Chapter 2

Financial Statements, Cash Flow, and Taxes

After reading this chapter, students should be able to:
Understand each of the key fnancial statements and recognize the kinds of information
they provide to corporate managers and investors.
Estimate a frms free cash o! and understand !hy free cash o! has such an
important e"ect on frm value.
Understand the basics of the federal income ta# system
Chapter 2: Financial Statements, Cash Flow, and Taxes Learning Objectives 7
Learning Objectives
Lectre Sggestions
$he goal of fnancial management is to take actions that !ill ma#imize the value of a frms
stock. $hese actions !ill sho! up, eventually, in the fnancial statements, so a general
understanding of fnancial statements is critically important.
%ote that &hapter ' provides a bridge bet!een accounting, !hich students have (ust
covered, and fnancial management. Unfortunately, many non)accounting students did not
learn as much as they should have in their accounting courses, so !e fnd it necessary to
spend more time on fnancial statements than !e !ould like. Also, at many schools,
students vary greatly in their kno!ledge of accounting, !ith accounting ma(ors being !ell)
grounded because they have had more intense introductory courses and, more importantly,
because they are taking advanced fnancial accounting concurrently !ith fnance. $his
gives the accountants a ma(or, and some!hat unfair, advantage over the others in dealing
!ith &hapters ' and * on e#ams. +e kno! of no good solution to this problem, but !hat !e
do is pitch the coverage of this material to the non)accountants. ,f !e pitch the lectures
-and e#ams. to the accountants, they simply blo! a!ay and demoralize our non)
accountants, and !e do not !ant that. /erhaps 0lorida has more of a di"erence bet!een
accounting and non)accounting students, but at least for us there really is a ma(or
di"erence.
+hat !e cover, and the !ay !e cover it, can be seen by scanning the slides and
,ntegrated &ase solution for &hapter ', !hich appears at the end of this chapter solution.
0or other suggestions about the lecture, please see the 12ecture 3uggestions4 in &hapter 5,
!here !e describe ho! !e conduct our classes.
!"#S O$ C%"&T'(: 2 OF )* !"#S +),-minte periods.
* Lecture Suggestions Chapter 2: Financial Statements, Cash Flow, and Taxes
"nswers to 'nd-o/-Chapter 0estions
2-1 $he four fnancial statements contained in most annual reports are the balance
sheet, income statement, statement of stockholders e6uity, and statement of cash
o!s.
2-2 7ankers and investors use fnancial statements to make intelligent decisions about
!hat frms to e#tend credit or in !hich to invest, managers need fnancial
statements to operate their businesses e8ciently, and ta#ing authorities need them
to assess ta#es in a reasonable !ay.
2-2 %o, because the 9': million of retained earnings !ould probably not be held as
cash. $he retained earnings fgure represents the reinvestment of earnings by the
frm. &onse6uently, the 9': million !ould be an investment in all of the frms
assets.
2-3 $he balance sheet sho!s the frms fnancial position on a specifc date, for e#ample,
;ecember *<, '::=. ,t sho!s each account balance at that particular point in time.
0or e#ample, the cash account sho!n on the balance sheet !ould represent the
cash the frm has on hand and in the bank on ;ecember *<, '::=. $he income
statement, on the other hand, reports on the frms operations over a period of time,
for e#ample, over the last <' months. ,t reports revenues and e#penses that the
frm has incurred over that particular time period. 0or e#ample, the sales fgures
reported on the income statement for the period ending ;ecember *<, '::=, !ould
represent the frms sales over the period from >anuary <, '::=, through ;ecember
*<, '::=, not (ust sales for ;ecember *<, '::=.
