1. (Corporate income tax) Potts, Inc. had sales of $6 million during the past year.

The cost of goods sold amounted to $3 million. Operating expenses totaled $2.6 million and interest expense was $30,000. Determine the firms tax liability. 2. (Measuring cash flows) Calculate the free cash flows for T.P. Jarmon, Inc., for the year ended December 31, 2003, both from an asset and a financing perspective. Interpret your results. T.P. Jarmon, Inc. Balance Sheet at 12/31/02 and 12/31/03 ASSETS 2002 Cash $15,000 Marketable securities 6,000 Accounts receivable 42,000 Inventory 51,000 Prepaid rent 1,200 Total current assets 115,200 Net plant and equipment 286,000 Total assets $401,200 LIABILITIES AND OWNERS EQUITY 2002 Accounts receivable $48,000 Notes payable 15,000 Accruals 6,000 Total current liabilities 69,000 Long-term debt 160,000 Common stockholders equity 172,200 Total liabilities and owners equity 401,200 T.P. Jarmon, Inc. Income Statement for year ending 12/31/03 Sales Less: cost of goods sold Gross profit Less: expenses General and administrative Interest Depreciation Total operating expenses Earnings before taxes Less: taxes Net income Less: cash dividents To retained earnings $600,000 460,000 $140,000 $30,000 10,000 30,000 70,000 70,000 27,100 42,900 31,800 11,100

2003 $14,000 6,200 33,000 84,000 1,600 138,300 270,000 $408,300

2003 $57,000 13,000 5,000 75,000 150,000 183,300 408,300

3. (Measuring cash flows) Calculate the free cash flows for Abrams Manufacturing Company for the year ended December 31, 2003, both from an asset and a financing perspective. Interpret your results. Abrams Manufacturing Company Balance Sheets at 12/31/2002 and 12/31/2003 2002 2003 Cash $ 89,000 $ 100,000

Accounts receivable Inventory Prepaid expenses Plant and equipment Accumulated depreciation Total Accounts Payable Accruals liabilities Mortgage payable Preferred stock Common stock Retained earnings Total liabilities and equity

64,000 112,000 10,000 238,000 (40,000) $ 473,000 $ 85,000 68,000 70,000 0 205,000 45,000 $ 473,000

70,000 100,000 10,000 311,000 (66,000) $ 525,000 $ 90,000 63,000 0 120,000 205,000 47,000 $ 525,000

Abrams Manufacturing Company Income Statement for the Year Ended 12/31/03 Sales Cost of sales Gross profit Selling, general, and administrative expenses Depreciation expense Operating income Interest expense Taxes Preferred stock dividends Net income Additional information: The firm paid $22,000 in common stock dividends during 2003. $ 184,000 60,000 124,000 44,000 26,000 $ 584,000 4,000 16,000 10,000 $ 24,000