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FIN 302 Lecture 11: Lec 11

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Verified Note
goldfox765
14 Feb 2019
School
U of M
Department
Finance
Course
FIN 302
Professor
Qin Lei

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FIN 302 verified notes
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10

FIN 302 Lecture Notes - Lecture 10: Payback Period, Net Present Value, If And Only If

11

FIN 302 Lecture 11: Lec 11

12

FIN 302 Lecture 12: Chapter10.1

Document Summary

Financial statements, taxes and cash flow: balance sheet, income statement, taxes, cash flow. Balance sheet is representation of firm"s assets and liability at a point of time: asset listed in order of liquidity, assets = liability +shareholders" equity, a = l+ e. Liquidity: ease to convert to cash, without significant loss of value. Balance sheet provides book value of the assets liabilities and equity. Whereas market value is the price the a,l and b can be bought or sold. Market value and book value sometime maybe different. Nwc = ca cl: positive when cash received more than cash paid out, healthy firm usually have a positive one, measures net liquidity. Net liquidity: ability to convert cash quickly, liquid firms are less likely to experience financial distress, liquid assets earn a lower return. Income statement is a measure of firm"s operations for a period of time.

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Related Questions

P5-3 Preparing a Balance Sheet and Analyzing Some of Its Parts LO5-3
Exquisite Jewelers is developing its annual financial statements for 2015. The following amounts were correct at December 31, 2015:
cash, $58,000; accounts receivable, $71,000; merchandise inventory, $154,000; prepaid insurance, $1,500;
investment in stock of Z corporation (long-term), $36,000; store equipment, $67,000; used store equipment held for disposal, $9,000;
accumulated depreciation, store equipment, $19,000; accounts payable, $52,500; long-term note payable, $42,000; income taxes payable, $9,000;
retained earnings, $164,000; and common stock, 100,000 shares outstanding, par value $1.00 per share (originally sold and issued at $1.10 per share).
Required:
1 Based on these data, prepare a December 31, 2015, balance sheet. (Amounts to be deducted should be indicated by a minus sign.)
Possible input areas are shaded.
EXQUISITE JEWELERS
Balance Sheet
December 31, 2015
Assets
Current assets:
Total current assets $ -
Long-term investments:
Fixed assets:
Total fixed assets -
Other assets:
Total assets $ 377,500
Liabilities
Current liabilities:
Total current liabilities $ -
Long-term liabilities:
Total liabilities -
Stockholders' Equity
Contributed capital:
Total contributed capital -
Total stockholders' equity -
Total liabilities and stockholders' equity $ -
Required:
2 What is the net book value of the store equipment?
Net book value

Which statement is TRUE?

A. The relation between a company's return on common equity (ROCE) and return on net operating assets (RNOA) reveals information about the company's financial leverage.

B. Return on equity is the percentage increase in stock prices.

C. The accounting-based stock valuation formula calculates the value of a stock as the book value plus the present value of future expected dividends discounted at the cost of equity.

D. Practice considers a segment significant if its sales, operating income (or loss), or identifiable assets are 30% or more of the combined amounts of all the company's operating assets.

5. Which statement is TRUE?

A. Once the projected financial statements are prepared, there is no need for sensitivity analysis to examine the assumptions used in the preparation.

B. Prospective analysis should be performed after historical financial statements have been adjusted.

C. Prospective analysis should only be based on the firm’s historical financial statements.

D. Prospective analysis can only be used to project an income statement, a balance sheet, and a statement of cash flows.

6. Which statement is TRUE?

A. As cash is the most liquid of all assets and liquidity is crucial to a company, all companies should hold as much cash as possible.

B. If the company has available cash, they should always pay their bills immediately, even if suppliers give them time to pay before charging penalties.

C. It is possible for a profitable company to go out of business because of severe short-term liquidity problems.

D. Free cash flow in a given year is a better indicator of profitability than earnings.

2. Balance sheet

The balance sheet provides a snapshot of the financial conditionof a company. Investors and analysts use the information given onthe balance sheet and other financial statements to make severalinterpretations regarding the company’s financial condition andperformance.

Blue Hamster Manufacturing Inc. is a hypothetical company.Suppose it has the following balance sheet items reported at theend of its first year of operation. For the second year, some partsare still incomplete. Use the information given to complete thebalance sheets for Blue Hamster Manufacturing Inc. for the yearsending December 31, Year 2 and 1, respectively.

Blue Hamster Manufacturing Inc.

Balance Sheet

For the Year ended December 31
Year 2 Year 1 Year 2 Year 1
Assets Liabilities and equity
Current assets: Current liabilities:
Cash and equivalents $55,350 Accounts payable $0 $0
Accounts receivable $25,312 $20,250 Accruals $3,516 $0
Inventories $74,250 $59,400 Notes payable $19,921 $18,750
Total current assets $168,750 $135,000 Total current liabilities $18,750
Net fixed assets: Long-term debt $70,312 $56,250
Net plant and equipment $165,000 Total debt $93,750 $75,000
Common equity:
Common stock $182,812 $146,250
Retained earnings $78,750
Total common equity $281,250 $225,000
Total assets $375,000 $300,000 Total liabilities and equity $375,000 $300,000

Given the information in the preceding balance sheet—andassuming that Blue Hamster Manufacturing Inc. has 50 million sharesof common stock outstanding—read each of the following statements,then identify the selection that best interprets the informationconveyed by the balance sheet.

Statement #1: Blue Hamster’s pool of relatively liquid assets,which are available to support the company’s current and futuresales, decreased from Year 1 to Year 2.

This statement is , because:

Blue Hamster’s total current liabilities balance decreased by$33,750 between Year 1 and Year 2.

Blue Hamster’s total current liabilities balance increased from$20,250 to $25,312 between Year 1 and Year 2.

Blue Hamster’s total current asset balance actually increasedfrom $135,000 to $168,750 between Year 1 and Year 2.

Blue Hamster’s total current asset balance decreased from$168,750 to $135,000 between Year 1 and Year 2.

Statement #2: In Year 2, Blue Hamster Manufacturing Inc. wasprofitable.

This statement is , because:

Blue Hamster’s retained earnings account increased between theend of Years 1 and 2.

The cash and equivalents account increased between Years 1 and2.

Blue Hamster’s total assets increased between Years 1 and 2.

Statement #3: The book value per share of Blue Hamster’s stockin Year 2 was $5,625.

This statement is , because:

The per-share book value is calculated by dividing the company’stotal assets by the number of outstanding shares of commonstock.

The per-share book value is calculated by dividing the company’stotal debt by the number of outstanding shares of common stock.

The per-share book value is calculated by dividing the company’stotal common equity by the number of outstanding shares of commonstock.

Based on your understanding of the different items reported onthe balance sheet and the information they provide, if everythingelse remains the same, then the cash and equivalents item on thecurrent balance sheet is likely to if the firm issues$3 million of new common stock.

Based on your understanding of the different items reported inthe balance sheet and the information they provide, which statementregarding Blue Hamster Manufacturing Inc.’s balance sheet isconsistent with U.S. Generally Accepted Accounting Principles(GAAP)?

The company’s assets should be listed in alphabetical order.

The company’s assets should be listed in the order in which theyare to be converted into cash.

The company’s assets should be listed from those carrying thelargest balance to those with the smallest balance.