2-) ,nvestors need to be cautious !hen they revie! fnancial statements. +hile
companies are re6uired to follo! ?AA/, managers still have 6uite a lot of discretion
in deciding ho! and !hen to report certain transactions. &onse6uently, t!o frms in
e#actly the same operating situation may report fnancial statements that convey
di"erent impressions about their fnancial strength. 3ome variations may stem from
legitimate di"erences of opinion about the correct !ay to record transactions. ,n
other cases, managers may choose to report numbers in a !ay that helps them
present either higher earnings or more stable earnings over time. As long as they
follo! ?AA/, such actions are not illegal, but these di"erences make it harder for
investors to compare companies and gauge their true performances.
Unfortunately, there have also been cases !here managers overstepped the
bounds and reported fraudulent statements. ,ndeed, a number of high)profle
e#ecutives have faced criminal charges because of their misleading accounting
practices.
2-4 0ree cash o! is the amount of cash that could be !ithdra!n from the frm !ithout
harming its ability to operate and to produce future cash o!s. ,t is calculated as
after)ta# operating income plus depreciation less capital e#penditures and the
change in net !orking capital. ,t is more important than net income because it
sho!s the e#act amount available to all investors -stockholders and debtholders..
$he value of a companys operations depends on e#pected future free cash o!s.
$herefore, managers make their companies more valuable by increasing their free
Chapter 2: Financial Statements, Cash Flow, and Taxes Answers and Solutions 5
cash o!. %et income, on the other hand, reects accounting proft but not cash
o!. $herefore, investors ought to focus on cash o! rather than accounting proft.
2-7 @es. %egative free cash o! is not necessarily bad. Aost rapidly gro!ing companies
have negative free cash o!s because the f#ed assets and !orking capital needed
to support rapid gro!th generally e#ceed cash o!s from e#isting operations. $his
is not bad, provided the ne! investments !ill eventually be proftable and they
contribute to free cash o!.
2-* $his statement means that the higher ones income, the larger the percentage paid
in ta#es.
2-5 ;ouble ta#ation refers to the fact that corporate income is sub(ect to an income ta#,
and then stockholders are sub(ect to a further personal ta# on dividends received.
,n fact, because of double ta#ation &ongress !as motivated to reduce the ta# rate
on dividends to the same rate -<5B. as long)term capital gains -at least through
':<:.. ,ncome could even be sub(ect to triple ta#ation. $riple ta#ation occurs !hen
-<. the original corporation is frst ta#ed, -'. the second corporation is then ta#ed on
the dividends it received, and -*. the individuals !ho receive the fnal dividends are
ta#ed again. $herefore, corporations that receive dividend income can e#clude
some of the dividends from its ta#able income. $his provision in the $a# &ode
minimizes the amount of triple ta#ation that !ould other!ise occur.
261, 7ecause interest paid is ta# deductible but dividend payments are not, the after)ta#
cost of debt is lo!er than the after)ta# cost of e6uity. $his encourages the use of
debt rather than e6uity. $his point is discussed in detail in 1$he &ost of &apital4 and
1&apital 3tructure and 2everage4 chapters.
2-11 $he ordering se6uence of asset items is based on liquidity. $he most easily converted
item is listed at the top of the balance sheet !hile the least li6uid item is listed at the
bottom of the balance sheet.
2-12 C!ners e6uity represents a companys net !orth. ,t is the di"erence bet!een the
value of all assets and the value of all liabilities. $his residual value belongs to
shareholders. $here are t!o ma(or parts of shareholders net assets: contributed
capital and retained earnings.
2-12 According to ,A3 D.*<
<
, interest received and interest paid may be classifed as
operating, investing, or fnancing cash o!s, provided that they are classifed
consistently from period to period
< ,nternational Accounting 3tandards
1, Answers and Solutions Chapter 2: Financial Statements, Cash Flow, and Taxes
Soltions to 'nd-o/-Chapter &roblems
2-1 %, E 9*,:::,:::F E7,$ E 9G,:::,:::F $ E H:BF ,nterest E I
%eed to set up an income statement and !ork from the bottom up.
