Answered: The right side of the balance sheet…

Financial Accounting: The Impact on Decision Makers

10th Edition

ISBN:9781305654174

Author:Gary A. Porter, Curtis L. Norton

Publisher:Gary A. Porter, Curtis L. Norton

Chapter1: Accounting As A Form Of Communication

Section: Chapter Questions

Problem 1.1DC

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Stockholders' equity

The right side of the balance sheet shows the firm’s liabilities and stockholders’ equity.

Which of the following best describes shareholders’ equity?

Equity is the initial claim on value of the assets before the firm pays off its liabilities.

Equity is the difference between the company’s assets and liabilities.

NOW Inc. released its annual results and financial statements. Grace is reading the summary in the business pages of today’s paper. In its annual report this year, NOW Inc. reported a net income of $148 million. Last year, the company reported a retained earnings balance of $476 million, whereas this year it increased to $560 million. How much was paid out in dividends this year?

$64 million

$232 million

$325 million

$4 million

Accounting statements represent a company’s earnings, but this is not the real cash that a company generates. Earnings data can be manipulated and can be deceiving. Thus, corporate decision makers and security analysts focus on the free cash flow that a firm generates to analyze the company’s real cash position.

Which of the following statements best describes free cash flow?

The excess cash generated by revenues less all operating expenses

Based on your evaluation you have (103,379,107,069,111,989,152,579) in free cash flow.

Can a company have negative free cash flow?

Yes

The cash flow available for distribution to all investors after the company has made all investments in fixed assets and working capital necessary to sustain a firm’s ongoing operations

Suppose you are the only owner of a chain of coffee shops near universities. Your current cafés are doing well, but you are interested in starting a fine-dining restaurant. You decide to use the cash generated from your existing business to enter into a new business. Your accountant provides you with the following data on your current financial performance:

Financial update as of June 15

•	Your existing business generates $123,000 in EBIT.
•	The corporate tax rate applicable to your business is 25%.
•	The depreciation expense reported in the financial statements is $23,429.
•	You don’t need to spend any money for new equipment in your existing cafés; however, you do need $18,450 of additional cash.
•	You also need to purchase $9,840 in additional supplies—such as tableclothes and napkins, and more formal tableware—on credit.
•	It is also estimated that your accruals, including taxes and wages payable, will increase by $6,150.

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