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CHAPTER 11
I. Questions
1. The four financial statements contained in most annual reports are the
balance sheet statement, statement of comprehensive income, statement
of stockholders equity, and statement of cash flows.
4. The balance sheet shows the firms financial position on a specific date,
for example, December 31, 2011. It shows each account balance at that
particular point in time. For example, the cash account shown on the
balance sheet would represent the cash the firm has on hand and in the
bank on December 31, 2011. The income statement, on the other hand,
reports on the firms operations over a period of time, for example, over
the last 12 months. It reports revenues and expenses that the firm has
incurred over that particular time period. For example, the sales figures
reported on the income statement for the period ending December 31,
2011, would represent the firms sales over the period from January 1,
2011, through December 31, 2011, not just sales for December 31, 2011.
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Chapter 11 Understanding Financial Statements
7. The balance sheet is based on historical costs. When prices are rising
rapidly, historical cost data may lose much of their meaning particularly
for plant, equipment and inventory.
8. The income statement and balance sheet are based on the accrual method
of accounting, which attempts to match revenues and expenses in the
period in which they occur. However, accrual accounting does not
attempt to properly assess the cash flow position of the firm. The
statement of cash flows fulfills this need.
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Understanding Financial Statements Chapter 11
10. Free cash flow is equal to cash flow from operating activities:
13. Sales
Cost of Goods Sold
Gross profit
Selling and administrative expense
Depreciation expense
Operating profit
Interest expense
Earnings before taxes
Taxes
Earnings after taxes
Preferred stock dividends
Earnings Available to Common Stockholders
Shares Outstanding
Earnings per share
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Chapter 11 Understanding Financial Statements
14.
Increase in accounts receivable Decreases cash flow (use)
Increase in notes payable Increases cash flow (source)
Depreciation expense Increases cash flow (source)
Increase in investments Decreases cash flow (use)
Decrease in accounts payable Decreases cash flow (use)
Decrease in prepaid expenses Increases cash flow (source)
Increase in inventory Decreases cash flow (use)
Dividend payment Decreases cash flow (use)
Increase in accrued expenses Increases cash flow (source)
15.
1. Balance Sheet (BS) 5. Current Liabilities (CL)
2. Income Statement (IS) 6. Long-term Liabilities (LL)
3. Current Assets (CA) 7. Stockholders Equity (SE)
4. Fixed Assets (FA)
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Understanding Financial Statements Chapter 11
a. We are given that the firms total assets equal 2,500,000. Since
both sides of the balance sheet must equal, total liabilities and equity
must equal total assets = 2,500,000.
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Chapter 11 Understanding Financial Statements
Jennifers Apparel
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Understanding Financial Statements Chapter 11
Price
= P/E
Earnings per share
31.00
= 19.375 P/E ratio round to 19
1.60
a. Sales 700,000
Cost of goods sold (70% of sales) 490,000
Gross profit 210,000
Selling and administrative expense
(12% of sales) 84,000
Depreciation 10,000
Operating profit 116,000
Interest expense 8,000
Earnings before taxes 108,000
Taxes @ 30% 32,400
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Chapter 11 Understanding Financial Statements
Angelique Corporation
75,000
b. Earnings per share = = 3.75 per share
20,000 shares
Shadow Corporation
2012 Income Statement
a. Sales 220,000
Cost of goods sold (60%) 132,000
Gross profit 88,000
Selling and administrative expense 22,000
Depreciation expense (8%) 20,0001
Operating profit (EBIT) 46,000
Interest expense 8,0002
Earnings before taxes 38,000
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Understanding Financial Statements Chapter 11
Shadow Corporation
2012 Statement of Retained Earnings
Shadow Corporation
2012 Balance Sheet
c. Assets
Current assets
Cash 10,000
Accounts receivable 16,500
Inventory 27,500
Prepaid expenses 12,000
Total current assets 66,000
Fixed assets
Gross plant 285,000
Accumulated depreciation (70,000)3
Net plant 215,000
Total assets 281,000
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Chapter 11 Understanding Financial Statements
Maris Corporation
Statement of Cash Flows
For the Year Ended December 31, 2012
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Understanding Financial Statements Chapter 11
c. The book value per common share for both 2011 and 2012 are:
1,300,000
=
150,000
(2011) = 8.67
1,400,000
=
150,000
(2012) = 9.33
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Chapter 11 Understanding Financial Statements
SM Farms
Balance Sheet
September 30, 2012
a. Assets
Cash 16,710
Accounts receivable 22,365
Land 550,000
Barns and sheds 78,300
Citrus trees 76,650
Livestock 120,780
Irrigation system 20,125
Farm machinery 42,970
Fences and gates 33,570
Total assets 961,470
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Chapter 11 Understanding Financial Statements
Revenues 5,500
Expenses (4,000)
Net income 1,500
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