CHAPTER 2
FINANCIAL 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
6. For a successful company that is rapidly expanding, for example, capital outlays will be large, possibly
9. If a company raises more money from selling stock than it pays in dividends in a particular period, its
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 owners’ equity, we must construct a balance sheet as follows:
2. The income statement for the company is:
5. To find the book value of current assets, we use: NWC = CA – CL. Rearranging to solve for current
8. To calculate OCF, we first need the income statement:
Intermediate
14. To find the OCF, we first calculate net income.
15. The solution to this question works the income statement backwards. Starting at the bottom:
16. The balance sheet for the company looks like this:
17. The market value of shareholders’ equity cannot be negative. A negative market value in this case
19. Income Statement
20. A firm can still pay out dividends if net income is negative; it just has to be sure there is sufficient
cash flow to make the dividend payments.
21. a.
Cost of goods sold
EBIT
Taxable income
Net income
The cash flow from assets can be positive or negative, since it represents whether the firm
c. We can calculate net capital spending as:
Income Statement
Challenge
24. a. The tax bubble causes average tax rates to catch up to marginal tax rates, thus eliminating the
25.
Balance sheet as of Dec. 31, 2010
Current assets
Long-term debt
Net fixed assets
Owners’ equity
Balance sheet as of Dec. 31, 2011
Cash
Accounts payable
Inventory
Current liabilities
2010 Income Statement 2011 Income Statement