E7,$ 9G,:::,:::
,nterest <,:::,:::
E7$ 95,:::,::: E7$ E
$a#es -H:B. ',:::,:::
%, 9*,:::,:::
,nterest E E7,$ J E7$ E 9G,:::,::: J 95,:::,::: E 9<,:::,:::.
2-2 E7,$;A 9D,5::,::: -?iven.
;epreciation ',5::,::: ;eprec. E E7,$;A J E7,$ E 9D,5::,::: J
95,:::,:::
E7,$ 95,:::,::: E7,$ E E7$ K ,nt E 9*,:::,::: K 9',:::,:::
,nterest ',:::,::: -?iven.
E7$ 9*,:::,:::
$a#es -H:B. <,'::,::: $a#es E E7$ L $a# rate
%, 9<,=::,::: -?iven.
2-2 %, E 95:,:::,:::F MNE@NE E 9=<:,:::,:::F MNE7N@ E 9D=:,:::,:::F ;ividends E I
MNE7N@ K %, J ;iv E MNE@NE
9D=:,:::,::: K 95:,:::,::: J ;iv E 9=<:,:::,:::
9=*:,:::,::: J ;iv E 9=<:,:::,:::
9':,:::,::: E ;iv.
2-3 $otal assets E 9<:,5::,:::K9*,:::,:::K95,*::,:::K9<,<::,:::K
9<,<::,:::
E 9'<,:::,:::
3tockholders e6uity E 9'<,:::,::: J 9*,GGH,::: J 9',O::,::: J 955:,::: J
9'<H,:::
E 9<*,GD',:::.
2-) 3tatements b and d !ill decrease the amount of cash on a companys balance sheet.
3tatement a !ill increase cash through the sale of common stock. 3elling stock
provides cash through fnancing activities. Cn one hand, 3tatement c !ould
decrease cashF ho!ever, it is also possible that 3tatement c !ould increase cash, if
the frm receives a ta# refund.
Chapter 2: Financial Statements, Cash Flow, and Taxes Answers and Solutions 11
G . :
9*,:::,:::
$. -<
9*,:::,:::
=

G . :
::: , =:: , < 9
. $ < -
::: , =:: , < 9
=

2-4 Ending MNE E 7eg. MNE + %et income ;ividends

95D=,O::,:::E 95<',*::,::: + %et income 9'',5::,:::
95D=,O::,:::E 9H=O,=::,::: + %et income
%et income E 9=O,<::,:::.
2-7 a6 0rom the statement of cash o!s the change in cash must e6ual cash o! from
operating activities plus long)term investing activities plus fnancing activities.
0irst, !e must identify the change in cash as follo!s:
&ash at the end of the year 9'5,:::
J &ash at the beginning of the year J 55,:::
&hange in cash )9*:,:::
$he sum of cash o!s generated from operations, investment, and fnancing
must e6ual a negative 9*:,:::. $herefore, !e can calculate the cash o! from
operations as follo!s:
&0 from operations + &0 from investing + &0 from fnancing E in cash
&0 from operations 9'5:,::: + 9<D:,::: E )9*:,:::
&0 from operations E 95:,:::.
b6 3ince !e determined that the frms cash o! from operations totaled 95:,::: in
/art a of this problem, !e can no! calculate the frms net income as follo!s:
%, +
on ;epreciati
+
s liabilitie
accrued
in ,ncrease

inventory
and ANM
in ,ncrease
E
operations
from &0
%, K 9<:,::: K 9'5,::: J 9<::,::: E 95:,:::
%, J 9G5,::: E 95:,:::
%, E 9<<5,:::.
26* a6
%et income 9<=,<:
:
;epreciation D,5::
%et cash provided by operating
activities
9'5,G:
:
b6
0&0 E E7,$ -< J $. K ;eprec. J &apital e#penditures J P%+&
E 9**,D:: -< J :.H. K 9D,5:: J : J :
E 9'D,D':.
