
amounts of assets and liabilities at that particular time. In this sense it is like a
2.
a. Cash and marketable securities
b. Accounts receivable
c. Inventories
3.
Sophie’s Sofas
Assets
Liabilities &
Shareholders’ Equity
Cash
10,000 Accounts payable
17,000
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Accounts
Est time: 01–05
Balance sheet
4.
a If the firm paid income taxes of $2,000, and the average tax rate was 20%,
k.
Revenues $ ???
Cost of goods sold 8,000
l.
Revenues $23,000
Cost of goods sold
6.
a.
Shareholders’ equity = total assets total liabilitie
b.
c.
Net working capital = current assets current liabilities
d.
Net working capital = current assets current liabilities
e.
Taxable income = $1,950 $1,030 $350 $240 = $330
f.
Net income $214.50
Depreciation 350.00
g.
Gross investment = increase in net fixed assets + depreciation
h. Current liabilities increased by $10. Therefore, current liabilities other than
7.
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Assets
Liabilities &
Shareholders’ Equity
2015 2016 2015 2016
Current assets 310 420 Current
liabilities 210 240
Net fixed
a. Owners’ equity = total assets total liabilities
b. Owners’ equity = total assets total liabilities
c. If the firm issued no stock, the increase in owners’ equity must be due entirely to
d. Since net fixed assets increased by $220, and the firm purchased $300 of new
e. Net working capital increased by $80, from ($310 $210) = $100 in 2015 to
f. Since long-term debt increased by $90, and the firm issued $200 of new long-term
8. See answers in financial statements.
Balance Sheet
Assets
Liabilities & Shareholders’ Equity
Shareholders’ Equity
Cash 15 Debt due for repayment 25
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Income Statement
Net sales 700
Cost of goods sold 580
9.
a. Book value equals the $200,000 the founder of the firm has contributed in
b. Market value equals the value of his patent plus the value of the production
10.
a. Increase, because the announcement is likely to increase the market value of the
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b. Increase, because an increase in the depreciation provision will decrease the
c. Increase, because an increase in inflation is likely to cause an increase in the market value
11.
a In early 2015 investors saw the value of assets on the books of these banks as
e. In contrast to the banks, investors perceived the assets of this company to be
12. Accounting revenues and expenses can differ from cash flows because some items
included in the computation of revenues and expenses do not entail immediate cash
flows. For example, sales made on credit are considered revenue even though cash
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13.
a Cash will increase as one current asset (inventory) is exchanged for another
f. Cash will increase. The machine will bring in cash when it is sold, but the lease
g. The firm will use cash to buy back the shares from existing shareholders. Cash
14. a.
Sales (mil) $14.00
million
Cost of goods sold 8.00
b. Net Cash flow = net income + depreciation expense = $3.95 million
c. If depreciation expense were increased by $1 million, net income would be
d. The impact on stock price is likely to be positive. Cash available to the firm
e. The net income would not change. The taxable income would remain the
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f. If interest expense was $1 million higher and the depreciation was $1 million
15. Working capital ought to be increasing. The firm will be building up stocks of
inventory as it ramps up production. In addition, as sales increase, accounts
16.
Sales $10,000
Cost of goods sold 6,500
General & administrative expenses 1,000
17.
a. The fact that start-up firms typically have negative net cash :ows for several
b. Accounting profits for start-up businesses are also commonly negative because
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