Finance - Chapter 3

CHAPTER 3

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FINANCIAL STATEMENTS, CASH FLOW, AND TAXES

1. Below are the 2007 and 2008 year-end balance sheets for Tran Enterprises:

Assets: 2008 2007

Cash $ 200,000 $ 170,000

Accounts receivable 864,000 700,000

Inventories 2,000,000 1,400,000

Total current assets $3,064,000 $2,270,000

Net fixed assets 6,000,000 5,600,000

Total assets $9,064,000 $7,870,000

Liabilities and equity:

Accounts payable $1,400,000 $1,090,000

Notes payable 1,600,000 1,800,000

Total current liabilities $3,000,000 $2,890,000

Long-term debt 2,400,000 2,400,000

Common stock 3,000,000 2,000,000

Retained earnings 664,000 580,000

Total common equity $3,664,000 $2,580,000

Total liabilities and equity $9,064,000 $7,870,000

The firm has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year, non-callable, long-term debt in 2007. As of the end of 2008, none of the principal on this debt had been repaid. Assume that the company’s sales in 2007 and 2008 were the same. Which of the following statements must be CORRECT?

a. The firm increased its short-term bank debt in 2008.

b. The firm issued long-term debt in 2008.

c. The firm issued new common stock in 2008.

d. The firm repurchased some common stock in 2008.

e. The firm had negative net income in 2008.

Answer: c

2. On its 12/31/08 balance sheet, Barnes Inc showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

a. If the company lost money in 2008, it must have paid dividends.

b. The company must have had zero net income in 2008.

c. The company must have paid out half of its 2008 earnings as dividends.

d. The company must have paid no dividends in 2008.

e. Dividends...