Assuming the ta# rate is H:B and there are no capital e#penditures and there is no
change of !orking capital.
2-5 a6 %+&'::D E $otal &A J -AN/ K Accruals.
E 95O,::: J -9O,::: K 9G,:::.
E 9HH,:::.
%+&'::= E 9D',<'5 J -9<:,=:: K 9D,G::.
E 95*,D'5.
12 Answers and Solutions Chapter 2: Financial Statements, Cash Flow, and Taxes
b6 0&0 E E7,$ -< J $. K ;eprec. J &apital e#penditures J P%+&
E 9*O,::: -< J :.H. K 95,::: J 9=,::: J9O,D'5
E 9<:,GD5.
%ote: $o arrive at capital e#penditures you add depreciation to the change in net
0A, so
&apital e#penditures E 95,::: K 9*,::: E 9=,:::.
c6 3tatement of 3tockholders E6uity, '::=
&ommon 3tock Metained $otal 3tockholders
3hares Amount Earnings E6uity
7alances, <'N*<N:D 5,::: 95:,::: 9':,=5: 9D:,=5:
'::= %et ,ncome '',*5:
&ash ;ividends -<<,<D5.
Addition -3ubtraction.
to retained earnings <<,<D5 <<,<D5
7alances, <'N*<N:= 5,::: 95:,::: 9*',:'5 9=',:'5
2-1, +orking up the income statement you can calculate the ne! sales level !ould be
9<',G=<,H='.
3ales 9<',G=<,H=' 3 J :.H53 J ;eprec. E E7,$
Cperating costs -e#cl. ;eprec.. G,ODH,=<5 9<',G=<,H=' :.55
;epreciation ==:,::: 9=::,::: <.<:
E7,$ 9 H,='G,GGD 9H,<GG,GGD K 9GG:,:::
,nterest GG:,::: 9G::,::: <.<:
E7$ 9 H,<GG,GGD 9',5::,:::N-< :.H.
$a#es -H:B. <,GGG,GGD 9H,<GG,GGD :.H:
%et income 9 ',5::,:::
2-11 a6 7alance of ME, ;ecember *<, '::D 9<,*DH
Add: %,, '::= *D'
2ess: ;iv. paid to common stockholders -<HG.
7alance of ME, ;ecember *<, '::= 9<,G::
$he ME balance on ;ecember *<, '::= is 9<,G:: million.
$o arrive at this statement, you must !ork up the statement because you havent
been given the <'N*<N:D ME balance.
b6 9<,G:: million.
c6 &ash K E6uivalents E 9<5 million.
d6 $otal current liabilities E 9G': million.
Chapter 2: Financial Statements, Cash Flow, and Taxes Answers and Solutions 12
2-12 a6
:D
capital !orking
%et
E &urrent assets J -AN/ K Accruals.
E 9*G:,:::,::: J -9O:,:::,::: K 9G:,:::,:::.
E 9'<:,:::,:::.
:=
capital !orking
%et
E 9*D',:::,::: J 9<=:,:::,::: E 9<O',:::,:::.
b6 0&0:= E E7,$ -< J $. K ;eprec. J &ap. e#pend. ) P%+&
E 9<5:,:::,::: -:.G. K 9*:,:::,::: J 9=:,:::,::: J -)9<=,:::,:::.
E 9O:,:::,::: K 9*:,:::,::: ) 9=:,:::,::: K 9<=,:::,:::
E 95=,:::,:::.
%ote that depreciation must be added to P%et /QE to arrive at capital
e#penditures.
c6 $he large increase in dividends for '::= can most likely be attributed to a large
increase in free cash o! from '::D to '::=, since 0&0 represents the amount of
cash available to be paid out to stockholders after the company has made all
investments in f#ed assets, ne! products, and !orking capital necessary to
sustain the business.
