Business Finance

Chapter-1: Solutions to Problems

P1-1. Liability comparisons LG 2; Basic a. Ms. Harper has unlimited liability. b. Ms. Harper has unlimited liability. c. Ms. Harper has limited liability, which guarantees that she cannot lose more than she invested. Accrual income vs. cash flow for a period LG 4; Basic a. Sales $760,000 Cost of goods sold 300,000 Net profit $460,000 b. Cash receipts Cost of goods sold Net cash flow c. $690,000 300,000 $390,000

P1-2.

The cash flow statement is more useful to the financial manager. The accounting net income includes amounts that will not be collected and, as a result, do not contribute to the wealth of the owners.

P1-3.

Cash flow statement LG 4; Intermediate a. Total cash inflow: $450 $4,500 $4,950 Total cash outflow: $1,000 $500 $800 $355 $280 $1,200 $222 $4,357 b. Net cash flow: $4,950 $4,357 $593 c. If Jane is facing a shortage, she could cut back on some of her discretionary items, including clothing, dining out, and gas (i.e., travel less). d. If Jane has a surplus in August, she should compare these cash flows to those of other months and verify that August’s cash flows are typical. She may, for instance, observe the existence of large automobile insurance bills or tendency to spend more during the Christmas holiday season. If she has such needs, Jane will want to save the $593 in a money market security, where she is unlikely to face a decline in investment. If her August net cash flow is not needed to pay anticipated bills, she should invest in a diversified portfolio.

1

P1-4.

Marginal cost-benefit analysis and the goal of the firm PG 3, 5; Challenge a. Marginal benefits of new robotics Marginal benefits of original robotics benefits of proposed robotics $560,000 $400,000 $160,000

Marginal

b. Marginal cost of new robotics – Sales price of current robotics = Marginal cost of proposed robotics $220,000 c. Net benefits of new robotics proposed robotics $70,000 $150,000 Marginal cost of Marginal...