Finman

P2-11. LG 1: Changes in stockholders’ equity

Intermediate

a. Net income for 2009  change in retained earnings  dividends paid

Net income for 2009  ($1,500,000 – $1,000,000)  $200,000  $700,000

b. New shares issued  outstanding share 2009 – outstanding shares 2008

New shares issued  1,500,000 – 500,000  1,000,000

c.

d.

P2-12. LG 2, 3, 4, 5: Ratio comparisons

Basic

a. The four companies are in very different industries. The operating characteristics of firms across different industries vary significantly resulting in very different ratio values.

b. The explanation for the lower current and quick ratios most likely rests on the fact that these two industries operate primarily on a cash basis. Their accounts receivable balances are

going to be much lower than for the other two companies.

c. High level of debt can be maintained if the firm has a large, predictable, and steady cash flow. Utilities tend to meet these cash flow requirements. The software firm will have very uncertain and changing cash flow. The software industry is subject to greater competition resulting in more volatile cash flow.

d. Although the software industry has potentially high profits and investment return performance, it also has a large amount of uncertainty associated with the profits. Also,

by placing all of the money in one stock, the benefits of reduced risk associated with diversification are lost.

P2-13. LG 3: Liquidity management

Basic

a.

2006 2007 2008 2009

Current ratio 1.88 1.74 1.79 1.55

Quick ratio 1.22 1.19 1.24 1.14

Net working capital $7,950 $9,300 $9,900 $9,600

b. The pattern indicates a deteriorating liquidity position. The decline is most pronounced for

the current ratio which includes inventory.

c. The low inventory turnover suggests that liquidity is even worse than the declining liquidity measures indicate. Slow inventory turnover may indicate obsolete inventory.

P2-14. LG 3: Personal finance: Liquidity ratio

a.

b. Since...