13 Answers and Solutions Chapter 2: Financial Statements, Cash Flow, and Taxes
Comprehensive7Spreadsheet &roblem
Note to Instructors:
$he solution to this problem is not provided to students at the back of their te#t. ,nstructors
can access the Excel fle on the te#tbooks !eb site or the ,nstructors Mesource &;.
2-12 a6
KEY INPUT DATA: Sinotronics
Sales $455,150
EBITDA as a percentae o! sales 15"
Depr# as a " o! !i$e% assets 11"
Ta$ rate 40"
Interest e$pense $&,5'5
Di(i%en% pa)o*t ratio 40"
Sinotronics Inco+e State+ent
,in t-o*san%s o! %ollars.
/00&
Sales $455,150
E$penses e$cl*%in %epreciation an% a+orti0ation 1&2,&'& 3o*n% a!ter !in%in EBITDA
EBITDA $2&,/'1 3o*n% t-is !irst
Depreciation an% a+orti0ation ',1&&
EBIT $20,&&4
Interest e$pense &,5'5
EBT $5/,104
Ta$es ,40". /0,4/4
Net Inco+e $11,1&2
5o++on %i(i%en%s $1/,554
A%%ition to retaine% earnins $1&,&11
b6
State+ent o! Stoc6-ol%ers7 E8*it)
,in t-o*san%s o! %ollars.
Balance o! 9etaine% Earnins, Dece+:er 11, /00' $1&,''4
A%%: Net Inco+e, /00& $11,1&2
;ess: 5o++on %i(i%en%s pai%, /00& ,1/,554.
Balance o! 9etaine% Earnins, Dece+:er 11, /00& $5',205
Chapter 2: Financial Statements, Cash Flow, and TaxesComprehensive/Spreadsheet
Problem 1)
State+ent o! 5as- 3lo<s
,in t-o*san%s o! %ollars.
=peratin Acti(ities
Net Inco+e $11,1&2
Depreciation an% a+orti0ation ',1&&
Increase in acco*nts pa)a:le ',25/
Increase in accr*als ',&/1
Increase in acco*nts recei(a:le ,1',&1&.
Increase in in(entories ,1,42/.
Net cas- pro(i%e% :) operatin acti(ities $1/,44'
In(estin Acti(ities
A%%itions to propert), plant, an%
e8*ip+ent ,$1/,11'.
Net cas- *se% in in(estin acti(ities ,$1/,11'.
3inancin Acti(ities
Increase in notes pa)a:le $/,500
Increase in lon>ter+
%e:t 1/,150
Increase in co++on stoc6 10,000
Pa)+ent o! co++on %i(i%en%s ,1/,554.
Net cas- pro(i%e% :) !inancin acti(ities $1/,/45
S*++ar)
Net increase?%ecrease in cas- $11,1/5
5as- :alance at t-e :einnin o! t-e )ear &4,'/5
5as- :alance at t-e en% o! t-e )ear $10/,&50
c6
Net @or6in 5apital ,+*st :e !inance% :) e$ternal so*rces.
N@50' A c*rrent assets > ,A?P an% accr*als.
N@50' A $/10,/14 > $45,'25
N@50' A $124,424
N@50& A c*rrent assets > ,A?P an% accr*als.
N@50& A $/44,254 > $21,/1&
N@50& A $1&1,4/1
14 Comprehensive/Spreadsheet ProblemChapter 2: Financial Statements, Cash Flow,
and Taxes
d6 An increase in the frmRs dividend payout ratio !ould have no e"ect on its corporate
ta#es paid because dividends are paid !ith after)ta# dollars. So!ever, the
companyRs shareholders !ould pay additional ta#es on the additional dividends
they !ould receive. As of <:N:=, dividends are generally ta#ed at a ma#imum rate
of <5B.
Chapter 2: Financial Statements, Cash Flow, and TaxesComprehensive/Spreadsheet
Problem 17
8ntegrated Case
2-13
'verelite Technolog9 Co6, Ltd6, &art 8
inancial Statements
At the end of '::=, Mobert 3uTA7A graduate from the Song Uong University
of 3cience and $echnologyTis asked by his uncle, 0rank 3u, the &hairman of
Everelite $echnology &o., 2td. to help him revie! the companys fnancial
status. Everelite $echnology. !as established in Aay <OOH, and is one of the
most successful ,$ solution providers of soft!are and services. ,t !on the
'::H A,3 7est &hoice a!ard due to its competencies in the provision of
!orkstations and servers, high)speed net!ork and related peripheral
e6uipment, computer soft!are, as !ell as consultation and maintenance
services.
Everelite also provides corporate data center)related products and
services, including:
high)speed net!ork and telecommunications e6uipment such as ,nternet
tra8c management solutionsF
information security soft!are and hard!are such as fre!alls and 33C
-single sign on. systemsF
storage e6uipmentF !orkstations, and servers for data computingF
telecommunications application soft!are such as e)mails, blogs, &,A3
-computer)integrated manufacturing solutions., EM/ -enterprise resource
planning. solutions, as !ell as data !arehouse and mining solutionsF
remote backup solutions for data recovery, and
application soft!are management solutions for data management.
1* Integrated Case Chapter 2: Financial Statements, Cash Flow, and Taxes
$he information industry refers to those companies engaged in value)
added services on information systems andNor soft!are applications. $here
are three main business categories: products, pro(ects, and services. $he
ne! e)business model has boosted the gro!th of the information industry in
market size in recent years.
7eing a leading e)business solutions provider, Everelites main business
lies in the pro(ects and services categories. $he demand for information
services comes mainly from the fnance industry, the manufacturing
industry, and the government. 7esides having a large pool of human
resources to provide services to clients, Everelite also trades computer
hard!are. ,n '::=, !ith the economic recession and the restructuring of the
fnance industry, the demand for ,$ services from the fnance industry !as
lo!. $he electronics manufacturing industry had also slashed their ,$
budgets substantially. All these factors contributed to the decrease in
revenue for the information industry in '::=. ,n '::O, the market demand is
forecasted to increase due to the further gro!th of !ideband services, ne!
development of e)learning services, and the increasing popularity of online
games. 0inancial institutions are also e#pected to increase their budgets on
system integration in '::*.
Mobert began by gathering the fnancial statements and other data given
in $ables ,& ')< and ,& ')'. Assume that you are Moberts assistant. @ou must
help him ans!er the follo!ing 6uestions for 0rank.
Chapter 2: Financial Statements, Cash Flow, and Taxes Integrated Case 15
Table 8C 2-16 :alance Sheets
2,,* 2,,7
Assets
&ash 9 ':=,*'* 9 <:',:'H
Accounts receivable GO:,'OH ='H,ODO
,nventories VVVV OH',*DH D<5,H<H
$otal current assets 9<,=H:,OO< 9
<,GH',H<D
?ross f#ed assets *<D,5:* '*',<DO
2ess accumulated depreciation 5H,:H5 *H,<=D
%et f#ed assets 9 'G*,H5= 9 <OD,OO'
$otal assets 9 ',<:H,HHO 9
<,=H:,H:O
Liabilities and Equity
Accounts payable 9 '==,DO= 9 'OG,<HO
%otes payable G*G,*<= H<H,G<<
Accruals <:G,DH= <:*,*G'
$otal current liabilities 9<,:*<,=GH 9 =<H,<''
2ong)term debt H<:,DGO *D',O*<
&ommon stock -<::,::: shares. 55:,::: 55:,:::
Metained earnings <<<,=<G <:*,*5G
$otal e6uity 9 GG<,=<G 9 G5*,*5G
$otal liabilities and e6uity 9 ',<:H,HHO 9
<,=H:,H:O
2, Integrated Case Chapter 2: Financial Statements, Cash Flow, and Taxes
Table 8C 2-26 8ncome Statements
2,,* 2,,7
3ales 9',*'5,OGD 9
','':,G:D
&ost of goods sold <,=GO,*'G <,G55,='D
Cther e#penses '=D,GG* 'D*,=D:
$otal operating costs e#cluding
depreciation and amortization 9',<5G,O=O 9
<,O'O,GOD
;epreciation and amortization '5,*G* 'G,*H<
E7,$ 9 <H*,G<5 9 'GH,5GO
,nterest e#pense *<,H'' <*,=:'
E7$ 9 <<',<O* 9 '5:,DGD
$a#es -H:B. HH,=DD <::,*:D
%et income 9 GD,*<G 9 <5:,HG:
E/3 9 :.GD 9 <.5:
;/3 9 <.:: 9 <.H'
7ook value per share 9 G.G' 9 G.5*
3tock price 9 <5.G: 9 '<.=:
3hares outstanding <::,::: <::,:::
$a# rate H:.::B H:.::B
Chapter 2: Financial Statements, Cash Flow, and Taxes Integrated Case 21
"6 ;hat is the impact o/ the 2,,* mar<et recession on
'verelite=s assets, liabilities, and sales>
Ans!er: W3')< through 3')O provides background information. $hen sho!
3')<: through 3')<* here.X 3ales increased by 9<:5,*G:.
A$ operating income
:=
E E7,$-< J $a# rate.
E 9<H*,G<5-< J :.H.
E 9<H*,G<5-:.G.
E 9=G,<GO.
A$ operating income
:D
E 9<5=,DH<.
%+&
:=
E

s 8nventorie ?
receivable
"cconts
? Cash J

Accruals
payable
Accounts
+
E -9':=,*'* K 9GO:,'OH K 9OH',*DH. J -9G*G,*<= K
9<:G,DH=.
E 9<,:OD,O'5.
%+&
:D
E -9<:',:'H K 9='H,ODO K 9D<5,H<H. J -9H<H,G<< K
9<:*,*G'.
E 9<,<'H,HHH.
%+& E 9<,:OD,O'5 J 9<,<'H,HHH E -9'G,5<O.
%et !orking capital decreased by 9'G,5<O.
%,
:=
J %,
:D
E 9GD,*<G J 9<5:,HG: E -9=*,<HH..
$here !as a big drop, )9=*,<HH, in net income during '::=.
:6 'verelite=s ':8T became smaller in 2,,*6 :9 jst sing the
income statements, can 9o provide the reasons>
Ans!er: W3ho! 3')<H here.X
0&0
:=
E E7,$-< J $. J %et investment in operating capital
E -9=G,<GO. J -9<,:OD,O'5 J 9<,<'H,HHH.
22 Integrated Case Chapter 2: Financial Statements, Cash Flow, and Taxes
E -9=G,<GO. ? 'G,5<OE -95O,G5:.
0ree cash o! !as )95O,G5: in '::=.
C6 ;hat cased 'verelite=s total assets to increase in 2,,*>
Ans!er: W3ho! 3')<5 here.X Everelites long)term increased to support its
increasing inventories.
!6 ;hat @nancing sorces did 'verelite se to spport its
total assets= expansion>
Ans!er: W3ho! 3')<G here.X 2ong)term debt.
'6 'verelite=s crrent assets accont /or a large part o/ the
@rm=s total assets6 !id 'verelite spport its crrent assets
mainl9 /rom short-term @nancing or long-term @nancing>
Ans!er: W3ho! 3')<D here.X 7y contracting the sales credit terms, it !ould
take shorter for Everelite to receive its moneyTits cash account
!ould increase and its accounts receivable !ould decrease.
F6 'verelite=s long-term debts are mch more than eAit96
;hat is the impact o/ this condition on the compan9>
Ans!er: $his situation is likely to occur as suggested in the second part of
the ans!er to Yuestion 0.
Chapter 2: Financial Statements, Cash Flow, and Taxes Integrated Case 22